As software companies continue to pursue new markets and business models by introducing software-as-a-service (SaaS) offerings, pricing management is a crucial factor that determines success or failure, according to a report from PricewaterhouseCoopers (PwC).
The third of a series of reports, “The Future of Software Pricing Excellence: SaaS Pricing,” explores how software companies can transition effectively to the SaaS model and maximize overall profitability through a holistic approach based on PwC’s pricing management framework.
The study explores PwC’s four-part pricing management framework when migrating to a SaaS model including SaaS pricing strategy, pricing formulation, transaction management and performance management. Pricing management is key to making a successful transition to the SaaS model, the report noted.
"Failing to capture the true value of a product does more than minimize or eliminate profits; failing to consider legacy products in pricing strategy or making SaaS products dramatically less expensive can make the SaaS option seem like an inferior, lesser option," the report said. "Excess discounting can even force a price war amongst competitors that damages the category’s entire market."
Another significant aspect of pricing strategy is packaging—in other words, what the purchase includes. The report noted many software packages are offered in an enterprise edition, an edition for small and midsize businesses and a personal edition, which lets buyers choose only the features and functionality appropriate to their needs. For price formulation, in order to manage pricing by segment, PwC said companies define the list price for a base product (usually targeted at the largest segment contributing to revenue) and adjust list price for other segments as a factor of the base product price.
Under the category of transaction management, PwC’s report recommends standard discounting should be made simple, and the channel and program structures should be analyzed and optimized to distribute customers and partners evenly and prevent the majority from ending up in the highest discounting bucket.
Finally, for performance management, the report recommends developing robust metrics for managing pricing performance, such as transaction data, costs and market trends, and analyzing them to drive decisions during and after transactions. For example, real-time profitability and margin analytics are valuable tools for supporting a deal and determining discounts.
Analyzing captured pricing data also makes it possible to adjust pricing strategy on an ongoing basis, for example, by monitoring product list prices to ensure they accurately reflect market conditions and adjusting them as needed to eliminate unnecessary discounting approvals.
"For software companies hoping to pursue new markets and business models by introducing SaaS offerings, pricing management may be the crucial factor determining success and failure. However successful your approach to pricing management may have been under the traditional perpetual license model of software, venturing into SaaS requires an update, with particular attention to SaaS-specific costs and considerations," the report concluded. "Taking another look at pricing may be the single most critical factor in determining whether your SaaS venture ends up in the black or in the red."