Saas Subscription Model

Subscription Model in SaaS businesses

Introduction to SaaS

Software as a Service (SaaS) is a business model where the software is developed and hosted by the vendor and the user accesses it using the internet. The end user customer doesn’t need to install the software on his/her computer, as the software is hosted on the vendors servers, the customer can access it using the internet. It is most popularly known as hosted software or On-demand software. The customer does not own the software, he pays a monthly/yearly fee to rent it. The vendor owns the software and runs it on computers in its data centre.

Background of SaaS

The expansion of internet during the 1990’s brought along a new group of companies called Application Service Providers

Also popularly known as “Pay as you go”, in this model customers are able to manage their usage of product or service and the costs associated to it. This flexibility is important for companies who want to ramp up their product and anticipating greater future usage. At a higher level of usage a locked-in contract may make sense for the customer, but for the scaling-up period, “Pay as you go” may be preferred.

Another key aspect of consumption model is that it provides limited commitments by customer for future. Unlike traditional product licenses, the customers have option of severing ties anytime and scaling down the usage without any significant negative penalty. Again, implicit in this offering is that customers have an idea of the value of the product but are unable to foresee whether they want to use it in future or the variability in usage patterns. Thus for ensuring flexibility as possible into future, “Pay as you go” might be

Since then it has been an effective means of price discrimination. The general idea is to tie pricing to some driver of value and usage like seats, modules, data volumes, servers and many other scale factors. Similar to Cellular Post-paid plans which bundles data, calls and SMS, the tiering plans are designed to encourage customers to upgrade to the next level.

The tiered model is supported by the mind-set of having a long relationship with customer. Eventually the needs of the customer will also evolve. The sales process involves demonstrating that the product will meet your current needs as well as your future needs through higher tiers that it “graduate into” over time. This also indicates that the sales process may longer in order to prove this proposition to the customer.

For a tiered model, it is important to segment the key metrics as well as customer expectations of service level. The perception of growth on the part of customers is an important part of psychological pricing that is comparable to the perception of “being charged for a service that I barely need”. The selection of value metric is an important part of this growth