How to Grow SaaS Revenue, Profits and Market Share with Use-Appropriate Software Licensing and Pricing

Executive summary

The initial wave of software-as-a-service (SaaS) was characterized by “one-size-fits-all” pricing. This was largely because SaaS vendors were out to pioneer a new market— and simplicity was a cornerstone of their pitch to early adopters. The offer of extremely simple and economical pricing helped these vendors overcome whatever resistance they may have encountered to a new and unproven model for software delivery.

With increasing adoption of cloud services, the SaaS marketplace has changed dramatically. SaaS and other on-demand models have now been fully embraced as compelling alternatives to traditional on-premises software deployment for many reasons. These reasons include reduced total cost of ownership, faster time-to-benefit, greater flexibility to increase or decrease capacity, and easier delivery to remote, mobile and/or third-party users.

Unfortunately, many SaaS vendors still employ a one-price licensing model, even though customers have already demonstrated their acceptance of—and even preference for—pricing that more accurately reflects the actual value that a SaaS solution delivers.

Vendors who don’t move beyond one-price SaaS model suffer from two core problems:

  1. They leave money on the table. When vendors charge a single price for their SaaS offerings, they are giving away features and functions for which customers would certainly pay a premium. This substantially reduces revenue and margins.
  2. They miss sales opportunities. Vendors who don’t offer lower-cost, entry-level solutions miss out on substantial sales to both potential and existing customers. This reduces near-term revenue and market presence. It also forfeits long-term opportunities for up-sell/cross-sell revenue.

The solution for SaaS vendors is obviously to implement software licensing and pricing models that more accurately reflect the value they deliver—and that give customers greater choice with their software spend.

This use-appropriate pricing can be readily implemented without burdening developers or slowing time-to-market.
Instead, proven software licensing and entitlement management tools can be used to segment access to software features, set limits on concurrent users, track the number of devices from which any individual user account accesses the software, manage transitions from free trials to paid subscriptions, and define any other use/cost parameters appropriate for a value-based pricing model.

SaaS vendors that fail to evolve past a one-price model will continue to miss out on revenue opportunities. Those that adopt use-appropriate pricing, on the other hand, will grow revenue, margins, and market share. They will also be better equipped to use pricing as a strategic competitive advantage as the global SaaS market continues to grow and mature.

Leaving money on the table

The first wave of SaaS market-makers primarily sold against incumbent on-premises software vendors. In doing so, they faced a variety of psychological barriers to adoption— not the least of which was that SaaS solutions could not match the capabilities and sophistication of conventional enterprise applications.

Against this perception, SaaS market-makers were able to offer compelling incentives of low cost, minimal risk, and great simplicity. These incentives attracted early adopters, who discovered that SaaS is more than just easier and cheaper way of implementing software. It is also great for accommodating peak workloads, supporting mobile/ remote users, and provisioning business continuity. Because of how quickly and easily they can implement upgrades, SaaS vendors can even out-innovate their more conventional competition to offer differentiated features and functionality.

Unfortunately, while the superior value offered by many SaaS solutions has been widely recognized in the marketplace, the legacy of one-price SaaS remains. As a result, today’s SaaS vendors typically leave money on the table every time they make a sale.

One-price SaaS tends to shortchange SaaS vendors in three ways:

  1. The one price is too low. Many SaaS vendors focused on highly attractive pricing in order to optimize the speed and breadth of their market penetration. Now they find themselves stuck at a price point that does not accurately reflect their solution’s real business value.
  2. One-price SaaS doesn’t reflect the added value of premium features. SaaS vendors keep adding new capabilities to their solutions to differentiate themselves from the competition. But not every customer wants or needs these additional capabilities. So one-price SaaS vendors wind up giving them away to both the customers who use them and the customers who don’t.
  3. One-price SaaS doesn’t reflect the added value of incremental business use. SaaS vendors tied exclusively to a price-per-concurrent-user subscription model don’t get compensated for the fact that they may be supporting three different shifts of users during a single 24-hour cycle—or that individual users may be using their software (and therefore require support) on two or three different devices. In fact, “credential sharing” among multiple users is costing some SaaS vendors 40-60 percent of their potential per-user revenue.

Of course, most SaaS vendors already charge customers for tangible “extras” such as additional data storage volume, transactions above a specified threshold, and/or data import and export. But these types of ancillary charges are tied to deliverables other than the software itself.

SaaS vendors, however, can also benefit significantly by generating additional revenue based on the additional business value their software provides to customers. If they fail to do this, the profitability of their core software subscription business will always suffer. SaaS vendors should therefore stop leaving money on the table and gain the ability to charge their customers a fair price based on their actual use of the software.