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August
2010
SaaS
Revenue Forecasting Is Different
Whether
yours is a new SaaS business or an established business adding
or moving to SaaS, revenue forecasting can be especially challenging.
In more traditional pricing models, large amounts of money
are paid up front and most of the customer lifetime value
is realized in short order. The impact of the key packaging
and pricing decisions can be gauged pretty quickly.
In
contrast, most of the customer lifetime value in SaaS is deferred.
It's related to revenue drivers that include customer acquisition
and retention, viral growth, and upgrades. Key packaging and
pricing decisions that affect these drivers have to be made
well before their full impact on revenue and gross margin
is realized.
In
an effort to help our clients understand the impact of their
SaaS pricing and packaging decisions on projected revenues,
we have developed a comprehensive pricing and revenue model
that helps them avoid many common problems...
- Customer
acquisition rates that are below expectations because packages
or prices scare off prospects
-
Retention rates that are lower than normal because entry
price points are too low and attract less financially-committed
customers
- Upgrade
rates that are low because customers don't see the value
of upgrading since too much functionality is included in
entry products or too little is included in upgrade editions
- Gross
margins that are lower than expected because too few paying
customers are subsidizing the cost of delivery to customers
that use unlimited trial edition (e.g. freemium) products
- Per-customer
revenue growth that is too low because available product
editions don't meet the functional needs of larger groups,
packaging or
pricing attracts customers that are too small or
not growing
SaaS vendors that understand these interconnected relationships
and have modeled their assumptions are more likely to make pricing
and packaging decisions that lead to success, and they'll be better
able to project future revenue and gross margin.
The
input and output sections of the revenue model we developed and
use in our SaaS practice are available here.
Let us know if you would like to see how the model might be put
to use in your company.
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