You can't retire on your recurring revenue if your customers do this..
The presentation had just finished. I closed the laptop screen and looked over the table. Opposite me, the lead engineer looked puzzled. His manager was writing something down on paper with a frown on his face. Inside I was exstatic, potentially another interesting job to work on.
“So I have to pay $5000 per year, forever?” the manager asked.
Have you been asked this question before. “Why should I pay for your product every month?” That question stops you dead in your tracks. Because it could have two meanings:
- I don’t derive any value from your product, why should I pay you?
- I’m not sold on the Software as a Service (SaaS) method of pricing
I’m not talking about the first meaning here. Certainly it’s clear, people don’t like to pay for things that don’t deliver value to them.
No. What I’m talking about is when potential customers question the SaaS pricing model, which typically involves a recurring payment per month, and in my case per year.
Our recurring payment pricing was rejected
We primarily consult to power systems engineering businesses. In the opening story we were contracted to develop a new tool to help engineers in a government type organisation. I thought that the idea behind the software tool had sales potential. I guessed that we could licence it more broadly than just that company, so I proposed two pricing options:
- They retain IP ownership but we bill at the usual contracting rate
- We get IP ownership, but we don’t bill for our time at all. Instead they become our first customer to use the new tool for a lower yearly fee (including maintenance).
I could see their lead engineer look puzzled and into the distance when he heard that second option. There was a calculation being made where our yearly license fee was being multiplied by some number of years. Forever. They didn’t accept the idea of the yearly fee and instead chose the ( much higher) contracting rate.
Worries about paying for your product
When customers question your recurring pricing model, they are worrying. They worry What happens if I stop paying?. The traditional retail model has always been purchase something and you own it forever. And this mindset also creeps over into purchasing B2B software. So your customer worries, if I stop paying, will I lose all my work? How could I transfer my work to another provider? What if you go out of business?
They also do a multiplication in their head to arrive at the true cost of your product. $20 per month times X months equals $Y dollars. Unfortunately for you, the person asking this question uses a very high number of months, or even worse, multiplies by forever. Suddenly your $20 per month product looks very expensive once it has been multiplied by 10, 50 or 100 years.
Change your pitch!
When a customer questions the way you charge, there may be an impedance mismatch between your pricing and the product for that customer.
Your product is being compared against competitors, and for you some of those might be fixed cost, like traditional boxed software. And if being a hosted SaaS doesn’t bring any obvious benefits to the consumer, then they quite rightly may question why they are paying every month.
Would your product make more sense packaged as purchase to own with yearly upgrade cycle? The Adobe Creative suite followed this model for many years. Their pitch was always that you owned the product for life. In reality they prompted people to upgrade every two years to take advantage of the cheaper upgrade path. And now they only offer monthly pricing with their Creative Cloud suite. $50 per month versus the $2000 outright purchase for the entire suite earlier.
Adobe is breaking the waves for the rest of us. We can watch and see how things play out for them. Will consumers, previously accustomed to a once off payment take to the monthly subscription? Or will Adobe’s sales buckle and they once again begin shipping boxed software?
What to do next time
Next time you are asked Why should I pay for your SaaS every month. Consider what they are thinking, how they’ve multiplied your monthly cost to arrive at the total cost. And what they are comparing your offering against.
You may just find the pitch that works for both you and your customers.