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 upfront and most of the customer lifetime value is realized in short order. The impact of 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.
Understanding the Impact of Pricing
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.