Jul 2, 2008 by Sinclair Schuller
Part of defining your SaaS business is determining a pricing strategy. Two primary categories of pricing taxonomy in the SaaS space are pay per use (each time a user uses your software, you charge a well known amount. Much like buying beer at the bar) vs. fixed recurring pricing (much like paying for cable television, where you pay some periodic fee for generally unlimited access). As a SaaS ISV, when should you choose one vs the other?
The decision really boils down to understanding value acquisition from the customers perspective. In order to charge on a recurring basis, you need to be able to justify your pricing with a measure of the magnitude of value acquired by your customer along with value acquisition frequency. For example, if you’ve designed a very valuable piece of software that might be used once or twice a month by your customer in their business processes, odds are they would prefer to “pay per drink” rather than a recurring fee since theoretically you should be able to charge less in an absolute sense for that one time used instead of unlimited for a given month (they would generally be willing to pay a premium as long as total cost is lower than recurring fee models). However, if your offering has frequently recurring value acquisition from your customer’s perspective, odds are they’d prefer to pay a fixed fee at some frequency knowing that the firepower is available to them when needed and that cost is fixed but value acquisition has no ceiling.
Clearly, what I’ve described is a trivial rule of thumb. If you’ve ever encountered this decision or have thought about the differences in these models, what other components should be considered? Have you ever offered a SaaS service in one model and then switched, or ended up offering both?
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