The Beginning of the End for Per-User Pricing?

Bieber

Successful SaaS companies over the course of the last decade have made it in vogue to pray at the altar of per-user pricing.  It makes sense – Salesforce, ServiceNow, Workday and Zendesk all price on a per-user basis and those are flashy public companies. 

Basically, is per-using pricing Justin Bieber in 2010 and we’re headed to Justin Bieber in 2015?  Like at first everyone was like “huh what is this per-user SaaS thing” and then a bunch of young kids were going nuts for it and you were like “oh hm that thing won’t go away” but you still dismissed it and then you were like “hm that’s a catchy per-user SaaS song” but now you just wish it would go back to Canada(a). Or is it more like Bruno Mars where it followed the same path(ish) but instead of wanting it to go back to Canada, you want per-user SaaS to play back-up on a song with every hip-hop artists that hasn’t been relevant since 2000? Hang with me – this is going somewhere.

Per-user pricing may actually hurt your business according to this study by McKinsey (and chart below).

Per user pricingAnd here is someone yelling about per-user pricing and saying click bait-y, sensational things like “per-user pricing kills your growth and sets you up for long term failure.”

Okay. So you’re more likely to die alone and have your children (or future children) hate you if you price per-user? Let’s unpack this a bit.

First and foremost, I don’t have the data set, but can guess at some of the problems in the underlying McKinsey data

  1. There are just more large companies that have been around for a long time that price by user count. Slower growth.
  2. Companies that use non-user based pricing have benefited disproportionally from the growth in the economy, and specifically technology, over the last few years. 

Second, the “Die Alone” article’s fundamental argument is that per-user pricing hurts Daily Active users (true – to be discussed more) and cites GitHub (the correct spelling of Github, a very successful company in code management) vs. Preforce (the incorrect spelling of Perforce, a less successful company in code management) as an example proving the point. This probably isn’t the main reason for the disparate levels of success as the article implies, but price is obviously a super important component of a business’ growth.

Let’s dive into price a bit more, shall we? I mean if you’re still with me after that Bieber analogy you’re here through the end.

Every company that has SaaS-based per-user pricing really only has a small fraction of the users that are paying them for a seat actually logging into the product. I’ve heard the normal relationship is something like 10-25% users that are active on a weekly basis and then a long tail that either sign in in-frequently or not at all.  Almost every product has two principal user groups within a single customer that touch it at some level:

  • Workflowers: people that (you hope) spend their day logged into your product, constantly using it
  • Report-getters: people that seldom (if ever) log into a product and don’t really care how the sausage gets made. If the sausage taste better than they’ll like it more… If they hear less complaining from other people than they’ll like it more. But for the most part these people get things in the form factor they want them. You need to convince them this is the form factor they want.

You can have people that are hybrids of these roles, but the main point is that they are seldom directly overlapping, have different priorities and various levels of influence. The value that your product provides to a company is a combination of the value each of these groups derive. Your goal as a company is to have as many people in the workflower bucket as possible. By making users the friction point, you’re inherently capping the number of report-getters that might move to more of a hybrid role (or even a workflower role). In other words, you’re causing a natural limit on the success that your product will have within an org.

You’re also consistently putting yourself in a negotiation with each user being benchmarked against the top workflowers.  You’ll inherently hear defensive arguments like “they don’t log in to the product.. I don’t understand why we’re paying for them.” The more you can eliminate this discussion the easier it’ll be.

So is per-user pricing killing you and your family slowly and setting you up for a long-term life of despair and loneliness with lots of cats? No.

Does it need to end? As the default? Yes. Entirely? No.

So what considerations should go into choosing your price (and determining if per-user is right for you)?

  • Grow up / protect down: Your customers are going to be successful because they’re using your product. Obviously. So share in the upside. This might be per-user or it could be like:
    • Demandware which has a flat subscription fee that they will negotiate and then share in revenue generated on their e-commerce platform
  • Align with value: Seems easy in practice, but it can be hard when there is a disconnect between who derives value from the product and how to quantify it. This might be per-user or it could be like:
    • Zuora which prices by the amount of subscription revenue on its platform. As customers bill and use the platform more, the price goes up
  • Simple and predictable: Don’t confuse your customers. Don’t surprise your customers. Customers are your external marketing team. This might be per-user or it could be like:
    • Marketo which prices with caps on the number of individuals contacts you can have in their system (in addition to feature tiers). More contacts.. more leads.. more money
  • Cheap: Yes. It should be cheap enough so that one of the following happens:
    • A business user can buy it themselves
    • A customer can easily justify ripping out the existing system or taking a risk and buying a net-new solution

Find the pricing model that fits your business – seats aren’t dead, but if they don’t make sense, don’t use them!  You should aim to be the next Salesforce and Workday, but you’ll never get there by forcing your customers into awkward pricing structures. Never forget, playing football at West Canaan may have been the opportunity of your lifetime, but I don’t want your life, Salesforce, Workday, or ServiceNow.

 

Footnotes

(a) Get ready for people to be a bit more sympathetic to Bieber after his roast on Comedy Central airs on March 30. Some quotes from it are coming out and they are great. Here is one from Hannibal Buress: “They say that you roast the ones you love, but I don’t like you at all, man. I’m just here because it’s a real good opportunity for me. Actually you should thank me for participating in this extremely transparent attempt to be more likeable in the public eye. And, I hope it doesn’t work.”