Costing Models

Looking at how to build a high performing SaaS Asset based on your know-how.

Firstly we looked at how you understand your first level value, then we got an understanding of the True Value you’ve built, how the internals of the solution will work and then the customer journey.

In addition to documenting the customer interaction, deliverables, and benefits, it is essential to incorporate a costing model into your documentation process.

One of the key frictions in any solution, no matter how compelling, is the pricing model.

The wrong pricing model will block prospective customers from joining and limit their growth if they do.

The right pricing model will allow your solution to grow and, ideally, your customers will not mind paying because the benefit and Value is clear.

Beware of the usual suspects

There are a few “standard models” for SaaS platforms that can cause many ideal customers to avoid your solution, or it will create unusual and unexpected behaviours.

Per user subscription. This is the default, and is often the right choice, however, if your solution is only useful to a few people, then a medium to large organisation may only take 1-2 licenses and share within their team, or they may look at the value derived and conclude it doesn’t prove enough value to buy it for everyone.

Advertising. This has been the default choice for many of the biggest platforms in the world. However it is becoming an old or obsolete model for many new solutions.

There are a few key problems with advertising as your primary revenue stream:

Firstly, its a very competitive market and your solution typically has to share its revenue with a lot of other parties.

Secondly, Implemented badly advertising puts a lot of readers off and creates poor user experience limiting the number of users who stick with the solution.

Finally, the biggest long term issue is that it creates the wrong set of incentives and relationships between your core company and its user base.

Ideally everything you do should be acting in the long term best interests of your customer and users. But if your customers goals are opposed to your users goals, ie. The customer wants to get in front of the user and the user doesn’t want to see them or give their data away. Then you create distrust from the user base and eventual decline as your customers move on.

Per transaction pricing. For high volume financial solutions and market places per transaction pricing is often a good option. Your earning at the point where the value exchange is happening, but customers who grow to larger volumes often move away because the cost of using you platform is greater than the cost of developing their own solution, or changing to a cheaper option.

Time limited trials. Another thing many platforms do is offer and time limited trial. This used to make sense when software got packaged and sold as a single transaction sale.

However, if your platform is going to be used ongoing, the last thing you want to do is kick your prospective customer out at the last step.

If they are using your solution and bedding it into their lives, let them. You have spent so much time and effort getting them to that position you don’t want to move them on because their decision timeframe doesn’t suit your imaginary cut off.

Generally the cost of customer acquisition is $20 to $200 or more and the cost per year to let a prospect use the free features of your system is measured in the $0.20 to $0.50 range. If they ever sign up OR if they refer one other person who signs up, you’ve made your investment back. Plus you can claim their expense back as a cost of marketing.

Creating your pricing model

When it comes to pricing a Software as a Service (SaaS) platform, finding the right balance between providing value to your customers and sustaining your business can be a challenging task.

A well-designed pricing model should not only align with the value your platform offers but also resonate with your target audience. In this article section, we'll explore the importance of identifying the value exchange in your SaaS platform and the considerations for creating a pricing model that strikes the right chord with your customers.

Understanding the Point of Value Exchange: The key to creating an effective pricing model for your SaaS platform lies in identifying the point at which your customers perceive the most value. It's crucial to consider the specific pain points your platform solves, the benefits it offers, and the impact it has on your customers' businesses. By understanding the value proposition of your platform, you can align your pricing strategy to capture a fair share of that value.

Charging at the Point of Value Exchange

While it is often recommended to charge at the point of value exchange, it's important to acknowledge that this approach may not always be the best strategy for every SaaS platform. In some cases, it is better to leave that point untouched to avoid building friction into the reasons people use the platform. Each case is unique and requires careful consideration.

The concept of value exchange suggests that customers should pay based on the value they derive from your platform. However, there are instances where implementing a direct pricing model may hinder user adoption or create barriers that discourage engagement. It's crucial to evaluate the specific dynamics of your platform and user base to determine the optimal charging strategy.

For certain SaaS platforms, alternative pricing models can be more effective. Freemium or trial-based approaches, for example, allow customers to experience the core features of the platform before committing to a paid plan. This approach can lower the entry barrier, encourage adoption, and provide an opportunity to upsell premium features or additional services down the line.

Additionally, some platforms may find success by charging for complementary services or add-ons rather than the core functionality itself. This strategy allows customers to benefit from the essential value proposition while providing the option to enhance their experience with optional extras.

Enabling Scalability

Another critical aspect of designing your pricing model is considering the scalability factor. Many SaaS platforms offer tiered pricing structures that allow customers to access additional features or resources as their needs grow.

By providing scalable pricing options, you create an opportunity for customers to experience the value of your platform at a level that suits their current requirements while also accommodating future growth. This flexibility promotes long-term customer satisfaction and encourages them to remain engaged with your SaaS platform.

Ensuring Continuous Innovation

While designing your pricing model, it's crucial to consider its impact on your ability to scale your operations and drive continuous innovation. A poorly structured pricing model can restrict your company's capacity to invest in new features and improvements, potentially hindering the long-term growth and viability of your SaaS platform.

A common challenge arises when the pricing model does not incentivize or provide sufficient benefits for the development of additional elements or enhancements. In the short term, without a clear advantage or demand, companies might be reluctant to invest resources into expanding their platform's capabilities. However, over time, this lack of investment can result in a stagnant solution that fails to meet evolving customer needs and loses its competitive edge.

To overcome this challenge, your pricing model should incorporate mechanisms that encourage ongoing innovation and expansion. Consider implementing tiered pricing structures that allow for different levels of access or feature sets. This way, as customers' needs evolve, they have the opportunity to upgrade to higher-priced plans that provide access to advanced functionalities. This not only ensures that customers can scale alongside their requirements but also generates the revenue needed to fuel your company's investments in research, development, and product enhancements.

Simplicity is Key

While it's essential to align your pricing model with the value exchange and scalability, it's equally crucial to keep it simple. Complexity can deter potential customers from engaging with your platform.

A convoluted pricing structure or intricate calculations may confuse users and discourage them from making a purchasing decision. Strive for transparency and clarity in your pricing model, making it easy for customers to understand what they're paying for and the value they receive in return. Consider simplifying your pricing tiers, clearly outlining the features and benefits associated with each level.

Conclusion

Designing a pricing model for your SaaS platform requires a deep understanding of the value your product brings to customers and their willingness to pay. By identifying the point of value exchange and charging accordingly, you can create a pricing structure that resonates with your target audience.

Additionally, enabling scalability allows customers to grow with your platform, fostering long-term relationships. Finally, remember that simplicity is key.

Keep your pricing model easy to comprehend, ensuring customers can clearly see the value they receive from your SaaS platform. By incorporating these principles, you can create a pricing model that supports your business goals while meeting the needs of your customers.