is an expert in all things software and he has written a fantastic piece on the mistakes which so many companies make when it comes to creating their pricing structure. Specifically Josh speaks in the article which he uploaded to his personal blog, about the fact that too many companies are using a one or two dimensional system which doesn’t really fit their needs. He also talks about the damage which an all inclusive payment structure can do for business.
When talking about the dimensions, Josh alludes to the fact that companies will set up a bronze, silver and gold package plan, yet this will be differentiated by only user and usage, missing out on what he believes to be the third dimension, which is the length of time of the plan. Here is exactly why Josh believes that the 3 dimensional plan is the smart option for those within the SaaS business.
Ability to Upsell
Ultimately prices never stay the same, in any industry, and the companies which offer software as a service have to set themselves in the right way in order to best protect their revenue stream. Adding a limited time to the product means that these companies can comfortably rise prices at the end of the year, to meet with the rising costs of the business.
Every business raises prices at some point, but there is a way in which you do it which will ensure that customers don’t run a mile when you do so. Now, offering a single year contract will almost ensure that customers are aware of the fact that when they renew, prices will probably have gone up a little bit. A two dimensional plan doesn’t enable this and you end up having to surprise customers with a price hike.
As Josh talks about, if you have a clear pricing structure which features all three dimensions then there is nothing wrong with being up front about it. Customers don’t mind paying a little extra year on year, but they want to be told about it. In doing this you will be able to offer the customer full transparency which will in turn generate trust and loyalty from them.
As the price rises each year you will be able to position yourself to give customers great deals on upgrades. Let’s say that you follow Josh’s model and increase by 5-10% each year, you can offer a customer the chance to only see an increase of 3-7% on the year, if they upgrade the package. In doing this you will be generating more money yet also saving the customer money. This is a wonderful way for you to ensure that you are covering costs, without surprising your customers.
Josh talks about the pitfalls of not offering this three dimensional approach and the reality is that a failure to do so will cost your SaaS business money in the long run.