Pricing Strategies: Software as a Service

An Introduction
One critical decision for any software company is product pricing. For startups this is particularly the case as they are working with emerging technologies. One of the hardest decisions for a company can be pricing of the product. There are several models which follow (SaaS) or software-as-a-service. This article looks at how companies can use these pricing models and make the right pricing decisions. To put the information into real work practice interviews with real companies are provided for analysis.

The Key Pricing Models
There are four main pricing models which are Consumption, Freemium, Tiered, and Perpetual License. Each of these has strengths as well as weaknesses. Decisions makers have several decisions that they need to make before deciding upon a pricing model.

Consumption Model
One popular pricing model is the consumption model. This allows users to tie the usage to the cost. This is also called “pay-as-you-go.” A customer is able to manage their use of a product or a service and the expenses related to it. This type of flexibility is valuable to a company are in the early stages of ramping up need for a particular product and have an anticipation for more usage in the future. A locked-in contract makes sense for the customer at a higher usage level, but pay-as-you-go might be preferred during the scale-up period.

Limited commitment into the future for customers is another important aspect of the consumption model. Traditional license models don’t allow customers to sever ties to a product immediately or allow them to scale back usage without some sort of negative penalty which can be significant. Customers must have an understanding of the value per use, but don’t have a clear view of the future use or how their usage patterns may change in the future. A pay-as-you-go model makes more sense for this sort of customer.

The vendor has a downside when working with the consumption model because they can’t predict revenues. The customer has more flexibility on their usage of a product or service which can vary month-to-month so this impacts the stability of the vendor’s income. As a company scales up and gets familiar with the value proposition of their product, the usage should go up. With a strong understanding of their user base and user needs for a product, it makes decisions about revenues easier. This revenue model has key metrics which include user growth rates, active users, and the average revenue per user.

The Freemium Model
The software-as-a-service companies soften use the freemium model. In the enterprise space and the consumer space, freemium if used. Freemium is a model that offers features or core services for free, but then changes a premium for components which are more sophisticated. The idea behind it is instead of expensive marketing and sales efforts, the company wants to create a low barrier for interested customers to get their product. The key is to get a lot of interest in the product and provide a minimum barrier such as a simple signup or a low cost (Free for a basic style offering) for users to try the product being offered. The intent of this is that the product will meet the needs of the users and entice them to pay for a premium offering. In 1983 Carl Shapirio released a paper and the freemium model comes from that paper. The paper was on the optimal pricing of experience goods and it argued that customers tend to underestimate the value of an experience good. He defined this as product value a customer learns after experiencing the product. The optimal price is one that is low as an introduction to the product which leads the customer to understand the true value of the product as they use it.

There are three freemium model methods which are commonly used to separate the premium offering from the free offering:
Capacity Based Freemium -In this model a customer is given a free version up to usage, capacity, or threshold of number of users. This model is one of the most common in use today. One example of this is Dropbox. You get 2GB for free and then an additional 10GB of storage priced at $10 per month for the “pro” plan. For those that need 1TB or more there’s enterprise sales which are negotiated.
Time Based Freemium – In this model there’s a free trail which will expire after a specified period. This allows the user to experience the product and learn the value of that product for free. There’s usually a higher conversion rate before and after the free trail if the engagement with the customer is there. There’s a 30-day free trial with for its CRM platform. The trial gives a lot of the functionality of the product so that the user can see the value that the product provides for them.
User-Case Freemium – This model is less common. Customers can use the offering for free if they fall under certain categories such as non-profit, educational, or non-commercial use. Example of this freemium model would be Adobe or Autodesk which address the student market.
Considerations for the Freemium Model:
Customer Targeting – The freemium model is popular because you can quickly establish adoption and market share. A business that wants to scale up quickly will benefit from the freemium model, but it’s likely to attract Pro-sumers as well as SMB which might not be the ideal thing for your business.
Value for free Users – The free aspect of it only makes sense if they get the “premium.” You have to be careful about the value the free customers are adding. This might be leveraging viral marketing, saving on marketing costs for some companies while others might be selling data or trying to save money through advertising.
Learning from the Free Users – Companies need to keep tangible numbers related to their free users. They may also want to use cohort analysis to understand their conversion rates and to track viral referrals so they understand the return on investment for the free users.
Cost to Serve the Free Users – It’s important to understand the continued cost of serving free users and the acquisition costs of the free users. A good comprehension of this cost and the estimated conversion rate will help to make quick determinations as to the market required to make viable business decisions as well as the premium members required which support the free members. These costs can include storage, bandwidth, as well as service and customer support.
The Size of the Market ¬– Freemium adds and other step, so a large market is critical for this model to succeed.
Does the Product have Network Effects – Does a user benefit more if there are more users of the service or product? This relates to switching costs as well as referral rates. An example would be GitHub or WebEx which are more valuable when more people are using it.

