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SaaS Pricing Strategies

December 4th, 2009 Comments off

Clear pricing models seem to be developing for infrastructure as service, with price competition based on CPU usage, storage and data transfer. However, pricing models for software are more complex for a variety of reasons.

Software is not a utility service – the value of different software applications varies widely, based on the ROI of its use. For applications that are not focused on people-related processes there can be clear benefits – e.g. a new inventory management system may clearly reduce warehouse space requirements and the software vendor can tout the financial benefits as on offset against the software cost.

For HR and people processes the picture is less clear. There is an ROI and should be able to be measured. But measurement, and linking process improvement to top line revenue for an organization is a big issue in general, and in particular for the HR profession. Also, benefits vary widely from company to company, so it’s not something a software provider is likely to be able to come up with a good estimate of.

Service pricing is generally based on a unit price, then a multiplier for the number of units used. A unit could be the number of users, usage time, or whatever is the primary thing that is being managed by the software.

From a purchasers perspective, the user as the unit is the main problem with this licensing model. The “traditional” software licensing model has a lot of the revenue being made by software sitting on computers and never being used. The proposed benefits of SaaS that are touted are paying for what you use. So to get the value from SaaS, this pricing method surely can’t remain over the long term unless the per user cost is clearly shown to relate to actual usage. I don’t see much evidence of pricing that is based on actual usage rather than a per user/month model at present.

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