I was part of a small group of SaaS/Cloud leaders who got together to talk about Pricing strategies, organized by Lincoln Murphy (@lincolnmurphy). The group consisted of founders of early stage startups that were comparing notes with fellow startup leaders, on various pricing strategies that worked for them and virtues of each of them. Amongst other pricing strategies, we discussed the tiered pricing based on storage and that got me thinking on why it was counterproductive to SaaS companies and they should abandon that scheme altogether.

SaaS companies, it seems like, took the easy route and started using the model that has been a staple of hardware industry (100GB hard disk costs $50 and 500GB costs $100) or the Storage Container vendors (100sqft – $10/month, 250sqft – $25/month). It worked great for hard-disk vendors as they operate in volume business, the more SKUs they sell the more money they make. Hard-disks have limited shelf-life, SaaS software is different. Also it is fine if you want to be in the commodity storage business like the cloud-based storage vendor Amazon S3. With SaaS, it is not so much the software that your are selling, it is the relationship. You are essentially a trading partner who the client relies on to run his business. The last thing SaaS vendors want to do is to look like wireless service providers – bargain basement prices for initial storage quota then the overages kicking in.

With that said, what should the SaaS company do with all the costs incurred? Should they absorb them as Cost-of-Goods Sold (COGS)?

Tactically, yes. They are COGS that need to be absorbed, but I take a different view and look at it as an investment. For one, you take one thing off the contract that the client has to constantly keep track of to avoid being slammed by overages. This, if anything, will allow them to use the system unfettered. The SaaS sales is predicated on the land-and-expand model, where you sign customers up for a small subset of use-cases that you can solve, while continuing to sell the long term vision. This keeps your sales cycle small and also affords a quick ROI for customers. With that as key focus, the last thing you want is, for customers to use your system partially and conduct business offline or in another application.

I would strongly encourage SaaS vendors to take a leaf out of the large malls operators’ thinking – they ensure abundant free parking and let customers spend as much time at the mall as they wish. The more time they spend at the mall, the more the cash counters ring. Last thing they want is customers going to another mall just because they could not find parking space.

So how could a SaaS vendor benefit from relaxing space quotas ? ( Did I mention I have a particular disgust for this word? Coming from India where every job opportunity, school admission, membership has caste based quotas perpetuated by politicians in lieu of vote banks) .

Here are some strategies to adopt.

1. One of the key advantages of going to a SaaS model is the continuous access to the user behavior that it affords. If you have lived through the old on-premise build-and-throw-across-the-wall model, you can appreciate the value of having access to the end customer without filters. You are not just going to have access to customers, you are also going to see what they are doing as opposed to what they think they are doing. This is a product manager’s dream. To draw upon the user’s behavior to determine the roadmap. So measure, monitor and rationalize the usage. You will find nuggets of information that will help you identify revenue opportunities in your product that will more than compensate for the lost space costs.
2. As an extension to 1, based on the data insights, introduce features like Surveys, Viral marketing opportunities to increase engagement, increase demand for your products. Your marketing team might be paying millions to get this kind of information to base their campaigns. No better source that the user community that is already using the system. Engage with the users based on the view you get to conduct Day-in-a-life, Case Studies, ROI studies. All these are real proof for the value your system delivers resulting in increased demand.
3. Companies are still document happy as it is the most easily transportable container of information. So don’t be surprised if you see companies consuming a lot of space quota (spare the itch to bill them for it) using documents in lieu of using the application to its fullest. Identify the causes and there might be additional opportunities to expand your product footprint.
4. Identify the value that your customers can derive from aggregate information across their industry or target industry. The more the usage, the more diversity in the data you will see. Unless you are one of those expense or task management applications (sorry no disrespect). Diverse data gives you good basis to make product decisions.
5. Guess what people would want when the data gets un-manageable?. Tools and capabilities to mine them. There is the opportunity to build out new high value capabilities (and upsell – Ka-Ching!) that could bring new user-base into your application. Think Executive Dashboards. If you did not know, the corner offices pay big bucks for everything. If you don’t believe me ask – Dennis Kozlowski and John Thain.

That is my rant on this topic. Would love to hear what others think. I would be happy to discuss more in detail with anyone interested.

About Subraya Mallya

Subraya Mallya is a technology executive, entrepreneur involved in conceiving, building software businesses. In this blog, he focusses on business and technology strategies around Business Model, Product Development and Marketing. Connect with me on Twitter - @subrayamallya