Innovative Strategies for Increasing Revenue & Adoption
With the concept of cloud services and cloud software, the implications of billing for the cloud has never been more acute. We briefly mentioned in our last blog post the importance of considering different approaches and strategies to SaaS pricing your product/service that go beyond static pricing.
Many of these approaches can significantly impact your SaaS revenue so today wed like to delve deeper into this topic.
Telefonica has calculated that if you bundle and target offers effectively, you can increase your revenues by 25 times not 25 percent, 25 times!
METERED BILLING
Metered or usage-based billing is the concept of charging based on units of consumption. The utility bill is a good example with cost usually calculated as: kwh used X unit cost per kwh.
This simple example can easily get complex when you have a fixed monthly fee (typically billed in advance), plus an additional usage fee (billed in arrears). So if youre a software service provider, your billing may now look like this:
Monthly service fee (for Feb 1 – 28)$100
Storage fee (Jan 1 – 31) 200 GB @ $0.10/GB$ 20
OVERAGE BILLING
You then analyze your data and figure out that you have a small number of clients that are using disproportionately large quantity of storage while most of your smaller clients are typically using less than 10 GB of storage and are moving to competitors with cheaper fixed fees. So you introduce another plan based on overage billing:
Monthly service fee (includes 10 GB storage)$100
Storage overage fees (190 GB @ 0.10/GB)$ 19
BUNDLING and ADD-ONS
At some point this service provider adds additional services, lets say backup services. Now youd typically want to incentivize customers to sign up for both services by offering a bundled product offering that is cheaper than the sum of the individual products. So a customer on a bundled plan would see something like this:
Storage and Backup Plan
Monthly service fee (includes 10 GB storage, 5 free servers)$100
Storage overage fees (190 GB @ 0.10/GB)$ 19
Backup service fees (3 servers beyond free tier, 3 X $ 25/server)$ 75
It is important to note that a monthly feed of raw consumption (typically containing the customer ID and the units consumed) is fed to the billing system so that if the customer switches to thenon bundled plan(that has no free servers included), then hed see this bill:
Storage Plan
Monthly service fee (includes 10 GB storage)$100
Storage overage fees (190 GB @ 0.10/GB)$ 19
Backup Plan
Backup service fees (8 X $ 25/server)$ 200
ROLL-OVER
So the service provider starts fielding calls from customers who have fluctuating monthly demands. They want to have predictable bills and want the service provider to allow them to carry over unused storage quotas from previous months so that the costs average out. Were now talking about new levels of usage tracking, since the customer may login mid-month to view their quota balances.
Storage Plan
Monthly service fee (includes 10 GB storage)$100
Storage overage fees ($ 0.10/GB beyond included storage)
5 GB unused storage carried over from previous month
12 GB used this month
Billed (7 GB – included storage)$ 0
TIERED and BULK
Tiered Allows users to select from a set of progressively increasing price points to receive the product(s) best suited to their needs. It is typically based on the idea that the more units a customer purchases, the lower the price they pay.
As a cloud provider, it is critical to your long term success to provide your finance and product teams with the ability to switch pricing models without getting into a 6 month IT project. Your checklist should include:
- Do I have a variety of models that I can quickly adopt?
- If I adopt a new model, do I have the choice to either grandfather existing clients under the old plan or migrate them?
- Do I have rich reporting capability to analyze the results of new models, and flexible billing systems to evolve my pricing strategy?
- Can I de-couple my IT operational system from my billing system?
- How do I tie my new plans into my ERP for corporate finance?
- How will changing pricing models impact my sales process that are happening inside our CRM today?
Purchase-to-use is winning, and purchase-to-own is on its way out. Why? Its simple: We only want to pay for the value we receive from a product or service and we only receive value when were using that product or service.
Read more about How To Prepare For The New Revenue Recognition Standards