For Better Subscription Sales Price Your Services Like a Mobile Plan

Most SaaS companies sell their software as yearly or multi-year subscriptions, and often they want all the cash upfront. Although it's good for the vendor to get their cash upfront and eliminate some of the billing administration, it is not how their prospective customers will want to buy in a cash-strapped economy or perhaps ever.

A few months ago I was trying to purchase (or should I say subscribe to) marketing automation software for my business. Every vendor I talked to wanted a large annual fee paid in advance. To make matters worse, they were asking for an entry-level fee that assumed 10 times more usage of their service than I could justify, and included modules I don't need at this stage in our growth.

So I asked the question: why not sell me a plan that suits my consumption of the services at a price point that makes sense for me, so you can capture my business and let me grow with you? In other words, remove the barriers that are stopping me from making the decision to buy.

I received a number of responses from the sales staff I asked which ranged from "That is just the way our pricing works" to "Oh how I wish I could." I received one call from a senior sales manager of one of the better-known providers to explain his point of view, which was they had priced their services to hit a specific size and maturity of organization. He further indicated they had made a conscious decision not to serve the smaller market because many of the features and capabilities would not deliver the value to a small organization. His argument and approach was well articulated and intelligently presented (much better than I did here), but he did not convince me -- and here is why!

Personally I like to think about the classic mobile phone plan as the standard to which we might all compare ourselves to. A mobile phone plan, although rather complex in its execution, is actually pretty easy to understand. Mobile phone companies have demonstrated that a single product can be the basis of a wide range of value bundles at a wide range of prices for a wide range of customers, and they have incorporated three significant strategies that are absolutely brilliant.

Number 1: Mobile phone plans virtually eliminate all barriers to adoption, by providing a pricing plan for every size of potential user.

• For the very smallest customer there is the prepaid card plan. You put as little or as much as you want on a card, use your phone and when you have used up what you paid for you can choose to add more funds to the card or not.
• With creative bundling and the use of a la carte menus there is a plan that will fit in to every users need and budget.
• As a result mobile phone adoption is amazingly high with some countries having adoption rates higher than 1 phone plan per capita.

Number 2: Mobile phone plans capture every penny of revenue by employing complex yet easy to understand and fair pricing strategies.

• You can choose from any number of bundles designed to target different user requirements and size of need. In addition you can select service upgrades from an a la carte menu, to get exactly what you want instead of being forced to pay for services you don't want or need.
• Most of the services come with a set amount of included usage (phone minutes, data plan, # of txt msg's), however you are never limited to how much you can use (exception being prepaid). You simply use what you want and get billed for the overage, maximizing revenue from customers who opt for lower cost plans as an entry point (remember with a higher entry point you might never have gained that customer in the first place).
• Mobile phone companies offer incentives (or is it higher prices) depending on the time of day or day of week you use the services. You pay a monthly fee for free evenings and weekends. This seems like a great deal to you but at the same time it is enabling the mobile service provider to shape usage patterns in order to spread the load out over their systems thereby saving them on infrastructure costs while still charging you for time that would otherwise have much less usage.

Number 3: By using almost unlimited flexibility in their pricing strategies and removing cost as a barrier to entry, they have closed the gaps that competitors can use to launch attacks on their market.

So my message to the SaaS marketing automation software providers or any SaaS company is you can choose to emulate the highly successful mobile phone model of pricing or continue turning away customers with high-cost, paid-in-advance, bloated features pricing. The customers you turn away because they don't "fit your target market" will become someone's customer, and that someone is a competitor of yours.

Traditional software marketing thinking segments the market and targets some segments at the exclusion of others. Courtesy of the mobile companies, your customers are already trained on picking a value package that suits their needs, so why not leverage it?

To be the mobile phone company all you need is a little subscription billing and payments automation, and some good customer feedback on how they want to buy!

About the author

Kevin Lennox is the Vice President of Sales for Monexa (formerly IP Applications), a company with 11 years experience in the subscription services billing and payments industry. The company's SaaS billing platform provides a complete subscription services commerce platform which includes product catalog functionality which allows for complex billing rules, customer interfaces for purchasing and self servicing, automated provisioning of services, payments processing and dunning automation as well as a complete set of reseller power tools to empower channel sales.

See the article on this topic published on EbizQ

The SaaS pricing debate revisited

Over the last year, the SaaS and PaaS players have all been working on finding pricing models that work for their clients and businesses. 

While nobody seems to have nailed it just yet, some recent decisions by some really large players in the enterprise software game have shone a spotlight on what doesn’t work.   