Optimizing Conversion Rates
When a freemium model is constructed there has to be a balance between offering too much (little incentive for a customer to upgrade) or too little (not enough interest for the customer to update to premium). There are several questions to ask in regards to what freemium model to use and what metrics the version should be based upon:
Get Customer Insights by Giving Enough Away – You want to offer the free version as a means to attract customers to the top of the funnel and for understanding more about customer behavior. Before a paid option is offered, you have to have a good sense of how often the customers are using the free offering and how they are using it. This allows you to offer opportunities for payment and to drive further usage of the product.
Conversions Are Aligned Around Product Features that Drive Repeat Usage – With a strong understanding of what’s driving repeat usage will create more understanding of both the customer needs and use case that the offering is currently meeting. You want to build your revenue model around the repeat usage and customer needs which is harder for the free customer to avoid.
Conversion Takes Time – Phil Libin, CEO discussed a strategy for his company which in the first 30 days the initial conversion rate was 0.5%. There was a focus on getting as many users as possible and then after two years, the conversion rate was 5.5%. This was done by adding more features over time. Some users drop off at a pay/don’t pay point when the freemium no longer meets their needs.

The Tiered Model
The most common model of SaaS is the tiered model. This has a long history and is effective means of price discrimination which dates back to the software created in the 1980s. The idea is to tie pricing to a driver of usage and value which may be modules, seats, servers, and other scale factors. This is similar to cellphone packages which offer minutes. The tiered bundles encourage a customer to upgrade to the next highest level.

This is used to create a long relationship with the customer. As the customers needs grow so does the model. The future needs and the current needs of the customer can be met with a tiered model. A customer can “graduate” into the higher tiers over time when it’s warranted.

A tiered model finds success when it’s segmented appropriately using metrics and intangibles such as the customer’s expectation of service level. They are not changed more for “a service they barely need”, they are charged more when they need more services from a company. They may upgrade when they see that the higher level offers more “value,” even before they reach a required need for the new level.

A tiered model offers advantage for a company that includes lower average cost of acquisition which is relative to lifetime value since they have more upsells and renewals, predictable recurring revenues, and an average selling price that is more stable. In addition, they don’t need as many sales or discount to keep their customers. The company strikes a balance between providing for a customer’s needs over a long-term relationship, and a steady revenue stream, versus a longer difficult sales process as the customer is asked to make a longer commitment.

The key metrics that are used this model include customer churn and rate, net new growth in subscribers, and the conversion rate between the tiers.

The Perpetual License Model
The subscription model has largely replaced the perpetual model, but it’s still worth discussing this model. In some cases, this model may be ideal. The traditional perpetual license models are structured with an upfront payment with about 18-25% for support and maintenance as well as professional services. The long-term buy-in and high upfront cost made it difficult for CFOs to adopted subscription packages as they had already committed to other software packages and had paid the perpetual fees. The rule of thumb was that annual subscriptions were priced with a 3-5 year payback on fees for a perpetual license in most cases.

In some cases, it’s more sense for a customer to consider a perpetual license and not a subscription. When there’s an investment of greater than 3 years or when the capital costs are very low, it’s prudent for a customer to use a cost analysis to see if perpetual licensing makes more sense financially. There’s also tax implications for capitalizing this type of license and not using an annual expense.

5 Questions to Ask Before Hiring a Custom Software Developer

It is a fact that bespoke software will give a set of major advantages to your business. Seamless process automation increases productivity and brings down costs. Scalability ensures that you will have a reliable and effective tool to use in the long term as your business grows. How can you be certain that the custom software which you invest in will bring all of these benefits? You need the right developer for the job in the first place. During the assessment process, make sure that you ask the following questions.

What is your experience and can you provide references?
The time, which the company has been in business for, is not as important as the number of projects which they have completed successfully. Ideally, they should be on the website of the developer and you should have the opportunity to study them in detail. Naturally, you wouldn’t want to hire any team without references. When you contact their previous and/or current clients, you should ask them about their overall experience with the developer and emphasize on factors such as the level of collaboration. It is crucial that you enquire about the results which the businesses have achieved thanks to their custom software.

Will the software be easy to integrate with our existing tools?
This is an extremely important question to ask if you plan to automate your marketing with new software, but to keep your existing scheduling tool, for instance. Data transfer across systems should not only be easy, but quick too. Still, even if the two tools are perfectly used together, the older one may get outdated too fast and require replacement thus posing new challenges to your business. That is why it makes sense to consider a comprehensive system covering all of your business processes. This will give the largest possible increase in productivity and cost reduction. This is important for scalability too.

How much training will users need and is it included in the package?
Intuitive user interface is an essential feature of every custom software solution. Simple forms, clear and uncluttered graphics and charts and convenient functions like drag and drop are among the main things to look for. At the same time, even the most intuitive software has to come with detailed training, which is designed to help your employees make full use of each and every feature.

What will be done to keep data secure?
Enquire about the security options which you will receive and the level of data encryption. If needed, ask for explanations to get good understanding of how your business and customers will be protected. Security is always paramount, especially when you opt for web-based software which can be accessed easily from all of your devices including mobile ones.

What kind of support can we expect?
You should receive ongoing support from the software developer. If a functional problem occurs, it should be reported automatically and eliminated quickly. The developer has to guarantee timely optimisation and upgrading.
Finally, remember that as the customer, you will outline the functionalities of the bespoke software. Research and analyse your business processes to find out where improvement and automation are needed. Consider your short and long-term goals and growth target to ensure that the software will help you reach them. I am always available to provide professional consultation.

