Decision Engine Software Pricing Models
Introduction
This is the second in a series of three articles, focused on the commercial aspects of decision engine software:
- Software license models
- Software pricing models
- Software billing models
By the end of the series, the reader will have a better idea of the various types of commercial models that are available from decision engine software vendors. Hopefully the information can be used to make more informed decisions.
Sam Walton summed up how important the pricing decision is to companies:
“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
What is a Software Pricing Model?
Deloitte defines a software pricing model in the following terms:
“Let’s use consumer examples to bring this to life. Consider how you pay for the following:
- Gas and electricity – consumption based-based pricing
- Video streaming services – flat-rate subscription
- Fitness classes – flat-rate subscription (for unlimited usage), consumption-based pricing (for pay-per-visit), or consumption credits (for 10-class bundles).
In short – a pricing model is a framework under which companies charge for their products. They play a pivotal role in supporting business objectives, whether it’s maximising revenue, customer acquisition, or product adoption – the right pricing model can differentiate a company from its competitors and create long-term customer and shareholder value.”
Deloitte identifies no less than 8 different types of pricing models in the software industry:
Most common pricing models in the software industry:
- Per-user: Charges per individual user of the product. Variants include per named user, per active user, and per concurrent user
- Freemium: Charges nothing for a limited version of the product. Often used as an acquisition tactic to accelerate customer adoption
- Flat-rate subscription: Charges a fixed fee regardless of usage. Variants include a fixed monetary value (e.g., $99 per month) or a fixed percentage (e.g., 10% of total contract value)
- Outcome-based: Charges based on the business benefit/value of the product, such as cost saving or revenue increase
- Consumption-based: Charges based on actual usage e.g., per minute, per request, per GB. Variants include consumption bundles, subscription plus overages, and consumption credits
- Per-device: Charges for each device e.g., per laptop or per ‘subscription unit’ (a generic unit of measure that amalgamates multiple devices into one unit)
- Tiered: Charges differentiated packages (such as gold, silver, and bronze) so customers can select the feature-set and price that works best for them
- Enterprise license agreement: Not a pricing model per se, but an ‘all you can eat’ model typically used by large vendors with complex global customers
Deloitte concludes:
- “Multiple pricing models coexist and for good reasons. The multitude of pricing models available allows companies to tailor their pricing to specific customer segments, addressing unique needs, budgets, and norms. Further, it allows companies to align pricing with the perceived value of their product, underlying costs, and company goals.
- Pricing models are not set in stone. Successful companies need to continually evaluate and adjust their pricing models to stay competitive, balancing revenue goals with the need to attract and retain customers. Take ChatGPT, for example. When the product first launched, they embraced a freemium model to attract as many users as possible. The platform skyrocketed to 100 million users in record time. But ChatGPT didn’t stop there. Realising that some customers were willing to pay for advanced features, OpenAI, the company behind ChatGPT, introduced ChatGPT Plus, a premium version with a flat-rate subscription fee of $20 per-month. This strategic move not only allowed ChatGPT to capture incremental value but also enhanced the user experience for those willing to pay for it.”
Pricing models are associated very closely with billing models, which will be examined in the final article in this series.
ADEPT Decisions has been a user and fan of Atlassian for many years and they have a great set of principles that drive their pricing strategy. To nobody’s surprise, putting customers first is the key to success.
8 principles to guide your SaaS pricing strategy
“Pricing is one of the most critical strategic manoeuvres for any business. For that reason, it can also be one of the most contentious areas for your teams. Finance, marketing, sales partners… there are countless stakeholders you need buy-in from, and no shortage of discussion along the way.
Over time, we’ve built some guiding philosophies on how to price products fairly while growing our business. Here’s the approach we’ve taken, from our start-up days through today.
- Make it easy. Make it easy to start, easy to buy, easy to afford.
- Price for volume. Always optimise for volume. The more happy customers you have, the more they tell other people about your products and, thus, you get more customers.
