In Brief: Tech revenue has been softer for many SaaS providers over the past couple of years. In an effort to restore declining revenue, many SaaS providers have turned to significant price increases this year that are double and often triple the rate of inflation. While this pricing strategy may move the revenue needle in the short term, the long term impact can be quite a different story. Price hikes can impede new sales and impact customer renewals. In this article, we explore two alternative pricing strategies that allow SaaS providers to recoup lost revenue without hiking the price of their software.
Sharp Price Increases by SaaS Providers
Vertice’s annual “SaaS Inflation Index” report, shows that software prices are surging despite a decrease in the consumer price index this year compared with 2022. According to Vertice, 73 percent of SaaS providers raised their prices in 2023. The rate of the price hikes varied across product categories, with sales software seeing the greatest increases at 10.6 percent. This was followed by finance software with a 10.2 percent and productivity tools at 10.1 percent. Compare these numbers to the consumer price increase of 3.2 percent in October, and it’s easy to understand why Vertice CEO claimed in a recent press release that businesses are facing a cost of software crisis.
This begs the question, are rate increases that are more than triple the rate of inflation helping the SaaS provider’s business or hurting it? The answer is both. It certainly may boost short term revenue. That said, the sustainability of that revenue over time is questionable. Consider the impact on customer renewals. At some point existing customers will revolt, then what will the SaaS provider do?
Next consider new customer acquisition. According to CFO Dive, software-as-a-service accounts for 14.1 percent of the expense line for a typical company. This is an 11 percent increase over last year. Will new customers delay new software purchases as a result? Will they explore your competition and potentially sacrifice feature differences in favor of affordability? These are risks to ponder.
Alternative SaaS Pricing Strategy 1:
Keep your software price the same.
If your software has embedded payment acceptance capabilities, you have a tremendous opportunity to grow your revenue without raising your software prices. Even if you don’t currently offer payments, you have the same opportunity if there is a use case for payment collection in your software. The revenue you earn from the payments that are processed through your software can greatly exceed the revenue that is generated through a software price increase. Adding to the appeal is that this approach does not hamper new customer acquisition efforts or current customer renewals.
It is essential to have the right payment partner, though. Too often payment providers take advantage of SaaS customers by charging unnecessary fees and higher processing rates. Those can lead to software customer attrition. And that doesn’t help anyone’s revenue flow.
Alternative SaaS Pricing Strategy 2:
Razor Blade Model
This opportunity is a riff on the tried and true Razor Blade business model. This pricing model means selling one product at a low or no cost in order to increase sales of the complementary product. An example is to give away the razor because the real money is in the sales of the razor blades.
In the embedded payments version of the Razor Blade business model, a SaaS either gives away its software or drastically reduces the price because the earning potential of the ensuing payment revenue is not only perpetual but much greater than the license or subscription price of the software.
This is how mobile service providers can offer new phones for free. They know the money they are going to make on the cellular service far outweighs the revenue they would get from selling the hardware. It works very well for them, and it can work for you too – provided you have certain elements in place.
Provision 1: Ensure your revenue-share agreement with your payment partner is clear.
Payment providers have a reputation for being less than forthcoming about their revenue share model with their SaaS partners. A common tactic is to add new fees to the software provider’s merchant customers that are not listed in the revenue share agreement. These fees drive revenue for your payment provider but not for you.
Provision 2: Reduce your payment partners.
Different payment partners offer different revenue share opportunities for their software partners. Often, the earning potential is tied to payment volume. If you are spreading your payment volume among five, six, or seven payment integrations, you are not hitting the volume tiers that allow you to maximize your revenue. It makes sense to aggregate your customers’ payment volume to a single provider – two providers, at most.
Provision 3: Partner with a provider that aligns with your values and your strategy for the future.
What are your values in terms of your customers’ experience? Are fair and transparent customer pricing important? What kind of support do you need from your payment partner? Consider these questions when selecting a payment partner to service your customers and work with you to achieve your goals. There has been unprecedented merger and acquisition activity in the payments industry over the past few years. As a result, there are fewer but much larger providers whose focus is on revenue, cost controls, and shareholder value – not customer service, pricing transparency, or a commitment to helping their SaaS partners grow their business.
Provision 4: Make sure your payment partner provides consistent merchant pricing.
We have seen merchant pricing all over the board for the customers of software partners. The amounts your customers pay should be consistent throughout your portfolio. This ensures that none of your customers are overpaying (which affects customer retention) or underpaying (which affects your payment revenue income).
Provision 5: Quantify the total economic value of your software.
Consider factors such as increased efficiency, time savings, scalability, and the ability to access advanced features to quantify the benefits of software. Quantifying the impact of your software on your customers’ business is key information that will help you convert more customers to your embedded payments capability and retain more customers at renewal time. The more customers processing through your platform, the greater your revenue.
Adopting a pricing strategy that is contrary to what others are doing can be a scary thing, indeed. On the other hand, it also can be the differentiator that sets your SaaS company apart. A differentiator that facilitates customer growth and retention rather than jeopardizes it. This is where the right payment partner comes into play. Key in on the word “partner.” To make these alternative SaaS pricing strategies work, you need a partner not a vendor.