To receive professional software development consultation, contact me here.

Major Benefits of Custom Software for Your E-commerce Business

Why get bespoke e-commerce software when there are so many SaaS solutions around? It is true that these are usually cheap and easy to use, but none of them can fit your needs precisely and this is something which can bring down your performance, especially in the long term. A solution, developed especially for your organisation, on the other hand, can give you a multitude of benefits. This is what my experience as an e-commerce development consultant has shown.

Full Process Integration
You and your employees will never have to spend hours trying to work with data from several different sources or to transfer it from one tool to another. Everything necessary for managing your online store and your entire business will be in one place. Imagine having one and the same software for customer relationships management, inventory management, human resource planning and scheduling, shipping management, email marketing and every other process that you can think of. All data and tools which you need will be at your fingertips no matter whether you have your laptop or only your smartphone at hand.

Greater Automation
Many of the tasks which you and your employees are used to doing manually will be completely automated. This will allow you to use all available resources more efficiently. There will be additional benefits for your e-commerce business such as higher customer satisfaction. When a customer makes an enquiry or a complaint, for example, acknowledgement of receipt will be sent automatically. This will help you keep the customer at ease and give you time to look into the matter.

Custom Analytics
No one knows your e-commerce business better than you do. When we develop bespoke software for it, we can integrate all the analytics which you require no matter how specific they are. You will have accurate data about the shoppers on your website and their behaviour at all times. It will be easy to follow the daily, weekly and monthly changes in visit and sales patterns and to make improvements timely.

Better Customer Experience
This is fundamental for the success of every business. The custom software will help you with practically everything which you need to keep your customers happy. In addition to providing quick response as mentioned above, you will have all sought products in stock, hassle-free shipping, which is easily trackable by every client, and easily-run newsletter, which is highly popular and allows you to build loyalty.

Flexible Options
No matter what you sell online, the market is highly competitive and driven by innovation. In this kind of environment, you need as much flexibility as possible. This is a key advantage which bespoke e-commerce software can give you. You can count on me and my team of developers to add new features and functionalities when they are needed. This will enable you to be up to date with the latest trends and to stay ahead of competitors.

Higher Efficiency
With the use of the custom software, each business process will be performed more effectively and each one of your employees will be more productive. This results in cost-efficiency and allows you to scale your business for achieving and maintaining high growth. This is the ultimate benefit from using a solution, especially tailored to the needs of your organisation.
Consider these important benefits when making a decision on using custom software for your e-commerce business.

Do you want to have custom e-commerce software for your business? Let’s talk.

Lifting the Curtain on Bespoke Software Development

Why do businesses invest in custom written software? They simply don’t find an on-shelf product which meets their requirements. At the same time, managers are often uneasy about embarking on the journey of development, which they play an important part in. Will the product bring real value to the business? Will it perform well? Will everyone on the company team be able to use it effectively? As a digital consultant with focus on custom software building, I’d like to take you through the development process to answer these and other important questions.

Requirements and Value for Money
It is common for businesses to know where they have problems in their processes, but to be clueless about how to fix them technically. This is where the digital consultant can provide professional support. With research and analysis, I can pinpoint exactly what solutions the software should bring. We get to discuss them to define goals. With clear objectives at hand, the development process can begin. The planning and scheduling are left to us too.
The size of the investment is always an important matter. Instead of concentrating entirely on per-hour rates, it is important to run full cost-benefit analysis. A bespoke software product is a long-term instrument intended to improve processes and to keep costs down. That is why the focus should be on determining the break-even point and the return on the investment over time.

Features, Capabilities and Integration
The core purpose of the bespoke software is to help you perform a range of tasks more effectively and quickly with the use of fewer resources. That is why every feature and capability will be tailored to your specific needs. This includes taking into consideration the technical skills of your employees. The goal of my team of engineers and designers is to produce simple and functional interface and to make every operation easy and quick – no clutter, confusing menus or the need to go back several steps to check something.
Integration is another fundamental for achieving efficiency. The particular solution can be integrated with other software and with different digital platforms which you already use. If the email marketing strategy for your e-commerce website hasn’t been efficient, for example, it can be optimised with the use of bespoke software integrated with the website and with existing CRM tool. The application will be driven by customer data and have a reliable system for performance measurement in addition to a high level of automation.

Performance Testing
Quality control is crucial for successful software development. The new tool for your business will undergo multiple tests on various devices. The performance of each and every function will be carefully examined and analysed. This is how my team and I ensure that the software will work flawlessly from day one.

Deployment and Support
Every new beginning causes excitement and a little bit of apprehension. My job is to eliminate the second part completely. With the use of the right tools and skills, the technical aspect of the deployment will be hassle-free. Together with my team, I will make the learning curve for you and your people as gentle as possible via special training designed to bring maximum result in the shortest time.

What’s next after the software’s deployment? You and your employees will receive full technical support at all times.

Share what business processes you want to improve with custom software. Contact me via email or call my office and seek Philip Philipov to speak to me directly.