On Pricing, Demand and Critical Mass

Recently I received a press release from SaaS accounting vendor e-conomic (CloudAve review here) announcing the release of a new pricing structure. Their various pricing plans are dropping by a few pounds a month. Meanwhile they’ve increased the maximum transaction number to allow more companies to work within their small business plan.

Commenting on the changes, MD of e-conomic in the UK, Mark Davies said that;

The new pricing structure is simpler, more transparent and even more competitive. Existing and new customers will get more for less, and e-conomic remains free for accountants and bookkeepers… e-conomic has grown at a phenomenal rate across Europe since it was launched eight years ago and 2009 looks set to be another year of good growth. We have set ourselves the ambitious target of reaching 100,000 companies using e-conomic by the end of 2011. In order to achieve this, we must keep ahead of the game ensuring that not only is e-conomic aggressively priced but also our product offers better and deeper functionality than our competitors – no other online accounting system offers the same amount of basic functionality plus the level of expandability we provide through add-on modules.

I spoke with Anders Bjornso, COO of e-conomic’s parent company in Denmark who said that their;

main target are the bookkeepers and accountants, who expect a more complete and mature bookkeeping suite, however these processes tend to take longer time. We are still quite sure that we will be able to take a substantial part of the UK market, once the market really starts moving.

Which kind of begs the question why drop prices if it’s only really a time issue?

At a similar time, SMB platform players Ubikiwiti (CloudAve review here) announced a new pricing structure to give users

the flexibility to choose only the components that [they] need, and to only pay for what [they] choose. This lets [them] start off with a few components and add more as the need arises, effectively giving  full control over the scalability of [the] application

These price shifts aren’t a new phenomenon, only a year ago a minor storm reared its head when I suggested that most pricing adjustments for SaaS vendors were both downwards, and a reaction to the competitive landscape. Interestingly enough during the release recently of multi-currency for Xero (Disclosure – in the lead-up to the release of multi-currency, I did a very small amount of contracting to Xero to produce some marketing videos), Xero chose to have multi-currency as an optional (and chargeable) extra as opposed to core functionality. Now personally I believe this makes sense if for no other reason than that multi-currency is a module that not all users actually need, but I’d also suggest that faced with a choice between increasing the base price to cover multi-currency, and offering it as a separate module, the later option is preferable – especially given the number of players in the field and the apparent price cutting that is going on.

The bottom line is that all the SaaS accounting players are in a race to achieve sufficient critical mass in terms of customer numbers to prime the flywheel effect. While the long tail would suggest that SaaS isn’t a zero sum game, and that multiple vendors will have success in distinct verticals, the reality is probably a little starker than that. The vendor that first wins enough market share to be considered well-known in a mass-market sense will have a much easier time leveraging that base – and as basic economics tells us, one way to increase uptake in the early stages is to reduce price.

Of course it’s ultimately a poor strategy – it decimates the marketplace and doesn’t do anything for the viability of the individual players.

It’s against this background that two of the more successful SaaS accounting vendors in the UK should be assessed. The recently reported numbers from Xero make for interesting reading. With total paying customers of 10000, over half of which are non-domestic, and with a 4000+ customer base in the UK the numbers are still tiny compared to the incumbents, but it’s the growth (a ten fold increase in customer numbers over a one year reporting period) that is cause for excitement. KashFlow were justifiably proud of their 2500 customer figure back in January, but again the really telling metric is the steepness of the sales graph CEO Duane Jackson told me that they’ve just hit 4200 paying customers, a similar number to Xero but at a lower growth trajectory. Interestingly enough both KashFlow and Xero have made new appointments recently, Xero of new UK MD Gary Turner, ex Pegasus and Microsoft alumnus, and KashFlow of two new directors giving the CEO more scope to concentrate on marketing.

Of course what is most telling about both these vendors, is that their numbers over the past twelve months have been gained without the need to drop pricing – and this nicely ties back to one of my core tenets about SaaS. Simple substitution, and an attempt to merely be cheaper than either the incumbent offering or other competitors isn’t a viable strategy. Rather a focus on value, adherence to a smart channel/partnership strategy and great execution are the key drivers.

Update – e-conomic are actually pulling out of the UK market, a fact I was aware of when writing this piece but one I withheld out of respect for my source who would be comprimised by me disclosing it. It’s out in the public arena now and the fact backs up many of the contentions in my post. Secondly I was contact by Jackson who pointed out that;

Update 2 – It appears the e-conomic story is cloudier than I first thought – but that it’s not a complete pullout of the UK market as I thought – more on the e-conomic blog. My read is that it’s a retrenchment and not a complete pullout – Anders will take over the UK role. I’ll be interested to see the impact on the ground