- Be consistent. It’s only when you deviate from your current pricing model in size, unit, you-name-it, that you create blockers to business.
- Give everyone the best price. This approach may not sound too revolutionary until you go visit any of the top enterprise software companies’ sites and try finding their pricing info. Even the few that divulge pricing will probably immediately guarantee a lower one if you get on the phone now and talk to a sales rep TODAY!
- Simple > flexible. Pricing is an incredible lever due to the relatively infinite number of options available to your organisation. In my experience, pricing strategies tend to have their own version of entropy. Unchecked, your pricing strategy will end up in chaos.
- Make entry inexpensive. It’s impossible to know whether you priced a new product correctly until it’s in the market. And if you’re going to be wrong in the beginning, it’s better to be wrong by being too cheap than too expensive.
- Beware of price increases. Price increases are never enjoyable, but providing ample runway can at least make them manageable.
- Trust your gut, not the spreadsheet. More importantly, it is you and your company that must explain these changes to your customers. When it comes time to make that call, don’t lead with the numbers. Lead with what you can confidently and personally explain to your customers.”
Atlassian concludes, in a typical Aussie forthright manner:
“Don’t f@$% the customer
Price can be more than an indicator of your product’s value. It can also indicate your company’s values. Fees that are high or sudden or hidden tell a customer they’re not respected as an equal partner – which means they probably won’t be your partner much longer.
From our early renewals to transparent prices to lower costs in market downturns, the one constant is that we value our customers first and foremost.”
ADEPT Decisions Pricing Model
ADEPT Decisions shares the same customer-first ethos as Atlassian and our Decision Engine software pricing model has always been based on transparency and honesty.
Clients pay a once-off fixed price software set-up fee, based on their detailed requirements.
Once live, clients pay a monthly software usage fee, based on the volume of applications or accounts, with volume discounts to provide added benefits.
This straightforward approach enables accurate budgeting and a true partnership with the client who sees reduced average usage fees as their business and volumes grow.
As the pricing model is totally transparent, there are also no ‘nasty surprises’!
Summary
Jared Schneider sums up the whole topic of pricing models very well
“In conclusion, pricing in the SaaS industry is not a one-size-fits-all approach. It requires careful consideration of various factors such as customer acquisition costs, customer lifetime value, market demand, and competitive landscape…
Several factors come into play when determining the pricing for your SaaS offering. Addressing these factors ensures your pricing is both competitive and lucrative:
Cost of Development and Maintenance
Before settling on a price, calculate the costs associated with developing and maintaining your SaaS product. These costs include software development, hosting, infrastructure, customer support, and ongoing updates. Understanding these expenses enables you to set a price that covers your costs and generates profit.
Market Demand and Competition
Thoroughly research your target market to identify what customers are willing to pay for SaaS solutions similar to yours. Take into account the competitive landscape and consider how your offering compares to others. Pricing too high may drive potential customers away, while pricing too low may lead to undervaluation of your product.
By positioning your SaaS product as a unique and valuable solution, you can justify a higher price point.
Value Perception and Customer Willingness to Pay
Understanding the value your SaaS product provides to customers is essential. Price your offering based on the perceived value it delivers and align it with customer willingness to pay. Identify the problem you are solving, the unique features you offer, and the potential impact on your customers’ businesses.
When determining the value of your SaaS product, consider the pain points it addresses for your customers. How does your solution simplify their workflow, increase productivity, or save them time and money?
Furthermore, take into account the industry and size of your target customers. Larger enterprises may be willing to pay a premium for a SaaS product that offers advanced customisation, scalability, and dedicated support. On the other hand, smaller businesses may prioritise affordability and simplicity.
It’s important to strike a balance between pricing your SaaS product competitively and ensuring it reflects the value it delivers.”
About the Author
Stephen John Leonard is the founder of www.adeptdecisions.com and has held a wide range of roles in the banking and credit risk industry since 1985.
