A Cloud charging model, tailored to your clients … in other words, how can you make money with SaaS and make your users sign up with no hesitation?

Believe it or not: you can make money with your SaaS Cloud-based service. OK, joke aside … before I start, I’d like to press on two points:

  • Point #1: In the world of Cloud/SaaS, your clients make a buying decision every month they get your invoice. This is why your charging model is so important. If you like this crazy thought but it’s new to you, read this post about the Customers’ psychology of Cloud and SaaS services.
  • Point #2: If today, you mainly work with large Customers, please read this post about the Cloud dilemma of large software vendors first before reading this one. It’s important how you approach the problem – answer the “what’s the service and who are my users” question first, then let’s talk about your business and charging model. Otherwise, it’s confusing and doesn’t make sense. It might turn out that your future SaaS Customers are not from your current Customer base … they create a new stream of revenue for you… eh? If you feel comfortable answering the bold question above, then go on and have fun reading and thinking all the way to the bottom of this post – and please leave a comment!

Baseline: how are you being charged by your Cloud provider?

For a start, I’ll take your Azure bill as the baseline, but the structure I describe here applies for most Cloud providers – Amazon, Rackspace and Google, too. From the moment you deploy your application into the Cloud, you start to pay for every resource that your application uses – processor time, database and disk space, number of read/write transactions and network bandwidth. What’s essentially important here is that you pay for only what you use – so if you shut down one of your servers for a few hours or delete some data in your virtual disc, you save money for yourself. Similarly, if you expand your service, use 2 more servers and grow your data, you’ll pay more. The more resources you use, the more you pay. The more you pay, the more you should charge to your Customer – well, most of the time.

A successful SaaS business model nicely aligns your service’s charges with your Cloud deployment’s resource utilisation. A well-designed charging model ensures that your end-users’ usage of your service is translated into their own business language – they understand the bill and they value the units they are being charged after. Putting a bit more salt and pepper on your charging model and taking some risks in order to make the buying decision easier for your clients is the key for success.

Let’s look at this from your Customer’s perspective – let’s say, you create a new business and you want it to be successful. Which model would you choose?

This one?

Seasonal business with flat costs

Or perhaps this one?

Seasonal business with costs following the revenue line

The first reaction from some of my clients is that the second model doesn’t exist in reality. Well, let’s say, it’s rather odd. Your job is to define this model and make it happen. As an example, look at the 90-day, almost “condition-free” return policy at IKEA. I can’t even remember all the useless little accessories I bought at IKEA with the freedom in mind that I can take them back if I don’t need them. It’s risk-free! I can take them home and return them 2 months later if I change my mind! Wow! Obviously, IKEA takes a risk here, but as a result generates a lot more revenue from folks like me who are too lazy to take their useless stuff back.

Know your Customers’ business – the “Pay Per User” era is over

The art here is to understand your Customers’ business and build a charging model that’s meaningful to them and is based on how they make money. If they generate more revenue, they pay more. If they generate less, they pay less or pay almost nothing. If your service stands out in quality, a no-risk model could result in a no-brainer buying decision.

I recently worked with this great SaaS company who has been specialising on building warehouse software for 20 years. They know their Customers’ business inside-out. The last time I met them, they explained how a large warehouse works – man, I’m telling you, programming Assembly and allocating computer memory manually is an easy job. At this company, even the techies know their Customers’ business inside-out. This helps them building a charging model, that is based on their Customers’ success. To give you a bit of an insight: a warehouse is typically charging their clients by the number of steps warehouse workers have to do in order to move and shift their clients’ stuff – from trucks to shelves, between shelves, from shelves to trucks, and so on. So, my friends at this SaaS company are designing a charging model, which is based on the number of warehouse transactions (scanning of RFID tags) – which means that the more transactions the warehouse does, the more money the warehouse makes and the higher bill they get from the SaaS app – revenue and costs aligned. Can you imagine anyone saying no for this model, considering that they need to make almost no initial investment either to buy licenses and install servers? In the days of recession times, this just works out perfectly for everyone!

Happy Units

It’s psychology on one side and common sense on the other, but it’s important to imagine what happens when your client gets their first bill: how will they react when they look at it? The point here is to make sure that they feel good about paying that bill, because every time they look at that bill, they make a buying decision to continue purchasing your service. Accepting a bill that’s a fraction of a cent for every warehouse transaction is guaranteed when the warehouse is charging their Customers 10 cents per transaction or one cent per step. Getting a bill that is going against your Customers’ existing business model (such as number of users using the warehouse application or number of read-only queries/reports) is not a recipé for success – it will present bills that are not related to the warehouse’s revenue. Your charging model, unit cost and product’s quality is what differentiates you on the market.

… And the Conclusion and Ask

The good news is that there’s still a lot of space to be different from others – a ton of opportunities to do something new, find unusual models for charging your Customers, generate marketing traffic – be talked about … So, it’s your time to do something new, something tailored to your Customer’s business, something that your clients can’t reject. And if you have seen some unusual charging models or want to share your thoughts, please leave your feedback here. If you can give me some hints on how to take nicer photo shots of LEGO bricks, please also let me know.

