Most of my application development is done directly for clients on a custom one-off basis. I am now considering developing my own Software-as-a-Service (SaaS) application. Being realistic from a business prospective, since application development is my livelihood, I need to make sure that the application I develop is profitable. What pricing models exist for web applications and what model makes the most sense for a startup?
To answer this question I first looked at the most popular SaaS applications available. This includes Basecamp, Salesforce, Google Apps, and NetSuite. How do they price their products? Looking at these I came up with the following guidelines.
- Give something away for free. Make sure there is a light or trial addition available for free so that potential customers can get used the product. Google and Basecamp both have free personal additions. Salesforce has a free trial and a very low cost personal addition
- Have a pricing structure that grows with your customers. As they become more successful, the SaaS provider should grow with them. That means both in gathering more money, but also in providing more services.
- Charge on a per user basis or based on the size of the data set (customer base).
- Allow them a way out. Make sure they always have access to their data, even when they cancel. This provides a comfort level with your product in the first place. But if they don’t pay, then they are either reverted to the free version or can’t add new data.
- Make the choices between levels of service and features clear. Let the customer decide where they fit. Also provide enterprise level pricing for clients who need custom solutions or additional hand holding.
- Provide discounts for clients that pay up front. This helps your cash flow, so providing an incentive helps.
- Set good renewal policies and auto-billing.
Basecamp Pricing Matrix
Next steps might include looking at the value of my product to my potential customer base and asking them what they are willing to invest in such an application. Then combining expectations with costs and profits I can set my pricing accordingly. At the same time being mindful of the examples of those who have set the rules, but also be willing to break them as well.
4 Comments
Interesting analysis of SaaS models. We at DeskAway also have a free plan and definitely that works best cause people can easily sign up for that and see the value of the service we are offering.
Thanks for the feedback Priyanka with your experience. I noticed that you have the free trial prominently displayed on your site. SaaS is certainly lends itself to the try-before-you-buy style of consumer behavior. Kind of wished I did that today with a piece of desktop software that didn’t quite work as well as advertised.
This is a great question to ask yourself before you get started! We changed our home page signup process to include just two fields. Since doing that, we have 11% of our visitors sign up for the application. That’s a great rate.
The other end of the funnel is to have people upgrade and pay you money! I like this end… We are focusing on this end by offering incentives like discounts for upgrading sooner rather than later. We are also giving my book, Infoenza away to people that upgrade within two weeks of signing up.
It’s working tremendously! The only issue with our pricing is that we don’t have much of an opportunity to do enterprise deals…but that’s not our business.
Thanks for the analysis…this is a great post.
Troy Malone
Pelotonics
Thanks Troy. Took a look at your tool. One suggestion on your site, I’d move the screenshot on the second page to the front page. Give people a preview earlier in the process. Otherwise it looks great and I might use it to collaborate among team members for a new project I’m starting soon.