Hi John,

Hi John,

Having been COO of an SaaS (actually, DaaS - Data as a Service) company, I have gone through the same exercise. Predecessor management had priced based on cost and some markup. As part of a turnaround, I focused on shifting pricing to a value-based system, as Jesse suggests. There was considerable pushback from customers, since they were used to paying $1,000s for software that generated them $1Ms in value, but we were able to raise prices as much as 3.5x upon renewal.

I say that as background to second Jesse's point that you should base pricing on what the service is worth to the users, not what it costs you. Simple example - if they currently spend $100K/year to do what your software automates, then paying $75K is a big savings. It does not matter what that actually costs you, but they are getting a better solution at a lower cost than they currently pay.

Pricing is a real art/science so take your time.  focus on value as mentioned earlier, but for your first few customers (those paying for your dev) you also need to consider cost.  Don't be afraid to sit down with a prospective client or two or even a company that could one day become a prospect and talk to the people that make software/SaaS purchase decisions.  This differs from company to company and also based on the size of the company, but don't get stuck talking to just one person in each company.  Get input from the user buyer, technical buyer (they will influence the 'build VS buy decisions), financial buyer, executive sponsors, etc.  - look up "strategic Selling" if you don't know what these different buyer-types mean).  Ask them how they make their licensing decisions.  by the way, in your description you use the term "full buyout license" - since the dawn of time (well computer time anyway) software has been "licensed" and never "sold".  Make sure you, your team and your customers know that you never 'sell' your SaaS, you "license" it (i.e. rent it).  Relative to what Jesse and Scott mentioned, if you are looking to have customers fund development you do need to consider from their perspective "build VS buy".  Yes, ultimately you want to price your SasS for the value it brings to the customer not what it costs you to build and maintain, but initially you should consider the customer's cost to build and/or license elsewhere. Sit down with as many prospective customers as possible and do a thorough needs analysis so you truly understand their costs, opportunity costs, competitive landscape, market position, etc.  You want them to know that you are there to help them make money and compete in their markets.  I don't know what market and section of markets you are going after, but if you can find a prospect that sees themselves as a market leader or the "luxury" brand then they understand value-based pricing VS cost plus pricing and may be more open to a higher cost solution.  Only when you have a solid handle on how you can help them sell more, differentiate themselves from their competitors, spot trends, support their customers better  - whatever they perceive their needs to be, only then can you decide how to price your offering.  good luck.  I have run sales orgs for small, medium and very large SW companies.  feel free to DM me if you have specific questions. 

I'm following as I work on our own pricing model of SaaS for an RFP... thanks John - and All who respond

Hey John,

This is really great stuff guys. Such a talented and responsive group. Thank you kindly. Some great material here for me to digest. Off to it... Will report back. 

OK guys thanks for all the great insights. 

One additional option/strategy not raised here directly and to think on once you have the value pricing nailed is to think (realistically) about your immediate funding needs. Is it more valuable to on-board X clients at XX per month (good statistics for investors) or bring on less clients but get much bigger buy in from each (offering discounts on paying a year up front etc?), this can bring in more cash in the short term and extend potential runway organically. 

I have not seen "gain share" model work except in business consulting and two SaaS companies.  I think these guys did it/or still do it.  http://www.servicesource.com/  http://www.athenahealth.com