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

Diversity Analysis Subscription Billing paper

Ben Kepes and Krishnan Subramanian over at Diversity Analysis have published a new paper on the subscription billing space. In keeping with their "10 Questions.." theme (See 10 Questions You Should Ask You Cloud Vendor), the paper discusses 10 questions across both operational and revenue generating themes they suggest companies ask themselves prior to either selecting a vendor or rolling their own billing system in house.

All of these questions resonate with us as we hear them time and time again from current customers and from prospects evaluating Monexa Billing. We don't often see them all from any given customer or prospect so it's nice to see them consolidated.

Here are some of the points I found interesting:

"The subscription and billing system should never be an impediment to a new
product approach and if a prospective system of choice puts limits on the
ability to rapidly change direction, it should be avoided."

This is really the crux of the Monexa Billing value proposition: Flexibility and Agility. Yes, a billing system can increase efficiency and save you money but it is crucial today to be able to quickly adjust your marketing and selling approach. Quantifying this for some of our prospects can be very difficult though as they can be very focused on today's problem:

"Businesses often make the mistake of underestimating the ongoing
complexity of their charging strategy. They might start with a very simple
monthly billing package but given growth and changing promotional
strategies the business may wish to offer new packages and/or broaden their
customer base geographically."

Quite often we think of billing complexity along only one axis, the pricing plan. Is it a simple monthly subscription? does it have a usage component? Billing is more complex than this. A good rating engine needs to understand the pricing plan configuration but also things like pro-rating rules, contract terms such as up-front or periodic payments. How will you handle metered billing? Will you simply bill in arrears or take a draw down deposit. As a prospect, it's hard to know what questions to ask if you haven't seen hundreds of pricing and billing models before.

One of the most effective topics for describing on-going complexity is the tax issue:

"The need to be able to react to international
taxation rates and laws, international currency issues, diverse payment
methods and multiple languages are all factors that need to be taken
into account."

Our previous blog and resource center paper on the Taxation of online commerce was by far our most read topic. It is easy to grasp the scale of the taxation problem if as an online vendor you have to keep up with taxation changes in thousands of jurisdictions. You definitely want to leave that to your billing vendor.

Have a read of the entire paper, you can get it from our resource center.

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.  

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. 

 

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.