SaaS Pricing Models (part 3)

In the previous posts we unveiled a number of different pricing models for SaaS applications. In this turn I’d like to explore the reasons why similar products, priced with similar models, can vary so much, in terms of final price.
Let’s just remember that the two basic elements of costing are:
a) Initial Fee (or start-up cost – this can even go down to zero)
b) Periodical costs per “unit” (whatever this is…)

  • Multitenant vs single tenant
    It is obvious that if you board a single-tenant solution, you will be provided with your own server (physical or virtual), your own database instance and your own application instance (executables or whatever this is). All of these require additional effort to support and maintain from the Vendor’s side. And this will obviously reflect on your costs. In addition, initial setup will require additional effort that simple does not exist in case of multi-tenant solutions.

  • Level of application parameterization
    If the application supports extensive parameterization then this will cause additional effort on behalf of the Vendor (even if you won’t be using some of the system features, they are still there and require proper parameterization).
    Moreover, extensive parameterization may provide more than one ways to tackle an issue. In that case, consulting services may be called-for.
    You can expect higher charges if you are buying a “big” system to cover “small” needs.

  • Internal effort of uploading (usually perceived as “trivial”) data, such as customer file, warehouse codes etc.
    A common problem in these cases is that the Vendor already supports some kind of uploading mechanism, but chances are that the Customer will not provide the exact file format that the Vendor supports and/or there will be data purification issues (not known beforehand) and/or the new SaaS system requires some information (data fields) that you simply didn’t have in your previous system.
    This creates a nuisance for the Vendor (not to mention delays in the implementation!). And, as always, “nuisance” means “money”

  • Number of modules and business functions that are covered
    You want to find a piece of software that does what exactly you are asking for. But it is possible that what you like best is larger in scope than your actual needs. This vendor has done a larger investment on that product than the guy next door. And this is going to affect the overall pricing. Of course, it is the vendor’s task to see you actual needs and come up with a “logical” charge. But “logical” is again a number range and not an absolute! It is your task, buyer, to balance what is offered to you versus what is being asked of you.

  • Security features that are (or could be) installed
    This is a big discussion, but I think you get the point, right? The Security issue is (and will become even more) hot. In fact, it is one strong reason why some buyers reject the SaaS idea, to begin with.
    Let’s just say that security can be physical (data center, firewalls etc.) and logical (software etc.). All these things cost money that the Vendor must spend in order buy and then maintain the entire infrastructure.

  • SLA level
    This is another significant cost factor. The Buyer should be very careful on the Service Level that they will require. Do you really need 99.9% for, say, a back-office Accounting subsystem?
    Now, to distinguish between different Vendors, we must also remember that, depending on a number of factors, same Service Levels may have significant differences in terms for internal cost for the Vendor.

  • Nationality of the Vendor
    The application is on the “cloud” but the programmers of the Vendors are residing somewhere! And they have a level of salaries, expenses etc. Therefore, the physical location of the Vendor can play a significant role in the overall cost of the solution. The phenomenon is more intense when the time comes for Professional Services or Customizations that are asked by the Customer and the Vendor is costing them (usually on a time-and-material basis)

  • Different “scaling” perception
    Scaling usually exists, but volume-based discounts are perceived differently by each vendor. The scale can be 4,6,8% or 4, 10, 18%. Then, although two solutions start from a similar base price, they diverge significantly as volumes increase. This is a significant point of attention for big Customers.

  • Periodicity of payments
    When increasing periods between payments, the cost of money saved by the vendor is different, depending on where the vendor is actually located. Local factors such as bank interest rates for business loans are obviously taken into account by each vendor, internally.
    In addition, certain periods may or may not be offered by a Vendor. E.g. a vendor might not want to engage in a monthly payment cycle, even if the customer requests so.

  • “Customer support” level and functions offered by the supplier
    The more “open” a Vendor is to Customers’ requests of any kind, the more “expensive” they tend to be. E.g. if a Vendor is open to “any” customization request, then he must have developed the mechanism to support this: hot-stand-by programmers and testers, very frequent upgrade cycles, complex “release planning” etc.

    These are the reasons why prices can be so different between SaaS vendors. And these are key aspects that Buyers should also examine when examining a SaaS offering. The Application itself does not represent 100% percent of the deal!
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