SaaS pricing strategy components
SaaS pricing strategy depends on policies that guide discounting and margin management.
Companies making the strategic choice of migrating their software business model from a traditional perpetual or annual license to a subscription license-based software-as-a-service (SaaS) product are doing so to drive stronger long-term positioning and business growth. In the short term, however, this shift can be challenging, as many SaaS providers remain unprofitable for some time. PwC’s experience suggests that it takes most SaaS providers at least two years to reach break-even, even though the typical provider spends more than half its revenue to fuel new business development.
Pricing management is key to making a successful transition to the SaaS model. Failing to capture the true value of a product does more than minimise or eliminate profits; failing to consider legacy products in pricing strategy or making SaaS products dramatically less expensive can make the SaaS option seem like an inferior, lesser option. Excess discounting can even force a price war amongst competitors that damages the category’s entire market.
PwC has identified the characteristics that define the leaders, laggards and mainstream practitioners of SaaS pricing. Laggards typically fail to take hosting costs into account, suffer an inability to adjust prices for different market segments, have far higher transaction costs and suffer other internal issues, along with risking their customers’ perceptions of the value of their products. Leaders, however, present pricing that is easy to understand and measure, and they incorporate costs, offer flexibility and monitor their pricing performance.
This paper explores how software companies can transition effectively to the SaaS model and maximise overall profitability through a holistic approach based on PwC's proven pricing management framework.
Read the full article and learn how to move up the laggard to leader spectrum in pricing strategy