5 Pricing Pitfalls to Avoid When Transitioning from Prem Based Solutions to an SaaS Pricing Model

“To increase the value of our business by 2-3.5x all we need to do is convert to a SaaS based pricing model? Let’s do it!”

I hope your CFO does not believe it is that simple.  Unfortunately, we hear from too many clients who go to market with subscription or SaaS pricing without addressing known pitfalls.

pit·fall /ˈpitˌfôl/ – a covered pit used as a trap

There are numerous benefits of moving to a subscription model, but this article is not about why you should do it. This article is about avoiding known outfalls once you and team have made the decision to transform your pricing model.

While all endeavors will bring to light things that could not have been foreseen, you need to address these 5 known pitfalls. 

For more on how SaaS can help you maximize enterprise value, read this article and listen to this podcast from two CEO’s.

Download the 5 Pitfalls Avoidance Guide to leverage specific steps to take to avoid these 5 pitfalls when switching to an SaaS pricing model.

1. You are misaligned: Your operational or go to market strategy is not aligned with your pricing strategy.

    

   Transforming your business to a cloud one will transform nearly every part of your company.  Do not mistake this as solely a pricing exercise.  Your product, sales, marketing and even how finance reports on your business will change.  New departments like customer success will likely also be needed to maintain renewal rates where you want them to meet pricing

    

2. You do not know how your customers prefer to buy: You need clear answers to these and other questions to maximize your chance for success.

    

   • For you to be easy to transact with do your customers want a flat enterprise price?
   • Should you have per user pricing? Can you operationally assure compliance?  Should only users who are active be changed or all those who have access even if they do not use it?
   • What features or should the customer land with and what is your next best product. Will you use a bundling pricing strategy?

      

3. Product upgrade cycle is misaligned: Your products must be aligned to the pricing strategy.

    

   While each pitfall listed is important, this can be the one that most quickly derails your launch and throws your strategy into chaos.  This occurs because the majority of on-prem services and installs are customized.  This happens due to particular customer requests and because customer environments are unique.  This inherently means the solutions are not ready to be consumed out of the box.

    

   In SaaS however, this is the entire point.  Your products must be able to be used with little to no customization.  If you do not take this into account, you will have to maintain different environments for customers.  The more your product is standardized the better you will be able to strategically implement a refresh and maintenance pricing.  Maintenance revenue is the basis of recurring revenue and you need to deliver this very cost effectively to realize the benefits of subscription pricing.

    

4. Your pricing strategy is misaligned to how sales sells.

    

   Moving to a subscription model will typically have the biggest impact on how you sell.  First year contract values will decline which impact quotas and how sales reps earn their income.  As these averages decrease you must not overpay for the cost of acquisition.  In addition, you must have a plan to close the gap on how sales sells today vs tomorrow.  Get these compensation and enablement issues wrong and you may have to revamp your sales team.

    

5. Your value chain has hidden costs.

    

   To achieve the margins predicted your new operational costs need to be in line with how you price.  New costs such as security and preventing costly mistakes need to be an input to your pricing strategy.  As you move the cloud you may also need to change channel partners that can help bring you into accounts or those who add value by combing your service with their own and or others. If these partners are not who you currently do business with you will need to find them and understand how they make money in order to be able to account for costs of your service.

    

Mitigating these pitfalls will help your team create an actionable operational plan that will save you frustration, money and time.  Avoid these and you will achieve your goals faster.

For more on moving to SaaS and steps to avoid, see this article from my colleague John Marcsisin titled, “3 Common Mistakes That Are Halting Revenue Growth When Shifting to an SaaS Model“.

We do not claim to give you answers to these 5 pitfalls in the above but we sincerely hope we have pointed out that each is a covered pit lying in wait for the unsuspecting to fall in.

Download the 5 Pitfalls Avoidance Guide to leverage specific steps to take to avoid these 5 pitfalls when switching to an SaaS pricing model.

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