Linkedin David Szabo, Regional Cloud Strategy Advisor, Firestarter and Rulebreaker at Microsoft

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26 Responses to A Cloud charging model, tailored to your clients … in other words, how can you make money with SaaS and make your users sign up with no hesitation?

  1. Pingback: Cloud from the children’s perspective | The Cloud Strategy Blog

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  5. Pingback: Running a SaaS business? With the Cloud, you can take risks for less! - The Cloud Strategy Blog - devPortal

  6. Pingback: Running a SaaS business? With the Cloud, you can take risks for less! | Vertical Cloud

  7. Pingback: Single-Tenant Vs Multi-Tenant SaaS Invoicing Architecture: How Can You Make Money With the Cloud – Part II. | The Cloud Strategy Blog

  8. Pingback: Single-Tenant Vs Multi-Tenant SaaS Invoicing Models: How Can You Make Money With the Cloud – Part II. | The Cloud Strategy Blog

  9. Pingback: Single-Tenant Vs Multi-Tenant SaaS Invoicing Models: How Can You Make Money With the Cloud – Part II. - The Cloud Strategy Blog - devPortal

  10. Pingback: Single-Tenant Vs Multi-Tenant SaaS Invoicing Models: How Can You Make Money With the Cloud - Part II. | Vertical Cloud

  11. taschr33 says:

    Very interesting thoughts… I have tried to find something else that a “user” to charge and I have actually found it in some cases (see here http://tchristidis.blogspot.com/2010/03/saas-pricing-models-part-1.html and here http://tchristidis.blogspot.com/2010/04/saas-pricing-models-part-2.html and here http://tchristidis.blogspot.com/2010/04/saas-pricing-models-part-3.html). I can’t say I disagree with your line of thinking. I just want to point out a couple of disadvantages in that “customized price-list” concept:
    a) If you MUST know your customer’s business (in order to come up with a charging scheme that makes sense), then you leaning towards the “business consultant” turf; which is not bad, I just don’t know if it’s feasible or desirable…
    b) Customized price-lists means that you can’t publish a general price-list on your product’s web site, for all people to see and compare (without contacting your sales staff); which is, by general acceptance, not good.
    c) What if you find a customer on the low-end of the pyramid. Small business, small revenue and small gross margin… Would you be willing to tie your earnings with that SMB’s viability? I’d say “no”. I would suggest to have that customer around (as long as they are viable) and get paid “per user”. If they come tumbling down, you just stop servicing them. In the meantime you haven’t taken any risks.
    On the other hand, I have to admit that such “customized” or “volume-based” charging is quite common is some businesses (e.g. banking applications).

  12. David says:

    Hi Tasos,

    Many thanks for your comment. I’ve read through your articles – very comprehensive work with a lot of interesting ideas. I also liked your argument. A few thoughts:

    a) If you MUST know your customer’s business (in order to come up with a charging scheme that makes sense), then you leaning towards the “business consultant” turf; which is not bad, I just don’t know if it’s feasible or desirable…

    If one offers a compelling product to their Customers, I assume that one knows their Customers inside-out. Otherwise, one’s lucky. 🙂 Better service companies don’t just know their Customers’ business, but they know their Customers’ employee profiles, too. They use this insight to position their services in a way that works best for the individuals making decisions.

    b) Customized price-lists means that you can’t publish a general price-list on your product’s web site, for all people to see and compare (without contacting your sales staff); which is, by general acceptance, not good.

    I would never advise anyone to hide the services prices. I’d certainly recommend publishing all options and packages – making them really transparent. For the variable invoicing option, I’d publish the % of charge per units and I’d explain what a unit means – in simple terms. Such as, for this Payroll service, we charge you 0.1% of all the transactions we process for you. Or if you choose to pay a fixed monthly charge, we can charge you $50 times the number of users per month. Or if you want to set your costs now and pay in advance, we can charge you a fixed $2,000 now and you’ll be covered for the entire year.

    c) What if you find a customer on the low-end of the pyramid. Small business, small revenue and small gross margin… Would you be willing to tie your earnings with that SMB’s viability? I’d say “no”. I would suggest to have that customer around (as long as they are viable) and get paid “per user”. If they come tumbling down, you just stop servicing them. In the meantime you haven’t taken any risks.
    On the other hand, I have to admit that such “customized” or “volume-based” charging is quite common is some businesses (e.g. banking applications).

    I’d advise every SaaS company to take risks and make it compelling for businesses to sign up for their service. The more companies sign up, the less risks they take. Of course, this is true for a multi-tenant service, for a dedicated single-tenant option, I’d advise to invoice a minimum fee, which covers the service provider’s costs + contingency + a bit of margin. Above this, comes the variable charge or the option works best for the Customer. I know, however, that this conversation can differ per different businesses/countries/cultures.

    • taschr33 says:

      Thanks David for your comprehensive answer. From all your ideas, I will hold on to this: “I’d advise every SaaS company to take risks and make it compelling for businesses to sign up for their service” and surely give it a second thought!

      • David says:

        … i.e. 90-day trials, PAYG and the like – make it as easy for your Customers to choose you – as IKEA does with their 90-day return policy.

    • Lorenzo says:

      All tighns considered, this is a first class post

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