The Evolution of Pricing in SaaS

The software industry, once dominated by packaged software sales, is now transitioning to XaaS, either through established companies or by new startups offering SaaS solutions. I previously discussed Adobe's sensational case as an example from abroad.

In this article, we will review how businesses and products have evolved in response to changes in XaaS, and then clarify how pricing needs to evolve.

Changes required in business and product

By defining the scope of provider support for both packaged software and SaaS, we can identify the necessary changes in both business operations and product offerings.

In the case of packages, the provider is responsible for the sale of the product, and then only provides maintenance and after-sales care. In the case of SaaS, on the other hand, the support goes beyond the sale to the point of use and further results.

In a subscription model, the sale is not the end point; providers must ensure users continue to use the service and see value, or risk losing them to cancellations.

So, what changes are needed to keep users using the service and to make them feel the results?

1. Business aspects

First, on the business side, changes are needed in the business model and in the way it deals with users.

Specifically, in the packaged software sales model, most of the sales are recognized at the point of sale, so the focus of evaluation from a financial perspective is on how much sales were made in the current fiscal year. On the other hand, in the case of SaaS, since subscription is adopted in many cases, it is necessary to utilize and evaluate new indicators such as ARR (Annual Recurring Revenue) and Churn Rate.

In addition, rather than designing the organization and evaluation in a way that is linked to sales, the organization is designed with target values such as ARR and Churn Rate, and evaluation is often based on the ARR of new acquisitions during the period.

Furthermore, changes are also required in the points of contact with users. In other words, making the sale isn’t enough; the entire sales process must be rethought to ensure the user achieves their desired outcomes. Thus, it's not just about making the sale but about designing the business structure to engage users through various functions like marketing, inside sales, field sales, and customer success, with each team passing the baton to deliver value to the user.

Of these, Customer Success Management (CSM) is a new concept, and is the last bastion of building a continuous relationship with the user and helping them achieve results and continue to use the service.

2. Product Aspect

On the other hand, on the product side, It is crucial to develop solutions that users will consistently use and find valuable, while continuously refining these solutions to meet their needs.

Therefore, it is first necessary to build a relationship with users directly or through CSM, so that users can share their issues and needs. Furthermore, since it is not possible to provide value to many users by responding to requests by individual users, it is necessary to confirm whether user issues and needs are common to a certain user segment.

By following these steps in the development process, we will be able to provide not just a product that sells, but a product that people will continue to use with a sense of success.

In addition, because SaaS is provided through the cloud, protocols that can authenticate users and provide usage are required, and security, availability, redundancy, and DR (disaster recovery) support are to be guaranteed by the provider.

In this way, it is necessary to build a continuous relationship with users, sincerely address their issues and needs, and focus on ensuring that users continue to use the service, from both the business and product sides.

The evolution required for pricing

The fact that changes are required in business and product when operating a SaaS service naturally demands evolution in pricing, which is the role of bridging business and product.

However, even though pricing is a theme that should be compared to the business and the product, it tends to lag behind. It seems that pricing, which is a theme that directly contributes to ARR, has been underestimated.

In addition, since the role of pricing is to bridge business and product, it is easy to become unclear who is in charge of pricing and who the decision makers are, and it is difficult to make progress without the CEO taking the lead. Furthermore, there are few engineers willing to develop business operations, and the evolution of processes related to pricing tends to take a backseat.

For this reason, many startups seem to be able to handle business and products, but still have room for evolution in pricing.

So, how should pricing evolve in SaaS? We will check this by dividing it into the startup phase, the PMF phase, the growth phase, and the monetization phase.

1. Startup Phase

The scope of the start-up phase is from product planning to release, and this is the phase in which user value is planned and development is advanced. During this phase, pricing is discussed as part of the go-to-market (GTM) process for release, and in many cases, a single plan with all basic functions is deployed. Therefore, the main focus of discussions is to determine the price.

At this point, rather than discussing specific plan design or process evolution, it is better to look at the future roadmap and envision the point at which user value and target segments will change, and be prepared for the possibility of a major pricing change at that time.

2. PMF Period

The PMF period is assumed to be the period from product release until the product is accepted by a certain user segment. During this period, pricing will be determined and sales will proceed according to the initially assumed target segment.

At the beginning of the release, it is common to focus on niche segments and gradually expand the target segment. As the users' business size and industry become more diverse, pricing will be divided and multiple plans will be offered according to the user persona and the value to be provided.

When the number of contracts is still small, business partners are managed in Spreadsheet and invoices are often created and sent with hand-made invoices. From there, as plans become multiple, various business operations around pricing are established: CRM and workflow are implemented, and in addition to managing clients, approval processes for quotes and discounts are put in place.

3. Growth Phase

The growth phase is when the product has been adopted in multiple markets and is accepted not only by SMBs, but also by enterprise companies.

In order to achieve these goals, the existing pricing must be further subdivided from various angles, and more detailed appeals must be made. For example, in order to broaden the user base, trial and freemium plans, as well as self-pricing, can be considered.

As target segments and qualitatively different markets are developed, plans tailored to industries and user sizes will be designed in a mesh structure. In addition to tiered pricing, add-ons and other methods of charging for additional functionality will also begin to be utilized. This will also be a period of rapid diversification of discounts, including coupons that support self-billing and referral code-based discounts.

As more companies adopt the system, the need to evolve business operations will become even more pressing. This is the stage to review the workflow from contract management to billing and establish operational processes by adopting SaaS tools for CRM, contract management, and subscription billing.

In addition, as plans diversify, tools will be developed to build an environment for delivery, and a process will be developed to examine which plans to allocate to as features are developed.

4. Monetization Phase

The monetization phase is a period focused on improving sales by optimizing ARPU as well as the number of companies that have adopted the service.

In this period, companies aim to diversify their revenue models, develop new products, and promote qualitative changes in their business models, such as SaaS x Fintech and SaaS x PF, and plans become more diversified.

The discussion will not only focus on plan segmentation, but also on optimizing prices in the process of accumulating business negotiations. The target will be diversified and optimized not only for subscriptions but also for one-time plans such as implementation support.

Following the growth phase, the number of plans increases exponentially, and a process to support comprehensive plan decision making begins to be developed, including pricing for new products and new business models, review of overall product pricing, and creation of new plans.

At this point, it becomes difficult to manage using SaaS alone for general CRM, contract management, payments, etc., and a development team will be put together to take charge of extending functionality to meet the increasingly diverse pricing needs.

Summary

As we enter the recession phase, pricing, which is directly related to ARR, is a theme that should be reaffirmed as we grow our SaaS business in the future.

Once again, SaaS operators should compare the current status of their pricing with the phase in which they are currently operating, and first conduct a self-assessment to determine whether they are making progress ahead of the curve or lagging behind.

If pricing can be viewed as a management issue, it can evolve into a growth engine on par with product and business.