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SaaS Pricing Precedents

Posted by Colin Kingsbury

Jan 31, 2007 10:51:00 AM

Jason Corsello posted last week about how some Software-as-a-Service vendors' pricing is starting to look more and more like the "bad old days," and includes an example to illustrate his argument. One of the commenters responds, saying "It's simple - the pricing models you refer to are just not SaaS."

All of this hearkens back to Thomas Otter's brilliantly-titled "Nobody Expects the SaaSquisition" post, where he wrote,
For ages I have been trying to figure out what SaaS is. I’m still no clearer, and I have read masses of posts, analyst reports, marketing materials and irregulars emails. It seems there are different forms of SaaS, including the highest forms of SaaSdom, "pure" and "true" SaaS.
The one and perhaps only thing I think every SaaS vendor can agree upon is that their own pricing model is "true SaaS" while their most-reviled competitor's is not.

The problem is that while customers often say they want service-based pricing, the way they sign contracts often says differently. If we look at three common utilities we can see three different approaches to the service pricing conundrum:

- Gas and electricity are typically purchased on a pure usage basis. Last year my gas bill ranged from just under $20 in the summer to nearly $200 in January. Prices vary with both usage and commodity price, and there is no choice--everyone gets the same "product."

- Cable TV offers a variety of features (channels and add-ons like a DVR), but all based on a flat monthly rate regardless of the number of hours you watch. You also pay based on the number of TV sets in the house.

- Mobile phones are priced by the minute like gas or electricity, but most customers opt to buy a fixed monthly minimum amount at a discounted rate.

It is interesting to note that the only markets in which pricing is based purely on effective usage are those which are effective monopolies, and long-standing ones at that. Mobile phones, which are the newest and least monopolistic of these markets, exhibit a pricing model closer to the airlines, where the guy sitting in the next seat could easily be paying twice or half as much as you. Frankly, compared to Verizon, Jason's pricing examples don't look half bad.

A 100% usage-based pricing model for SaaS, which is more comparable to mobile phones than electricity or cable TV, would likely exhibit similar complexity. The fact that it is still by and large less complicated is a testimony mainly to the low cost of infrastructure and the high degree of competition which persists. 

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