It may not be obvious at first blush, but most small and medium sized companies that use software to power their online businesses need the same software features that big companies do.  They just don’t need the same amount of them as big companies do.   

The trap that awaits software marketers that miss this point is that by narrowing the product functionality to hit an affordable price point they produce a product that nobody wants.   

Just think of what would happen if a leading car maker offered an “entry-level” vehicle based on their top-of-the-line chassis.  However, to offer an entry-level price, they leave out the window glass, the transmission and the passenger seats.  Even though it contains most of components that are in the higher priced “enterprise” version, this “entry-level” product is doomed.  Software works the same way.   

The lesson?  Product plans that eliminate software functionality to arrive at an entry-level price won’t deliver new customers.  

The RFP 2.0

Everyone knows the RFP is dead in the SaaS world right?

Our product is a relatively sophisticated on-demand billing system for companies that have non-trivial subscription billing needs. The thing about our business is that any SaaS or Cloud Service company, even the ones just getting started, know they will, in very short order, run into problems rolling out new plans, supporting payments for international customers, and simply handling the subscriber management as the business grows.

So, we deal with prospects and customers ranging from 3 guys in a garage so to speak (not intended to be derogatory, I've done the garage thing twice. It's fun, hard and very rewarding)  to large enterprises who don't want to spend 18 months and $10M ripping up their ERP or Telecom Billing solution to simply roll out a new subscription product.

For example, last month we answered 3 RFP's (aren't they dead?), had online leads from 10 pre-revenue companies and a whole bunch of prospects in between.

The point is, a lot of SaaS companies like us deal with the full spectrum of buying behavior so we are rarely surprised at the different ways people find and evaluate vendors.

Today we saw our first RFP 2.0. We've seen lots of folks using twitter and other social media tools to ask about various vendors and solutions but this approach took it further. @dacourt created a google spreadsheet with some high level subscription billing capability questions, shared with the public and distributed over twitter. A few vendors were initially filled in and over the course of a day or two other vendors added their product evaluations to the mix. Very cool use of today's social media and collaboration tools.

Check out the subscription billing spreadsheet or just search twitter for "subscription billing" and you'll find it being discussed.

It would be great to hear some other stories like this...

Does Your Billing System Help or Hinder Sales?

A few weeks back I was chatting with a marketing executive from a multi-billion-dollar software company that operates around the world.  They’re very successful; let’s just leave it at that.   

When I asked him about his SaaS products and the company’s billing strategy, he seemed a bit surprised that there was even a question.  His response boiled down to “our CFO says we only accept customers that can pay for the full year up front”.  When pressed, he admitted that his company had declined customers that wanted a different payment arrangement.  At his company “billing” is a financial issue.  His competitors might see it as part of their go-to-market strategy but this guy’s CFO respectfully disagrees.   

In a competitive world, turning business down because your rigid accounting or ERP system won’t support a customer-friendly contract billing cycle is bad business.  It puts entire market segments out of reach and creates opportunities for competitors.  Imagine a cell phone company announcing that it would only accept customers that paid a full year up front because they didn’t have an automated billing system.   

It’s a back-office strategy that reduces workload two ways:  less work per customer combined with the added “bonus” of fewer customers.  It reminds me of the parable of the horse-drawn carriage driver who reduced his costs by feeding his horse a little less every day.  The strategy was successful, although just as he was getting to the point when he could feed it nothing at all, the horse died, with dire consequences for his business. 

Worthwhile customers come in many flavors.  Some customers need price certainty.  Others want to pay as they go.  If you have the flexibility in your back office to sell the same product to both, you have the opportunity to grow faster and make more money than your competitors.  Traditional accounting and ERP products weren’t built to support subscription billing.  Just ask your CFO. 

 

Monexa subscription billing launches

It's been a very busy month for our team. We had a number of exciting clients go live and with all our spare time, decided we would re-brand the IP Applications subscription billing service.

The branding exercise was an incredible amount of work considering we decided to launch it at the SIIA OnDemand show in San Jose this week. Having said that, these exercises are always a great way to bring the team together.

We learned a lot about how our customers see our company and our billing product. We got to work with some really creative people. The team at WoW did our branding work and on top of having some really great creative people, made us think hard about exactly what type of impression we want our brand to make.

We'll be writing a series of posts on our experience but we wanted to get a quick post out there to see what people think of the brand. We've worked hard to create a brand that invokes a reaction so we'd like to hear yours. Our twitter feed is also a great place to follow the conversation.

