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Don't Blindly Model Your SaaS Pricing on 37signals

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Re: Don't Blindly Model Your SaaS Pricing on 37signals

#21

Post by 18pfsmt »

rgrieselhuber wrote: post #8
iamwil wrote: post #7

Earlier quoted context omitted.

What is transactional? And how is it different from enterprise?

That's explained really well in this ebook: http://chaotic-flow.com/saas-sales-model-and-organization-st... But, briefly, the transactional model is one in which you require some customer communication in order to close the deal and is typically closed via inside sales reps. Enterprise deals are larger, cost more and typically require on the ground reps and a lot more customer facetime in order to close deals.

That's interesting. In the freight, and oil services industries, transactional is often used to describe spot market arrangements versus contractual ones. I think that makes sense, but I need to think about it a bit more as it relates to rivalrous goods.

Re: Don't Blindly Model Your SaaS Pricing on 37signals

#22

Post by redler »

rgrieselhuber wrote: post #6
jcampbell1 wrote: post #5

The discussion around annual pricing seems misguided. You should charge customers in whatever method they prefer to pay. For some customers, putting $400/month on a card is much easier to deal with than a $4800 check. The oposite is true in other organizations. Requiring pre-payment for software and using customers to fund working capital to pay sales associates seems myopic. Get the working capital from somewhere el…

Very few companies are going to turn down revenue, regardless of the shape it takes, so if customers are unwilling to pre-pay for a year, it's easy to figure out a way to make it work. That being said, the startups we've spoken with who have switched to annual pricing are able to get paid in advance 60-70% of the time. This helps a lot. Some companies prefer this as well as it can reduce their own AP and record-keepi…

Annual pricing can be a great thing -- simplification and money up front: what's not to like? But anyone being paid long in advance of when a service will be delivered should keep in mind that, from an accounting perspective, some portion of that pool of advance payments may be considered a liability, and can complicate revenue recognition. As soon as you receive a payment, you now owe the customer a year of service instead of, perhaps, them owing you the cost of a month of service.

Re: Don't Blindly Model Your SaaS Pricing on 37signals

#23

Post by rgrieselhuber »

redler wrote: post #22
rgrieselhuber wrote: post #6

Earlier quoted context omitted.

Very few companies are going to turn down revenue, regardless of the shape it takes, so if customers are unwilling to pre-pay for a year, it's easy to figure out a way to make it work. That being said, the startups we've spoken with who have switched to annual pricing are able to get paid in advance 60-70% of the time. This helps a lot. Some companies prefer this as well as it can reduce their own AP and record-keepi…

Annual pricing can be a great thing -- simplification and money up front: what's not to like? But anyone being paid long in advance of when a service will be delivered should keep in mind that, from an accounting perspective, some portion of that pool of advance payments may be considered a liability, and can complicate revenue recognition. As soon as you receive a payment, you now owe the customer a year of service…

Rev rec definitely gets more complicated, this is a good point. Everything is a tradeoff.

Re: Don't Blindly Model Your SaaS Pricing on 37signals

#24

Post by jcampbell1 »

GavinB wrote: post #9

If you want to sell services to large companies--even low cost ones--you need to offer invoice payment. At a big company, the corporate credit card is for meals and travel, not for paying vendors.

In my experience, if you send a proforma invoice, a W9, a federal tax id, and a soul sourcing statement, at the end of the signup form, many times a check will just show up in the mail. It is possible to do invoice payment without having a high touch sales process. You just have to preemptively provide all the stuff the AP department needs.

I really think 37 signals is leaving quite a bit of money on the table by not offering PO payments. I understand they don't want to do a whole bunch of customer hand holding, but it is possible to accept POs without ever talking to a customer.

Re: Don't Blindly Model Your SaaS Pricing on 37signals

#25

Post by rgrieselhuber »

jcampbell1 wrote: post #24
GavinB wrote: post #9

If you want to sell services to large companies--even low cost ones--you need to offer invoice payment. At a big company, the corporate credit card is for meals and travel, not for paying vendors.

In my experience, if you send a proforma invoice, a W9, a federal tax id, and a soul sourcing statement, at the end of the signup form, many times a check will just show up in the mail. It is possible to do invoice payment without having a high touch sales process. You just have to preemptively provide all the stuff the AP department needs. I really think 37 signals is leaving quite a bit of money on the table by not…

This is a really good idea.

Re: Don't Blindly Model Your SaaS Pricing on 37signals

#26

Post by drudru11 »

ChuckMcM wrote: post #3
rgrieselhuber wrote: post #2

Hopefully this is useful. I've seen very little discussion on pricing models for SaaS in the startup community.

I would have liked it better if you had actually talked a bit about business. A lot of people who hang out here are engineers / developers who don't get a lot of exposure to that side of things. Start by explaining a business 'model' which goes like this: Revenue - Cost-to-deliver = Gross Margin Gross-Margin - All-other-costs = Net Margin Its a sad bean countery topic, but really its not that hard to see that if your…

Agree with most of your point Chuck. However, I think most people on HN are in the startup phase. They are doing customer discovery/development to find something that is actually valuable. This post is really optimization in the execution phase. It is normal for most of the engs/devs to not understand the business side.

Re: Don't Blindly Model Your SaaS Pricing on 37signals

#28

Post by rdudekul »

Pricing is complex in general, but for SaaS companies even more so. Enterprise SaaS companies spend a lot of resources to acquire customers. Annual billing to a large extent helps offset these costs. However a question remains: How does a new unfunded SaaS company acquire customers, when annual billing can be a big obstacle for sign ups?

Re: Don't Blindly Model Your SaaS Pricing on 37signals

#29

Post by ChuckMcM »

drudru11 wrote: post #26
ChuckMcM wrote: post #3

Earlier quoted context omitted.

I would have liked it better if you had actually talked a bit about business. A lot of people who hang out here are engineers / developers who don't get a lot of exposure to that side of things. Start by explaining a business 'model' which goes like this: Revenue - Cost-to-deliver = Gross Margin Gross-Margin - All-other-costs = Net Margin Its a sad bean countery topic, but really its not that hard to see that if your…

Agree with most of your point Chuck. However, I think most people on HN are in the startup phase. They are doing customer discovery/development to find something that is actually valuable. This post is really optimization in the execution phase. It is normal for most of the engs/devs to not understand the business side.

Agreed, but if you're the founder, even if you're just one guy and an idea, you need to be able to evaluate your options.

Example, founder says "We launched and got 100K users in the first weekend!" That is fabulous, shows that they have really connected with their target market, but do they know how much money each user has to generate to pay for their expected burn rate? They should. You can say "We're build X for Y, and we're looking to monetize the landing pages with advertising." So what "CPM" do you need? (clicks per thousand) What RPM (revenue per thousand) do you need to make that work? Are there other businesses that have similar CPM/RPM numbers?

We're fortunate that a lot of folks can and do share their numbers with this community. I'm just encouraging founders to keep the whole equation in their thoughts between costs + engagement + revenue so they can think about ways to test against their models.

The three questions every founder has to wonder; Can we build it? Will people use it? Can we convince them to pay enough for it to sustain it?

Re: Don't Blindly Model Your SaaS Pricing on 37signals

#30

Post by lackiem »

Really great article and very refreshing to read. We recently adjusted the pricing on one of our services http://www.advantly.com to include a lower price monthly package and 2 other value added packages that require annual subscriptions. It has proven to be successful for us and the subscriptions to our annual packages have increased.
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