EC1 Capital

Enteprise SaaS pricing: Balancing Simplicity, Cash flow and ROI

Kapil Singhal discusses the things to think about when pricing an Enterprise SaaS product
Kapil Singhal Kapil Singhal Sat 23rd Aug 2014 23:12
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SaaS (Software as a Service) is slowly but surely sweeping away the old world of on-premises software systems. SaaS products allow enterprises to save substantial costs on hosting infrastructure, expensive software licensing, development and maintenance costs.

Yet the image of SaaS embedded in most people’s minds has a distinct b2c flavour. Many consumer SaaS companies have opted for a freemium model, waving a carrot in the face of consumers before upselling premium features for relatively low monthly fees.

SaaS household names such as Dropbox or Linkedin Premium work well with low monthly fees as it mirrors habitual consumer spending patterns e.g. on utility or mobile phone bills. The cost of user provisioning (ie setting up an additional user) is marginal so SaaS companies well versed in the art (or science) of user acquisition stand to gain bountiful recurring revenues. 

Whereas consumer SaaS gets much of the press, the enterprise sector perhaps provides the most fertile market territory for SaaS opportunities. To show the sheer financial weight of enterprise software, the three biggest vendors – Microsoft, Oracle and IBM – earned combined revenues of over $120 billion in 2013.   

 

The Dark Days of Enterprise Software     

Large and medium sized enterprises have traditionally paid for software in three hefty parts:

  1.      Upfront Design, Development and Integration fees, which typically run into millions and spans 9-12 months before the first signs of user activity are seen.
  2.      Ongoing annual license fees
  3.      Maintenance & Support fees

 

The Future of Enterprise Software

The new age of Enterprise SaaS disrupts the legacy model by:

  1.      Accelerating business productivity i.e., solving real commercial problems by creating user-centric systems, leveraging existing IT infrastructure and/or riding on top of existing application servers to add value.
  1.      Reducing total cost of ownership by a factor of 5-8x over a 3-5 year period
  1.      Reducing time to deployment from months to weeks – enabling near immediate ROI for clients

Enterprise SaaS has the tools to disrupt all three elements of integration costs, annual licencing and support costs.  But this is not necessarily by replacing all three by a monthly subscription fee. Pricing strategy in Enterprise SaaS is a more complex, yet possibly more lucrative, beast.

Whereas consumer SaaS companies are largely addressing the needs of single users, enterprise software is solving nuanced business needs of a whole organisation.  As a result, the product development phase is more complex with important considerations around security, interoperability, and scalability.

 

Practice some Enterprise Empathy

Pricing an Enterprise SaaS product is a tricky business. Applying a simple tiered, freemium pricing model will often underestimate the true value the software brings to enterprises.   It is key to have an idea of both the corporate budget allocated to new software as well as the Return on Investment that the enterprise customer stands to gain.  With this information, a startup can better gauge the comfortable pricing sweet spot for enterprises.

 

Cash Flow is King

While there is no ‘one size fits all’ winning pricing strategy, it is important to have cash on the mind.  Cash flow can be the life and death of a business and so the ideal pricing structure should ease the onus on both the startup and the enterprise customer.

On the enterprise side, charging monthly may offer more headache than simplicity. Having to process multiple invoices in a year may add to a large company’s financial overheads.  A growing number of companies are now offering the choice of monthly and annual billing plans to mitigate this.   On the startup side, cash is pivotal in order to stay liquid.

The opportunity lies in creating creative bundles of pricing that focus on the ultimate goal of reducing the total cost of ownership across a 2-3 year horizon for an enterprise and provide the startup with enough liquidity to continue operations.  Once the user needs are satisfied and management can see a clear Return on Investment, the pricing then becomes a simple financial mechanism to smooth out cash flows for the enterprise and (more importantly) the start-up!

 

Kapil Singhal is Co-founder and CEO of humanLearning (hL), which is working with Fortune 500 firms to expedite more value from within their user and Management communities. 

He is also an advisor to EC1 Capital.



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