The Science of Optimal Versioning in SaaS

[tweetmeme source=”pricingright”] There is nothing more profitable to a marketer than the ability to price the same product at each customer’s willingness to pay (and get away with it).  The next best thing is to define one version for each customer with the  right value-price combination. But there are costs to versioning, I wrote about the four costs:

  1. Product Costs- Cost to create the different versions
  2. Sales and Marketing Costs
  3. Menu Costs – Maintaining all those SKUs
  4. Customer Costs – Incurred by your customer. This is what it takes for your customers to understand your multiple versions

If your offering is SaaS based and your go-to-marketing strategy does not involve an expensive sales force, it is arguable that your first three costs are close to $0. It is very tempting to use the magic of software configuration to define and offer one version per customer. When the customer comes to your website to signup, if you can show them just the one version that is right for them and nothing else, then you have achieved the marketing nirvana – pricing at each customer’s willingness to pay. Since this ideal situation is not possible,  you have to present them all your versions and let the customers self select.

Product costs, Sales and marketing costs and Menu costs are incurred by you, so you can control them and reduce them to $0. But  the customer incurs the cost to select your versions.  This cost is a double whammy:

  1. Presented with multiple versions, it will not be obvious to customers which is the right version for them. Your customers need to spend time thinking and evaluating these options and make a choice. That is a significant tax on them.
  2. While we should expect that once the customer picks a version and signs up,  this costs becomes irrelevant (because it is now sunk cost), only it does not.  Research shows these costs are sticky – customers remember and associate these costs with overall product experience.

So not only it is tiring for your customers to sign-up, the feeling lingers through out their lifetime (with you). Even though your product experience may be exceptional, its value to customers is reduced by the one-off buying experience. If the customers have to go through this process at each renewal instance, they are never allowed to forget the costs.

Sheena Iyengar, author of the recent book, The Art of Choosing, and a prominent researcher in consumer behavior writes in her 2000 paper,

Customers are more likely to make a purchase when offered a limited array of options than a wide range of choices. Subsequent customer satisfaction is higher if the selection choice set is small.

In addition, customers’ willingness to pay was higher when presented with fewer options.

So what should be your versioning strategy for your SaaS offering?

  1. If you can only present the same pricing page to all your customers then practice Goldilocks pricing. This is three versions, a low, medium and a high priced version.
  2. If you have a way to not show all versions to all customers – for example, enterprise version to SME customer – then offer three versions for each segment.

What is your versioning strategy?

10 thoughts on “The Science of Optimal Versioning in SaaS

  1. Thanks Vikas.
    I am not (and I can tell neither is Lincoln) recommending businessses move to single version before moving to SaaS.
    The net of the article is – while SaaS makes it easy to “serve a segment of 1 with its own version” – resist that because more the number of versions more is the cost to the customer. The ideal number of versions to offer is 3 (See my link in the article to Varian’s Goldilocks pricing).

    By the way, if a business is moving from hosted to SaaS model I think they have bigger marketing and operational challenges than just versioning.

    Thanks for reading.


  2. An excellent article Rags! and an equally fantastic strategy Lincoln!

    But does this mean companies currently providing multiple versions to their customers shouldn’t shift to SaaS model till they convince all their customers to shift to a single version?!!

    Something seems to be missing here.

    Have you never faced this issue? How did you go about?

    Wanted to get your feel of what are the best practices around this!




  3. This is a great post Rags… This is very much in-line with our conversation the other day about price discrimination and testing. Since SaaS is our specialty at Sixteen Ventures, we have a lot of experience in versioning, bundling, etc.. One of the main things we tell our clients is, in SaaS, things are a little different than in other businesses, including traditional (or legacy) software.

    SaaS vendors need to understand all of the underlying revenue streams they will leverage *before* they architect and build their product. This is different from other businesses where the revenue model is disconnected from the product or service itself. In SaaS, you need to have a way to keep track of the metrics relevant to your immediate market (at launch) as well as have inbuilt flexibility to ensure you can support the appropriate revenue streams and metrics for ancillary markets to come.

    But once you have ensured you can support the appropriate revenue metrics in the application, lets say usage-based, or per-seat under the recurring revenue stream, then you can start to bundle features along with the measurement metrics and apply pricing. This is why we say you must decouple revenue model from pricing in SaaS; ultimately pricing is part of marketing, but it is all tied together. This is why SaaS is unique and if you don’t understand this, it can cause significant business scalability issues later on (often quite soon).

    One note, we always tell our clients to differentiate the pricing bundles based on value-added features, services, etc. and to avoid “commodity” items like storage, CPU, or even users. Sometimes users are the key metric that is most aligned with the needs of the client, so it would be foolish to not use that, but often, it is a metric with little perceived value. Being value-based allows vendors to charge more in many circumstances.

    The great thing in SaaS is, if you’ve built your product properly, you can very easily customize pricing bundles, versions, tiers, etc. to fit the appropriate market segments. Then, using the marketing website, landing pages, campaigns, etc. you can segment and direct your target market to the appropriate pricing page for them. But like you said, even when targeting a specific market segment with their own pricing, why do just one? If it makes sense and you can align different pricing with the value delivered to the different segments of that already tightly targeted market segment, why not? Of course, it all depends on so many other factors, but in the SaaS world, we have a lot of options.

    Great piece Rags! Keep up the great work.

    – Lincoln


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