You may also want to view our webinar “Pricing Considerations for Cloud Solutions”
How to Determine Pricing for a SaaS Application
Pricing is a big question for ISVs that are moving an existing on-premise application to a software as a service (SaaS) model.
There are many more pricing models for Cloud applications than for on-premise. It really opens the opportunity to be creative and to establish pricing that really aligns with the value you are providing.
If you are entering an established market, the existing competitors will be your first benchmark. If there are one or more dominant players, it would not be a good idea to introduce a completely different pricing model, unless you have a truly disruptive solution. With competition, you will likely have to be more aggressive in offering discounts as clients shop around looking for the best deal.
The level of services you provide can impact your pricing, because you will be looking at the overall margin you get, not just the revenues from your solution. There are complex solutions that generate services that are 2-to-10 times more than the license, in which case you can be more flexible in the price you end up charging.
The technology platform plays a role in pricing. Open source products are often provided free, with revenues coming from services contracts.
If you are selling your SaaS solution through your website or an app marketplace, you will want to keep pricing simple. Best practices lean toward no more than three pricing levels.
If you are working through a channel, you will want to be sensitive to the impact on your channel partners, especially if you are going to be offering a SaaS version side-by-side with your on-premise product.
A few common pricing models include:
• Freemium – limited use product for an unlimited duration. Free trial – a full-featured product for a limited duration.
• Ad-based – Full-functioning applications paid for by advertisers wanting access to the user base.
Pricing per Unit of Measure (Metrics-Based Pricing) – This is emerging as a common pricing model because it most closely aligns with actual consumption, similar to utility pricing.
Revenue Sharing – This is a value-based model where the application provider participates in revenues processed through billing engines or similar.
Perpetual License – There is nothing to prevent you from charging a perpetual license fee for a Cloud offering, in the same way you do for your on-premise solutions.
Classic SaaS Pricing – The classic pricing model is based on “per user per month.” A quick and easy formula for an annual subscription price is:
• Start with the on-premise, perpetual license fee
• Add in three years of maintenance
• Divide the total by three.