Navigating the world of Software as a Service (SaaS) pricing unveils a landscape of intricate complexities. Unlike other pricing models, SaaS introduces ambiguity and variation that often perplexes the companies providing the service as well as the customers.
The quest for the best price becomes a challenging endeavor, with numerous providers resorting to terms like ‘custom pricing’ or ‘contact for a quotation’. This adds an air of obscurity to the entire pricing paradigm. The opaque nature of SaaS pricing structures makes it difficult for organisations to understand whether they are getting advantageous terms, or are just being taken advantage of.
As we highlighted in our other article, it is very possible that two customers utilising the very same SaaS provider, who have identical requirements, can have totally different pricing agreements to one another. This is often driven due to the opaque nature of SaaS pricing models.
Why Do Inefficiencies Exist In SaaS Pricing?
1. Value-Based Pricing
Many Software as a Service (SaaS) providers operate a value-based pricing model, where the price of a product or service is determined by its perceived value to the customer rather than the cost of production. In this pricing model, prices are set based on the benefits and outcomes the customer expects to receive.
This approach often requires a deep understanding of the customer’s requirements, and the unique value proposition offered by the SaaS provider. In this article, we are not criticising value-based pricing models, their advantages, and disadvantages. Each pricing models is unique and offers varying opportunities for both the provider and end-customer.
What we want to point out in this article are the inefficiencies created from a value-based pricing model that might lead to very different pricing outcomes for the very same requirements. This is because a deep understanding of both the customer’s requirements and the SaaS providers value proposition is needed for this model to work effectively.
In practice, value-based pricing is inherently subjective and relies on varying perceptions from the customer and the SaaS provider. Subjectivity can therefore introduce potential inefficiencies when it comes time to pricing a SaaS agreement.
2. Discount Flexibilities Available
A second influencing factor that contributes to inefficient pricing in SaaS is the fact that frontline sales teams are given varying degrees of flexibility to discount and adjust pricing in order to achieve the ‘perceived value’ by a customer.
Sales teams are often given more significant decision making powers on pricing than you might realise, or than they might let on.
It is not uncommon among SaaS providers that sales representatives and their direct sales managers might have a combined decision making power of giving up to 50% in discounts at their own discretion. Because such a decision making process is highly subjective and heavily influenced by psychology, very different pricing scenarios can be generated for the very same set of requirements.
Small elements can heavily influence this decision making process, it can come down to how well a sales rep and their manager understands the ‘perceived value’, how confident they are that a customer will be on-board at a specific price, how much pressure a sales team might be under to close a sale. These can all influence how much discount a sales representative and their manager might approve – and it can be A LOT more significant than you believe.
3. Conflicting Interests & Incentives
Because SaaS pricing models can be subjective and created based on the perceived value of a sales representative, their interests and incentives also need to be considered as influential factors.
In Software Sales, sales people are often compensated on a commissions-driven structure. In many cases, a large portion of a person’s salary will be dependent on how much revenue or sales they close. Therefore, there is a natural incentive to drive prices higher in order to score larger commissions.
Conclusions: 'Finger In The Air' Guesstimates
In conclusion, the combination of all three points mentioned above, means that a lot of subjectivity can be involved when SaaS pricing decisions are made by sales people.
It is often a running joke to compare SaaS pricing decisions to that of the old fashioned ‘ Finger In The Air ’ guesstimates.
It is for these reasons why CloudCost Consulting exists, we believe that these inherent inefficiencies in the industry offers every organization an opportunity to better optimize their SaaS and Cloud pricing agreements. All of which can be done without changing the technology that you use, and how you use it – we purely help negotiate and structure pricing agreements to your advantage.
CloudCost Consulting has +10 years of experience negotiating and pricing SaaS agreements, we possess the thorough understanding of what can and should be negotiated by buyers of SaaS products.
With this in mind, let us help negotiate your next SaaS quotation, or structure your next renewal agreement!
