What is SAAS and Why Is It so Revolutionary for Pricing?

Monday, May 11, 2015

Software used to be different. In order to use an application, a customer would have to go a software store, purchase a set of diskettes, drive back home, and then install the system. It was only hours later, and after much frustration, that he could begin to derive any semblance of value from the ordeal.

Now the barrier for customers to use new systems is much lower. The time of SAAS (software as a service) has arrived, and I would argue that both customers and vendors have benefited.

The advantages to the creators of the software are numerous (and outlined in my software pricing book), but software companies are still having great difficulty in explaining the benefits to their users. Potential customers continue to think that SAAS is a money grab that does not benefit them in the slightest.

How wrong they are! The main advantage of SAAS is that it enhances the economic alignment between the producer and the consumer of software systems. Let's take a look at three reasons why customers should be demanding SAAS applications.

• SAAS pricing forces honesty and continuous improvement. In the days of shrink-wrapped software, companies felt free to overemphasize and mischaracterize their product offerings. After all, few shops would accept returns on software, so "ethically challenged" vendors could benefit by misrepresenting their offerings. Once the sale had been made, the incentives for a vendor to keep its clients happy were approximately nil. As switching costs are reduced, software vendors are forced to continuously innovate and improve their products, lest their customers take their money elsewhere.
• SAAS pricing improves both customers' and vendors' finances. Many B2B software packages are atrociously expensive and can take an enormous bite out of a firm's operating budget. Monthly pricing is a form of financing. While the total lifetime cost to a customer may be similar, the reduction of upfront costs can allow customers access to better software products. Meanwhile, vendors benefit by having a predictable income stream that is no longer dependent upon expensive marketing efforts.
• SAAS pricing allows for the blurring of product and service. Many know that I'm a big fan of Google Apps. One of the primary benefits that I receive from this service is the automatic backing up of my business files. Such data retention services can only be offered when firms receive income on an ongoing basis. Google's significant economies of scale allow it to offer levels of data protection that would be completely unavailable to me as an individual.

This is not to say that SAAS pricing solves all of the world's ills, but it is one of the most impressive and misunderstood innovations in the entire software industry. Want to learn how pricing can help your business? You'll certainly want to contact us for advice!