More to come this week...

Freemium conversions: Sales versus Finance - whose job is it?

An automated billing solution smooths out the flow of revenue and cash from freemium renewals by ending the debate over whose job it is to remind your customers to renew. 

Let’s just say that you’re commercializing an open source product on the freemium model.  You have a million or two “free” users and a nicely growing group of paid subscribers getting the enhanced version of the product.  While you might not consider your customers “subscribers”, the term “subscription” in this context is a bit of payments and billing jargon that describes an enduring business relationship that has to be invoiced occasionally to keep it alive.   

Depending on your business model, but most likely once a year, your existing paid premium subscribers need to renew their subscriptions.  The question is, which part or your org chart should be responsible for making sure renewals happen?  In most companies, Finance takes the position that coaxing customers to renew isn’t their job, and that they wouldn’t be very good at it even if it was.  Meanwhile, to keep the growth rolling, your sales force is tightly focused on generating new revenue from new customers.  They’re loath to stop pursing new business and turn their attention to what looks like a low-value maintenance job.   

But, regardless of whether anyone wants to do it, somebody has to reach out and remind your customers that it’s time to renew.  Your customers are more focused on using the product than paying for it. Chances are good that if you don’t remind them to renew, they just won’t get around to it.  If the “premium” part of their service stops when they don’t renew, they will probably get around to renewing in a few months, but then again, maybe they won’t.   

What’s our experience in this model?  Well, in the last few months, two freemium business-model companies have begun using Monexa Billing to automate their renewals.  It’s a simple solution to a vexing problem.  The subscription billing application remembers the customers’ details and it automatically reminds them when their subscriptions are about to run out.  This keeps the sales force selling to new customers, and allows the finance staff to respond only to exceptions where payments don’t arrive properly.    

You get a smooth revenue flow, peace between finance and sales, and best of all you have happy, up-to-date paying customers. 

Subscription Storefronts, Admin Portals, Rating Engines and Payment Gateways

Our last blog post dealt with our telecom billing heritage and the need for a strong rating engine if you want to handle the coming pricing models of cloud based applications. It turns out, a strong rating engine is only part of the story, and to our customers and prospects, quite often not the most interesting part.

It doesn’t matter where you start on the spectrum of monetization applications for subscription-based services and products, you have to do everything right to bring a subscription service to market.  As a “billing” company, prospective customers arrive on our doorstep looking for one or maybe two of the above.  The conversation warms up considerably when we talk about our whole range of capabilities. 

The Storefront gives subscribers a low-touch way to subscribe.  “Touch” is a weird variable in the business equation.  Regardless of the customer response, it costs money.  For some products, increasing touch increases satisfaction, but for many products it lowers it.  A well-designed self-service storefront can improve the customer’s experience as it reduces costs.  Subscribers like to set themselves up on your system because when they do it themselves, their name is spelled right, the products they want will be what they get, and they don’t have to worry about whether the stranger on the other end of a phone is going to steal their credit card number.  A clean and simple storefront improves customer satisfaction.   

The Admin Portal is how your company’s staff communicates with the system.  Through it they configure products, pricing plans, business rules and process workflows for your customer’s experience.  A well-designed Admin Portal connected to a comprehensive application provides tremendous flexibility.  Flexibility in defining pricing, product presentation and subscriber experience becomes increasingly valuable over time as product lines evolve and the customer base expands.   

The Rating Engine automates the financial administration of your business deals.  The Storefront and the Admin Portal are how the participants in a deal define the key business parameters.  Then, every billing cycle, the rating engine takes all that data about products, prices, taxes, currencies, subscribers and usage and computes an invoice.  Long-term contracts with variable terms, like subscriber counts or usage statistics are very difficult to bill accurately.  The rating engine doesn’t get bored, it doesn’t go golfing, it doesn’t take vacation, and it never forgets.   

The Payment Gateway, for those deals where payments are made by automated bank check or by credit card, is where money happens.  “Payment gateway” is a simple concept, but the actual implementation can be daunting because of its complexity.  Moving money around is done by banks and credit card issuers, and they protect us and themselves with walls of bureaucracy and risk mitigation strategies.  Your choice of business model has a powerful influence over how long it takes to get set up and your long-term costs of doing business.  The payoff to all the challenges is that once the setup and testing is complete, money “just happens” every billing cycle.   

