Prescription for Subscription Fatigue? Time for New SaaS Pricing Models

As an analyst that’s covered the software-as-service (SaaS) market since 1999, I am briefed by vendors introducing new subscription services into the market on a regular basis. Many of these solutions provide small businesses with real solutions to real problems—whether helping you market your business, keep your books, manage projects or pay your bills (just to mention few). In many ways, SaaS or “cloud” pay-as-you-go subscription pricing model is ideal for small businesses. It eliminates the barrier of big upfront capital investments, and reduces financing requirements, freeing up capital for other needs. The SaaS provider takes on the burden of IT support and maintenance, enabling the small business to focus more resources and attention on the business.

And there’s no doubt that the SaaS model provides tremendous economies–which vendors can pass on to customers. Multi-tenant architecture enables vendors to service customers much more efficiently, and Web-centered marketing makes it much more affordable for companies to effectively reach prospective customers with their offerings. All else being equal, its highly likely that a SaaS solution will be easier for a small business to digest—both financially and technically—than a packaged software offering.

But, I have to wonder, how will subscription fatigue affect adoption of software-as-a-service (SaaS) or cloud computing solutions in the small business market? While the threshold for purchasing an individual solution may be quite reasonable, when you start adding more services, how many of these monthly subscription fees can the average small business afford? And how many different service provider contracts does a small business want to manage and monitor?

From a consumer standpoint, just stop and tally up what you spend every month on mobile and land lines, cable TV, Internet connectivity, and other services from Netflix to satellite radio to online gaming–not to mention traditional media subscriptions. For a family, it can quickly creep up to enough to feed a family of six in a third world country.

In the SaaS world, these monthly fees can add up even more quickly for a small business, who may be purchasing a service for $10, $25, or $60 per user per month, for several users. At a certain point, individuals and decision makers in small businesses balk at forking out for another subscription. Unless the service just whacks you over the side of the head with its value, many businesses will decide to just continue to do without. As they tally up monthly fees, they may also determine that some services haven’t really provided enough value—and are, in fact, dispensable.

All of which points to the fact that, for the most part, the small business SaaS per user, per month pricing model hasn’t changed in the past 10 years! Oh sure, there are ad supported free services, and a few vendors, such as Zoho, that give companies a couple of free seats before fees kick in. But for the most part, the per user, per month model reigns, no matter how much or how little individual users actually use the solution, or the value that they get out of it.

SaaS vendors targeting small businesses need to start experimenting with some different options if they want to create a true volume market for their solutions. How about trying pricing models that would allow for concurrent use, instead of specific named users?  Or unlimited use for businesses of different sizes? Or (and I’m sure that this will send shudders down some vendors’ spines) pricing based in part on measuring the effectiveness of the solution, in terms of time or cost savings, or increased web site traffic, or some other relevant variable? SaaS has been a huge leap forward in how software is delivered, it’s time for vendors to experiment with the next big leap—new pricing models.

8 Responses

  1. Very thought provoking blog. Clearly as small businesses sign up for more and more SaaS applications, there will be a point where the burden of the accumulated subscriptions becomes too high. This provides an opportunity for aggregators like ourselves to discount subscriptions based on integrated packages.

    With the emergence of “enterprise 3.0″ and virtual organizations, a business will require a full suite of SaaS applications to operate end-to-end. This is effectively what we are doing at Ki Work, using the virtual team function as the basis for integrating multiple apps. A single discounted subscription for a package of apps is clearly the way forward.

    See http://ki-work.com

  2. I agree whole heartedly, a new value based model is required. Watch our website for a new SaaS offer which will be based on a value model, not per seat/user.

  3. Laurie,
    Great blog post! We couldn’t agree with you more. Experimenting with SaaS pricing models is long overdue. As a company that caters to SMB’s, we realized that our customers were tired of complicated contracts and especially tired with per-seat charges. The issue of “dead users”, particularly these days, is huge. Companies buy into inflexible contracts and get charged for service that they don’t use causing among other things animosity towards the vendor.

    Also, another thing that we realized is that most SaaS companies need to make their software more complicated to support their inane user rights and complicated pricing schemes. That’s another can of worms worth exploring in a blog post some time.

    We went with tiered pricing, month-to-month contracts, and we only charge for administrative users – our clients can add their general users for free- as many as they want – any time! And, we decided to take this a step further by putting pricing right on our site – no hassles! Total transparency!

    http://www.newtonsoftware.com/pricing.html

    Joel

  4. Subscription pricing model would be convenient and comfortable for small business. As zero upfront cost and quick delivery are two major plus points for model, paying a nominal fee, every month will not be a burden. Also this can avoid lock-in and vendors will try their best to ensure best service, always

  5. Laurie, interesting post. I work for a document Assembly Vendor, the industry leader actually. We’ve priced our SaaS product to be in line with our corporate product because our tech is that game changing and powerful in either form. In fact until we introduced our cloud based product, document assembly simply wasn’t available to small businesses. I am curious, what is your view on support for a SaaS product. Should that be built into the subscription or should that be offer on a per needed basis or at an additional monthly charge?

    • Hi Anatoly,

      Most SaaS vendors include at least basic support (via email, chat, etc. as well as self-service training). Many also have more comprehensive, fee-based services that provide things such as phone support, dedicated support, etc. My recommendation is that you include basic support in the service, as this will probably help you to retain customers month to month and year to year–a necessity in the SaaS model.

  6. Hi Laurie
    Great post, I stumbled across this and feel this is still a relevant topic. The fact remains that without a monthly fee the user would have to pay them selves to take care of the technology, servers, support, people etc. That monthly fee relives them of a lot of responsibility and allows them to get cracking with the job, ie recruiting.

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