Anyone experienced with B2B SaaS product pricing structure/licensing?

December 10th, 2013

Hi guys, I'm new to FD so wanted to say hello. I'm developing a B2B SaaS product and had a few questions surrounding structuring pricing… I'm not looking to raise money, I'm trying to have clients (business) fund the development. I am selling this in two ways:

a) full buyout license + monthly hosting/support or

b) one-time setup cost and monthly fee (% license + hosting/support).

If my estimated initial build cost is $25,000 (onshore, local talent) then:

- how should I structure the license fee for both full buyout and monthly?
- how many paying clients should I plan on being utilized to cover all development costs? I could then work out fees from there.
- in the monthly pricing model (b), should there always be a part of the build cost factored in?
- how should I scale the pricing based on the size of the business (larger companies have more money)?

Any other insights into pricing structure for B2B SaaS models out there? Would love to hear your experiences - John.

Rob G

December 11th, 2013

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.

Jacob Shriar Head of Product at BrainBank

December 10th, 2013

Hey John,

I currently work for an enterprise software company, and I'd be happy to share my experience with you.

For larger companies, we charge an initial license fee (in our case, it's ~$100k), and starting in year 2, there is a 17% maintenance fee (you could obviously charge monthly). This includes the hosting/support.

For smaller companies, we charge $38k/year flat fee, again you could easily do it monthly.

This link should answer most of your questions. Good luck!

http://sixteenventures.com/saas-web-app-pricing-resource-guide

Ben Land Corporate Communications & Entrepreneur

December 10th, 2013

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

Anonymous

December 10th, 2013

Hi John,

Check out the content created by price intelligently in their blog: http://blog.priceintelligently.com/blog/bid/190815/A-Complete-Guide-to-SaaS-Metrics-and-Your-Pricing-Strategy

In addition to approaching your product idea as a fixed r&d cost which must be recovered, you should also attempt to figure out the value of the problem you're solving and the size of your addressable market.

Jesse

Scott Milburn Entrepreneurial Senior Executive and Attorney

December 10th, 2013

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.

John Duffield

December 10th, 2013

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.

John Duffield

December 12th, 2013

OK guys thanks for all the great insights.

The concept of 'value based' pricing was like a smack-in-the-face wake-up call. Makes a lot of sense. These two videos are highly recommended if you haven't watched them. Basically an overview of 'Whats In It For Them' approach to pricing. You can price all you like, but its the perceived value for your potential customer which really counts:

Free beginner (15 mins): http://sixteenventures.com/saas-web-app-pricing-resource-guide

Free advanced (15 mins): http://sixteenventures.com/how-to-price-your-saas-or-web-app-advanced

Also, my product contains functions which drive revenue for my clients (business). So in an effort to become more appealing on the value-generation side of things I am re-evaluating earlier considerations of going entirely on a 'revenue share' payment system. That way both parties have skin in the game and the barrier-of-entry for early adopters is lowered. Early adopters can come on board quicker as they don't need to be caught up for as long in the layers of approval needed to sign-on. There are less concerned with lengthly ROI analysis based on my current upfront + monthly 36-month contracted term.

I already have a few proposals out to prospects with my current pricing approach, so will wait to hear the feedback on that. But in the meantime, I need to focus hard on coming up with creative ways to identify all possible revenue-generating functions of my product in order to have a small % fee be do-able client payment revenue stream for me.

Anyone have experience or thoughts on B2B products based entirely or in-part on revenue share? Should this be in place just for early adopters or permanently etc.

David Morse VP of Sales at Censio

December 2nd, 2014

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

Gain sharing is complicated and hard to measure unless you can so easily and objectively beyond the shadow of a doubt measure your contribution. And at some point, customers would just rather have a fixed cost to budget and simplicity. Also, even though customers may share a %, if the absolute $ value of the % is too high, they may prefer a predictable fee.

Some additional thoughts on developing SaaS pricing: http://b2bsalesvp.com/saas-pricing-sell-larger-deals/

Matthew Griffiths Technology Entrepreneur, CTO, Startup Executive

December 3rd, 2014

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.

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