There is a lot more detail behind a complete subscription commerce business, and that becomes evident as new customers work through the onboarding checklist we’ve developed over the last decade.  The good news is that once that detailed work is done, you have a smooth-running and efficient subscription business system that supports your products, your business model and your subscribers.

SaaS channels coming of age

At Monexa, we've been writing about the emergence of successful channel strategies within the SaaS community for some time. Late last year our VP of Sales, Kevin Lennox, wrote about the importance of channel strategies as SaaS companies penetrate the mainstream.

We've seen a number of announcements recently around channel strategies in the SaaS community. Some, like the Microsoft reversal on who will own the billing relationship in the channel (microsoft or their VARs) make it clear that the large traditional ISVs with established channel strategies are actively implementing their SaaS strategies, even if they're a little rough around the edges.

Just yesterday, Intacct announced a channel relationship that will plant their SaaS offering directly in the mainstream of the SMB accounting and financial services industry. This is a very significant announcement from a pure-play SaaS provider.

Monexa has an interesting vantage point of the happenings in the SaaS market with respect to channel strategies. We provide an on-demand subscriber management and recurring billing solution that has specific strength around billing recurring services with channel or reseller relationships. So, our customers and prospects run the gamet of SaaS startups, traditional ISVs launching SaaS services and successful pure-play SaaS companies.

In 2009, we've seen an enormous increase in the number of prospects in our pipeline that are launching SaaS services into existing or newly created channels. Almost daily, we're talking to pureplay SaaS companies, but also traditional ISVs looking for subscriber management and recurring billing solutions that will support their channel strategies.

From where we sit, the Intacct announcement is only the first of many coming down the pipe. At Monexa, we share Jeff Kaplan's view that 2009 will be the year of the channel.

55% of SaaS companies sell their software licenses as yearly or multi-year subscriptions

The overwhelming predictions among SaaS writers is that companies replacing outdated software or implementing new software capability will seriously consider SaaS alternatives. One big reason in 2009 will be to avoid large capital outlay.

According to a 2008 survey released by Softletter, 55% of SaaS companies sell their licenses as yearly or multi-year paid in advance subscriptions. From a cash flow perspective that's great, but many of the prospects you are likely to work with in 2009 will be directed to conserve cash. As a result charging annually in advance may not be a good customer acquisition strategy.

Consider your prospects decision criteria in an uncertain cash is king environment. Their thought process is probably something like this:

• Do we need this or can we do without it?  See our blog entitled The Economic Downturn and SAAS Companies.

If we need it:

• What companies can provide the solution we need?
• What will it cost?
• What am I committing to?
• What if I need more or less of this service throughout the term?
• What are the payment terms?
• Am I comfortable with how and what I am being charged?

If all else is reasonably equal (product functionality, vendor viability, total cost, contract terms etc.) your prospect will surely prefer a monthly or quarterly payment option or some form of value / usage based pricing.

In SaaS, customer retention, renewal and growth are what drives continued revenue and profit. Your products and value based pricing is what attracts them and helps retain them. If you are one of the 55% asking for annual payments up front you may want to reconsider or at least keep a close eye on your prospects buying (or lack of buying) habits in 2009. If you are one of the 45% offering subscription flexibility with pay for use or monthly or quarterly payment structures, 2009 is the time to herald that advantage just as loudly as you can.

2009 could prove to be a pivotal year for those SaaS companies that are able to match the purchasing and payment criteria of their prospective customers.

SaaS or on-premise, channel partners and VAR’s are equally important

In the past month, I attended 3 SaaS industry events (Softletter's SaaS University, Salesforce.com's Dreamforce, and SIIA's On-Demand conference) to keep up with what is happening in SaaS and Cloud Computing, and to investigate new partner channels for IP Applications on-demand subscription billing and payments platform.

A key message at all three events was how channel partners and VAR's played a key role in almost every SaaS and Cloud infrastructure vendors' strategy. This was especially gratifying to hear because a couple of months ago I wrote a blog article challenging the wisdom of a significant analyst group that had suggested SaaS companies would not go to market with partners.

When researching to support my argument I came across Intacct, a SaaS company with what appeared to be a mature partner strategy. So at the SIIA On-Demand conference I was not surprised to see Daniel Druker, Intacct's SVP of Marketing and Business Development lead a panel of SaaS executives in a discussion on the importance of channels and VAR's to all of their businesses.

The point is that the SaaS industry from a partnering perspective is no different than the traditional on-premise software business. Software companies, whether on premise or SaaS, still need to develop new markets, deliver vertical expertise and service their customers and channels.VAR's will play a big part.