Blog Entry

Apr 10
2012 

Putting Customers First: Why ISVs Need Flexible Pricing Models

I have spent much of my last seven years promoting software licensing and monetization. Of course, market dynamics have changed over those years and our solutions and thinking has evolved accordingly. More recently, with the launch of Sentinel Cloud in 2011, we have been very focused on encouraging our customers to start aggressively adopting usage-based models – primarily because their customers – end users – want such pricing schemes.

So, you can probably imagine my reaction as the following story unfolded….

We have been using a cloud-based solution for sales automation, and recently decided that we want to do more.  We wanted to start using the same system to start servicing our customers as well; from managing reported incidents to maintaining a knowledge base and enabling additional internal and external communication channels including but not limited to social media.  Choosing the right system was hard enough, but then came the big issue – how much were we willing to pay for it? Nothing could have prepared us for what came next.

Everyone assumed that our current cloud-based system would have two distinct advantages for us: 1) it would be quicker to market, and 2) it would cost us less to run compared to an on-premise competitive offering, at least in the short run (3 years).   We were half right! Yes, this solution would definitely allow us faster time to market, but the cost of expanding adoption of our current solution was astronomical compared to the competition.   With this discovery our expansion project looked to be in jeopardy.

Why, you ask? Well, as it turns out our current vendor offers only one pricing model: per seat, per month paid annually.  We have two distinct requirements for this project:

-          We have a worldwide client services group and are growing constantly. This team would need power-user access

-          Beyond the services group, we also need to make sure several of our related groups (e.g., R&D, Marketing) have access to the same system and data.  These groups are not power-users – like our primary support and services group, but they need the information to get more efficient with their own jobs.

As we did the math on the per-seat, per month model, costs climbed well beyond any budget we had put together.   It quickly became clear this was going to need a little negotiation.  Having been on the vendor side for many years, I was confident I could simply explain our needs to the vendor and we could come to an agreement to keep this project within budget.

Later that day, I put in a call to my contact at our vendor. As I walked him through our dilemma, he listened, empathized, and promised to follow up.  Having been a good customer so far, I was confident we could work something out on pricing.   The next call I received from the vendor offered a small percentage discount on a per-seat and per month model. Really, I asked? How does that help me?  Sure, cost went down a bit, but I still have users with different usage models, so a user in R&D who logs in 10 times a year costs the same amount as the client services engineer who is constantly using the system. I pleaded my case for a different pricing model.  I explained that because are we growing constantly, our costs will keep going up with no end in sight.   After a brief silent pause, he offered to guarantee the per-seat per-month model up to a certain number of users…for next three years.  This was still not going to work for us – it was now time to put it all on the table.

Finally, I just asked for exactly what I wanted: give me a model whereby I pay a higher amount (yes, per-seat, per month) for my power users, but a different amount for those who are not. Better still, charge me based on number of logins over a month, or something similar to that approach. His response? “Everyone asks us the same question but we don’t have that model supported. I will have to escalate to my management and our product folks to see what they can do.”

I have no idea how this story will end but one thing is clear – we are not going to get a usage-based model anytime soon. Most likely we will get another few percentages off; we will only pay for the seats we really need; more users will want access to the system over time but will be denied access due to budget reasons, and eventually, the true value of the system to the enterprise will decrease, and we will be out shopping for a new system.

Here is my plea to SaaS vendors:  Just because you have a subscription model does not mean you have won the battle over on-premise vendors. Your users are getting smarter, and whether they are “over-licensed” for on-premise or SaaS solutions, they are still “over-licensed”. Get creative with pricing models, or you will find yourself in the same boat as on-premise vendors who came before you.