If you are a CFO or a PE Firm thinking about buying a company whose product has a low fixed and high variable cost (i.e., software), this is important to you. Why, because when you are looking at investments, price alignment to product strategy is the most important lever to pull to get power from your pricing strategy (Don’t learn the pricing problem too late). This alignment is the basis for an effective versioning strategy. Product and price versioning, when executed well, has a significant effect on valuation.
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The right product versioning will increase the overall selling price and what your customers will buy. From the smallest startup to enterprise software companies, success in selling software requires elasticity, scalability, flexibility, and this all needs to be iterative. Implementing price versioning allows upsell and will drive more profitability. Giving customers a choice on how they link the price to value received is critical. Some of the most successful SaaS companies that have implemented versioning are in the areas of sales and employee management, gamification platforms, analytics, application lifecycle development, and time management solutions.
According to Marketwatch, The Global Software as a Service (SaaS) Market size is expected to reach $185.8 billion by 2024, rising at a market growth of 21.4% CAGR during the forecast period. With the industry showing no signs of slowing down, it has become an attractive space for many investors. However, getting into SaaS with an idea is one thing, but being successful with it is a beast of its own. While numerous articles are detailing the development of successful SaaS companies, the focus on versioning to drive valuation is top of mind in many board rooms.
Let’s breakdown four examples of versioning based on what we see every day and how they work.
- Market or Buyer Segmentation – Giving different functionality and pricing based on different market segments, buyer segments, or geographic segments. If you look at how Salesforce.com sells their product, they have these segments in their model (i.e., sales team, marketing team). LinkedIn also does this by segmenting the type of role (recruiter, enterprise, end user).
- Iterative Development – Focus new product versions against a new or renewal price to drive more revenue. A classic example is Intuit. You can use an older version, and they provide updates, but if you want the newest version with the latest tax information, you need to buy it year after year.
- Freemium – Gives the consumer a basic version of the product, and then if interested in more features, there is a fee. Apple and Evernote are examples of where this has been successful.
- Feature-Based Pricing (Good, Better, Best) – This is the most common versioning strategy and has been around in various forms for many years. It is what drives the success of companies like Microsoft.com and even recently Uber.
Leveraging versioning to put together a better b2b strategy is the key to success in today’s software market. Versioning is the best way to monetize the value of your product strategy.
As we look at history, versioning strategies have been around for nearly 100 years. Alfred Sloan introduced a “price ladder” to differentiate Chevrolets and Buicks from Oldsmobiles and Cadillacs, creating “a car for every purse and purpose” and powering General Motors to overtake Ford. In the modern era, we see versioning in many businesses including Gas stations (regular, plus, and super fuel) or American Express (range of credit cards, including green, gold, platinum, and black, with varying benefits and annual fees). Cable TV providers (market basic, extended, and premium packages). Car washes typically offer several options, separated by services such as waxing and undercoating.
If implemented, the right versioning strategy can drive accretive value, but if implemented wrong, it could cost you the company. Here is a link to a diagnostic on how to position versioning. The most prevalent leverage of versioning is in the SaaS market. This is one of the first areas of due diligence that VC and PE firms look at when they are estimating valuation. It has been proven that proper alignment between product and price is the most effective way to engage with the customer, manage the company, and drive valuation. So, if you are a CFO or PE Partner, I am sure this is top of mind, or it needs to be.