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Director, OpenShift Strategy at Red Hat. Founder of Rishidot Research, a research community focused on services world. His focus is on Platform Services, Infrastructure and the role of Open Source in the services era. Krish has been writing @ CloudAve from its inception and had also been part of GigaOm Pro Analyst Group. The opinions expressed here are his own and are neither representative of his employer, Red Hat, nor CloudAve, nor its sponsors.

10 responses to “SaaS Vendors Need A Mental Shift”

  1. Jason M. Lemkin

    This is a great post. As an end user of applications, I agree with you.

    For this reason, at EchoSign esignature we fully support on-demand, month-to-month, free trial, etc etc. pricing. We love the model as users and it empowers our customers and users to buy what they need, not what they don’t, and have a terrific customer experience.

    As founder and CEO of a vendor too, though let me tell you the short-term numbers don’t actually support it and so almost every head of sales at a SaaS companies argues against it ;)

    The reality is very very few SaaS companies can survive selling just (x) <$20/mo subscriptions (y) just to small companies. To build just a $10m company on companies paying $20/month (which isn’t cheap), you need over 40,000 customers.

    Very few SaaS products actually have over 40,000 customers. Even Salesforce, with over $1b in revenues, has only 50,000 customers.

    Folks who can win just selling to SMBs – Intuit, WebEx, etc. are the exceptions, not the rule. There are a number of well known reasons, but marketing is the principal challenge for most apps.

    The reality is almost all SaaS vendors need to adopt a strategy of either a hybrid model (SMB + enterprise silos) — like us — or go relatively big ($x0,000 and up/year) to build a $20m+ business.

    We love the customers that pay us <$20/month. But if that’s all we had, we’d be bankrupt, not cash flow positive …

  2. Krish

    Jason, I agree with you that every SaaS vendor should have a strategy that will keep them with cash flow positive. I am all for it. If they target SMBs and individuals, then they need to be smart about their pricing models.

  3. Silona

    Have they considered more the freememium model?

    Give the easy to use but not as secure or as customizable option away for free or almost free (~20 a month) so that you can convince them to buy the REAL product that has REAL customer support and integration with their current processes… ( you know the drug dealer model)

    Chris Anderson (long tail) guy outlines much of this in his new book “free.” In this day of age of free software in exchange for data (ie google) the thing you can give back to the customer is data ownership and control…

  4. Ian Sweeney

    The pay-as-you-go pricing is undoubtedly a big component of Saas products. The interesting thing we see, with active users, is that they would prefer to pay for longer than 1 month, e.g. quarterly or annually. As active users they know the product meets their needs and the process of making a payment is a pain.

    This leads me to believe Saas should be more about flexibility of pricing than set pricing. The flexibility is needed to support two very different types of customers; the low volume, feature-poor user (free) vs active, feature- & support-rich users (pay). Its sometimes hard to to serve both those customer types well at the same time.

    Ian Sweeney
    CEO billFLO

    P.S. Jason, I love echosign, great product.

  5. Julianstone

    re: Jason M. Lemkin
    You said:
    “We love the customers that pay us < $20/month. But if that's all we had, we'd be bankrupt, not cash flow positive"
    - If that's the case then your expenses/overheads per sale and marketing costs are too high. Just work towards sales automation and a low inertia model. There are plenty of companies selling SaaS (in low numbers) to SME's who are nicely profitable. We're one. We have been in profit selling at $20 per user for about 4+ years now at http://www.proworkflow.com. It’s all about the low inertia model.

    Re: “As founder and CEO of a vendor too, though let me tell you the short-term numbers don’t actually support it and so almost every head of sales at a SaaS companies argues against it ;)”
    – That’s one issue there. Head of Sales. That’s a ‘structure’ – to be nicely profitable, you shouldn’t need a large sales team with a sales manager, rather the website, processes and documentation as well as after sales autoresponders should do 90% of the sales work for you.
    Reason is, you need to make 50-75% or more of your sales in SaaS with little or no effort. Basic maths can tell you it’s hard to get a return on sales staff wages if they have to land 100% of the sales @$20 p/u. Do you really want a sales model that means you have to add more sales staff and managers to scale? Automate and systemize, and with support, add a client area and make it all self service.
    Just a thought.

    Re: Krish who said “then they need to be smart about their pricing models.”
    – Agreed, but also keep in mind that whilst pricing models will affect incoming sales, ultimately it the business model people need to be smart about. Low inertia, automate nearly everything.

  6. Krish

    @Julianstone

    Completely agree with the need to automate everything.

  7. Chris Yeh

    At PBworks, we require annual contracts and contact with our sales team, but we view this as a transitional phase.

    Because the market is still relatively immature, we believe that giving our sales team a chance to speak directly with users is helpful to us as a learning strategy.

    But I totally agree that it doesn’t make sense for small purchases in the long run. We will re-automate as we gain confidence in our market segmentation and processes.

  8. Zoli Erdos

    Chris,

    That’s a good point, learning from customers is important – but perhaps it does not have to be tied to the purchase event. Follow up inquiry after the sale is golden – but not the typical survey, more the “how-can-I-help-you” type.

    And automation vs. high-touch are not necessarily exclusive. You can always leave the “contact by salesperson” as an option on the self-serve buy page. Contact as the *only* option may be a deterrent to some potential buyers…

  9. Kevin

    Chris,

    Your “rant” is dead on. People are buying differntly today in the Web 2.0 world. I have created a blog talking about this and would love your feedback. The latest posting is entitled “How Generation Y Killed Cold Calling and Gave Birth to Credibility” please vist…all comments are welcome http://insidesalessaas.blogspot.com/

  10. Sahil

    With software everything can be automated so why not give different options for pricing – monthly, 6-monthly, yearly and let the customer decide.

    As SaaS vendors we need to manage client expectations very well and see to it that we are building the app for them!

    Having a comprehensive help/support area is important so as to minimize the support requests coming in.