Software Monetization Featured Article

Pricing and Packaging Strategies for the SaaS Era

June 05, 2017

Cloud services have transformed the world of software.  The Software-as-a-Service (SaaS (News - Alert)) delivery model gives businesses more control over how they package, deploy and manage their offerings while also giving customers more flexible pricing models. However, effectively pricing and packaging cloud services can certainly be a challenge, particularly for businesses that are new to the SaaS business model.

Properly pricing and packaging SaaS solutions is an art and a science, according to the software monetization experts at Gemalto. The company has published a white paper, “Lucrative Pricing and Packaging Strategies for the Cloud Today, Tomorrow, and Beyond,” to guide software companies as they make the transition to a SaaS and cloud software model. One of the key ingredients to gleaning the most value out of SaaS offerings is to understand that cloud services are very different from on-premise traditional software and its perpetual licensing model. And while plenty of software revenue is still derived from perpetual licensing with maintenance, subscription revenues are also on the rise.

Independent software vendors (ISVs) should be mindful of some of the main characteristics of SaaS apps as they move forward with pricing and packaging of their solutions. Most SaaS apps are hosted offsite by a third-party provider, so SLAs are key to ensuring good service. And since apps are accessed through the Internet, ISVs need to provide scalability and resilience. They should also be mindful that most end users won’t be tech savvy and that they will have to do the heavy lifting of deployment and maintenance.

Companies offering SaaS will also find automated provisioning to be a major benefit, as they will be required to provide dynamic scalability and flexibility. ISVs should also be flexible about pricing, which can be based on consumption or usage as well as support services and ongoing delivery of value. In terms of licensing, ISVs offering SaaS software are essentially providing a single code base for a multi-tenant architecture, and should offer easy configuration, customization and integrations.

A comprehensive SaaS packaging and pricing contract will factor in a number of components, including a subscription-pricing model as well as a variety of pricing metrics. It will also specify a contract term and set up a schedule for billing and subscription revenue recognition, as well as maintenance revenue. Other important factors include predictability, setup fees, minimum usage rules and differential pricing for various tiers and options.

Finally, ISVs making a cloud software play need to figure out which business model works best for their company. Some of the more common choices include the freemium model, through which a core solution is offered for free with a pay-for-upgrade option that enables increased functionality. A feature-limited model lets ISVs offer a low-cost version of their service with limited features to facilitate rapid adoption. Customers must then pay more for upgrades and advanced features and functionality. The pay-as-you-grow model is either usage-based or transaction-based, enabling customers to only pay for what they use without incurring any base or ongoing fees. Companies can of course offer hybrid pricing and packaging models to cover a broad range of offerings and better meet their customers’ needs.

The cloud offers massive benefits to ISVs and their customers. By being careful about how they package and price their new service offerings, businesses can ensure they are properly monetizing their products and gleaning the most value from them over the long term.

Edited by Alicia Young