Are Subscriptions The Only Revenue Model For SaaS?
SaaS is the growth sector in the software industry. It has grown through a subscription based recurring revenue model. There is nothing wrong with this model. But explosive growth cannot last forever. And once SaaS is dominant in the industry pricing and revenue models will be just another way to compete. SaaS businesses should be more creative. Startups can look to alternative revenue models for competitive differentiation.
Many years ago I worked in Johannesburg. I was a manager at the time and I learned a lot from the experience. My mind was broadened by the cultural experience. The fascination of watching a wonderful country emerge from a dark time. I also worked with some great people.
One partner in particular taught me much. He had a trick when approaching a new client. He would arrive for the first visit, get out of his car and sniff the air in the car park for a few moments. Based on his impressions of the head office and the feel of the place, he would estimate the fee potential. Weeks later our proposal would be accepted. Only after much poring over spreadsheets and agonising about margins. He would turn out to be spot on.
Experience and Experiments
Pricing is all about experience. Which creates a challenge for many startups. I fear that SaaS has become narrow minded and predictable when tackling this issue.
Right now it feels like we have adopted the wrong definition for the acronym SaaS. It is supposed to stand for software as a service. In almost every business it has become software as a subscription. You pay a fixed amount per month for using the software. With slight variations based on premium features, number of users or similar. The only discussions are about the monthly cost. And how to present the best option on the pricing page.
Services Are Not Based On Subscriptions
There is nothing wrong with subscription. It works well for magazines or insurance companies. The closest it gets to software in the old days is cable TV. Or access based products like broadband or mobile.
Yet in the pure services industry it is almost unknown. I worked in professional services for 30 years. Over that time we had exactly zero revenue from subscriptions. The same is true of many other services. A hairdresser, a plumber, a freelance developer or a copywriter. None charge subscriptions.
Look To Service Industries For Alternatives
SaaS companies need to start considering the alternatives. In my career, the main revenue models we used were:
- Time and Materials. The old fashioned way. You tell the client how many hours you have clocked. Add on the expenses. And send them the bill. Lawyers and accountants love this stuff.
- Fixed Price. This is a variation on T&M. You estimate the time and expenses ahead of doing the job and give the client a fixed quote. You take the risk if your estimate is wrong. Popular at the point of sale. But it often ends up in arguments about overruns. Or “changes” to the original specification.
- Secondments. Sometimes your client just wants access to expert resources. You provide a member of staff who works under the client’s direction. The price is per diem at salary plus a margin. You will not be keen to disclose the margin.
- Value Based. You look at the value you will add if you carry out the assignment. And charge a fee based on that value. Sometimes with a clear link, sometimes just in the general area. This is the McKinsey model. They have built their business and reputation by never charging rates by the hour or day. And delivering on the promised value. You need string quality and reputation to pull this off.
- Success Fee. Measure the benefit the client has realised at the end of the engagement. Charge an agreed share of that benefit as your fee. This is a close cousin of the no win/ no fee beloved by certain types of lawyers and claims specialists. You will be in trouble if the measurement of benefits is not crystal clear.
SaaS Startups Can Differentiate On Pricing
There are many other variations and combinations. Yet the SaaS industry is offering only one billing model. The variety and specialism of products is bewildering and awesome. When you get to pricing, all of a sudden everything looks the same. This is nowhere more true than in SaaS aimed at SMEs when prices are displayed on the company website.
It does not make sense. Pricing is a key differentiator in any competitive market. It is not just about the sticker price. SaaS companies are closing off a whole range of opportunities. You can use pricing and offers to appeal to customers in many more ways.
Some Ideas For SaaS
I hope that in future we will see different models emerging. Slack has started the trend with its usage based model. Benefits and others are free to use because of an advertising/ marketplace approach. What else might we see? Here are some ideas to think about:
- There is ferocious competition in sales and marketing SaaS. This must be ripe for someone who offers payment by results.
- Lots of B2B SaaS offer process support in some form. One way to approach this would be to take over the whole function. And accept payment at a lower cost than the client spends.
- An alternative would be to charge a low flat fee for basic functionality. Much as today. But charge premium features based on usage or realised benefits. For example, accounting software where you only need some functions for year end reporting.
- Adoption is a big issue for SaaS. Offer reduced fees per user based on larger volume. Or some similar incentive for regular users.
- Lots of business applications have irregular usage patterns. Customers don’t carry out the related process every week. But they have periods of heavy use. A pay as you go model might fit best for this type of activity.
SaaS is already a competitive industry. The pressure will increase as margins fall and the industry consolidates. For many B2B functions, buyers will take a commodity approach. Things like finance systems, CRM and procurement will be hard to differentiate on function.
Cost becomes a big factor in the buying decision. Different revenue models will offer more flexibility to compete. Get creative with pricing structures to offer better value and stand out from the crowd.
For more great SaaS ideas to help your business grow and develop, subscribe to our newsletter. Or visit Sunstone’s SaaS Pricing Stack.