SaaS providers: Is it really a buyer's market?

Don't assume you'll save money with Software as a Service. Learn more tips for evaluating SaaS providers' evolving pricing models.

Pricing models for Software as a Service (SaaS) enterprise apps are evolving, and experts suggest that it's becoming more of a buyers' market in some respects. But savvy CIOs and CEOs should drill deep into what they're paying for, the metrics behind these pricing models and the small print. They should also not blindly assume they will save money with SaaS providers, experts warn.

SaaS pricing models have evolved from a per-seat/per-month subscription model to everything from use-based to metered, especially as you go down the stack to Infrastructure as a Service (IaaS), said Lincoln Murphy, founder of Sixteen Ventures, a SaaS consulting company in Arlington, Texas. Pricing for SaaS "has come back around to longer contract terms with more customized pricing on a per-customer basis, and we're seeing larger deals," Murphy said.

If you think paying for what you use is cheaper, you're deluding yourself; vendors just raise the price point.

Duncan Jones,
vice president and principal analyst, Forrester Research

Customers are maturing in the way they consume these services, he said, and vendors are also maturing and becoming more accommodating. "More vendors are working with customers to make deals that work," he said. "Customers want longer-term contracts to lock in pricing. It's not a move back to enterprise software pricing, but a maturing. Pricing itself is now more tied to the value achieved by the customer."

Jim Geisman, principal and founder of Software Pricing Partners Inc., a consulting firm in Newton, Mass., says that the "quality of pricing overall is not real high. Most times [the vendors] don't have an orderly, rational way of doing it." SaaS vendors, he said, have mostly stayed with a subscription model, but many are now facing the challenge of buyers asking for a variety of delivery models and prices for on-premises and off-premises, subscription and perpetual. "As a consequence, the savvy IT buyer asks how they came up with the price and compares. The savvy IT director may find out the SaaS people are under-pricing the on-premises version and get a better deal."

According to Forrester Research Inc.'s Duncan Jones, vice president and principal analyst, sourcing and vendor management, "In theory, price is always meant to match business value." But processing power used to be expensive, so the theory was, "if you're throwing a lot of power at an application it must be worth a lot of money," Jones said. With the advent of cloud, big data and process improvements, though, "now you can throw a lot of processing power at things with little value."

Especially for SaaS, Jones explained, the vendor can't say, "OK, here's our application. We're charging you based on the number of cores your software is running on." The SaaS customer says, "I don't know or care what cores you're throwing at your application; I want a metric I recognize."

Not getting stuck with "shelfware" is a big driver in the enterprise software world, Murphy said, but the same issue can also apply with SaaS. "You have to understand what you're buying. Some SaaS companies create a pricing model that's incongruent with what the market is looking for. With SaaS you have the ability to price based on value received."

One value-based model Jones proposes is role-based. "It's my solution to only pay for what you use. Rather than track how often we're using software, we'll take an average based on what we know about an employee's role in the organization."

Murphy added, "There are times when the customer is in a better position to tell the vendor how [they would] like to use the system. With self-service [SaaS] models, vendors have to boil it down to something that works for everybody, but they may miss the mark on what works for a customer. As a customer, you have to know you have the ability to go to the vendor and tell them that."

SaaS buying tips

When evaluating SaaS providers' pricing models, here are some tips:

Look for hidden costs. Sometimes they're in the fine print, said Murphy, like overages. "If you're at a certain pricing tier, what happens if you go over the usage for that tier? You need to get clear on that." Also, a vendor may charge for or limit storage. "If you're not clear on that, it can be problem. Frankly, the vendor may not know what they're going to do if you're going over that level."

Understand the terms of a "free trial." Sometimes it's not clear, Murphy said. "Know what will happen at the end of the trial."

Find out if there is a money-back guarantee. If so, what are parameters? Is there an adoption guarantee? "Get the particulars," said Murphy.

Know the difference between an active user and a registered user. Also, find out how the vendor calculates an active user, Murphy recommended. "People try to get granular for pricing and it's more confusing. You don't want surprises."

Determine what integrations or add-ons may be required. "What else will be required to make that product work with the rest of your internal systems? Sure, there may be API connectors, but what is that going to cost?" Some vendors may charge a one-time fee, Murphy said, and others may tie it in with the cloud-based subscription fee. "All of these things come into play," he said.

Be aware that service-level agreements (SLAs) and performance guarantees vary wildly. If you need an SLA, Murphy said to go to the vendor and get clear on the rules. "Most SaaS vendors will shy away from a true SLA because there are a lot of different parameters. A lot of SaaS companies are built on infrastructure like Amazon or Azure, which they don't control. If you require an SLA, don't assume one is in place."

Look (closely) before you leap

According to Jones, it's too early to say if SaaS saves companies money. "Whatever you buy, if you have an annual contract for a certain volume you will pay a lower price point than if want to pay for an hour or a day. If you think paying for what you use is cheaper, you're deluding yourself; vendors just raise the price point." Also, Jones warned, "We're seeing SaaS providers bought up by large players and [then] prices going up 70% because customers can't walk away from their service."

Further, says Geisman, "If you license multiple SaaS applications and you're paying per month, your monthly fees can add up."

The bottom line: This is an evolving space and nobody has the right answers, Jones said. "If you don't like the model they're offering you, you don't have to accept it."

This was first published in March 2013
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