Rags Srinivasan posted a great article titled “The Science of Optimal Versioning in SaaS” to his blog that talks about SaaS pricing.
In the article, Rags talks about taking apply SaaS pricing to through different bundles of features at different prices for various market segments. The whole article is great, so I encourage you to read it.
I did want to ensure that the complex issues associated with SaaS and Revenue Modeling, followed by Customer-facing Pricing, were not glossed over, so I left the following comment on Rags’ blog, and since it is relevant, am posting it here as well.
Since SaaS is our specialty at Sixteen Ventures, we have a lot of experience in versioning, bundling, etc.. One of the main things we tell our clients is, in SaaS, things are a little different than in other businesses, including traditional (or legacy) software.
SaaS vendors need to understand all of the underlying revenue streams they will leverage *before* they architect and build their product. This is different from other businesses where the revenue model is disconnected from the product or service itself.
In SaaS pricing, you need to have a way to keep track of the metrics relevant to your immediate market (at launch) as well as have inbuilt flexibility to ensure you can support the appropriate revenue streams and metrics for ancillary markets to come.
But once you have ensured you can support the appropriate revenue metrics in the application, lets say usage-based, or per-seat under the recurring revenue stream, then you can start to bundle features along with the measurement metrics and apply pricing.
This is why we say you must decouple revenue model from pricing in SaaS; ultimately pricing is part of marketing, but it is all tied together. This is why SaaS is unique and if you don’t understand this, it can cause significant business scalability issues later on (often quite soon).
One note, we always tell our clients to differentiate the pricing bundles based on value-added features, services, etc. and to avoid “commodity” items like storage, CPU, or even users. You have to know your market and if users are the key metric that is most aligned with the needs of the client, it would be foolish to not use that, but often, it is a metric with little perceived value. Being value-based allows vendors to charge more in many circumstances.
The great thing in SaaS is, if you’ve built your product properly, you can very easily customize pricing bundles, versions, tiers, etc. to fit the appropriate market segments. Then, using the marketing website, landing pages, campaigns, etc. you can segment and direct your target market to the appropriate pricing page for them.
But like you said, even when targeting a specific market segment with their own pricing, why do just one? If it makes sense and you can align different pricing with the value delivered to the different segments of that already tightly targeted market segment, why not? Of course, it all depends on so many other factors, but in the SaaS world, we have a lot of options.
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– Lincoln