SaaS and Coffee – They’re Both All About Granularity

It seems fitting for a morning post to include coffee themes – no doubt many are reading this post with a brew in hand, and in that spirit I’ll admit that I’m writing it with a supreme C4 Coffee long black sitting next to me.

Xero (disclosure – Xero is a past client) announced yesterday a broadening of their granular pricing strategy. Many will remember that when Xero introduced their multi-currency functionality, they flagged that it would be an added cost to the main product – banking on the fact that different customers have different functional requirements and would want to design their own solution to fit.

The new pricing tiers however introduce another option, a transaction-limited offering for smaller businesses that will only allow them 5 invoices and 20 bank transactions per month. In effect this is the package most suitable for property owning entities and the like who have a small number of regular transactions (rent coming in, mortgage payments going out for example). In the blog post announcing the change, CEO Rod Drury gives an indication as to the thinking around this, saying that;

With recent investment in our hosting capability we can now deliver Xero at price points that make Xero compelling to a further, large segment of the SME market  – many of whom are still doing accounting manually or using spreadsheets.

This seems to primarily be about increasing the addressable market and, while it will unavoidably lead to a drop in ARPU, it’ll also increase customer numbers and create an on-ramp for the higher tiered options. And this swings us back to the title of the post – granularity is important with SaaS – the long-tail business environment demands offerings that can be tailored to a particular users requirements – expect to see more of this sort of segmentation from SaaS vendors in the future.

Other commentators are a little bit down on the move, Emily in particular says she has doubts about two areas of the announcements; first whether small businesses can really fall within the “small” category and secondly whether multi-currency is such an optional extra. On the first point, and while I understand M’s point, I actually think the plan is a good move. Other vendors would just push it out as a free plan and hope customers converted to paying ones down the track – personally I’ve gone on record saying I’m dubious about the freemium model as it devalues the core offering. The Xero “small” plan retains core a perception of value, while still creating an on-ramp for the higher prices options.

As for the multi-currency debate – Emily is an accountant so I’m hardly in a position to question the needs of her own client – in my own case however, of the three businesses I run through Xero, only one requires multi-currency. Further of the other three or four business I would run through Xero if the functionality provided met our needs, none require multi currency.

I talked to Rod to see where they were planning on going with this – when I suggested that it was an opportunity to hit a formerly unaddressable market he concurred, saying that “initial feedback is that is compelling for many that just didn’t do enough transactions to go for a $49 price point.” He also indicated that this segmentation is only the start – “it is natural that we would want to use our assets in different ways. This is the first fairly simple segmentation and we’re looking forward to seeing how it goes.”

Keep watching this space….