CFO, entepreneur, Finance, Innovation, Investment Banking, management, Process, SaaS, Strategic Finance, technology, Uncategorized, Valuation

Why is SaaS pricing so important?

Part 1 of 5 post series on – DIY on Pricing for your SaaS product


Companies have woken up to the fact that people want outcomes, not ownership. They want customized experiences, and they want continuous improvement, not planned obsolescence.
– Tien Tzuo (Founder & CEO, Zuora)

SaaS (Software as a Service) has singlehandedly emerged as the single largest business model disruption in the last decade. SaaS companies suddenly made available enterprise quality technology to people (and businesses) across the world. SaaS public companies made ~$70Bn (at a ~70% gross profit) while adding ~$700Bn in MCap on the Nasdaq.

But there is one thing that sets SaaS apart. A 70% gross profit means that the every $1 of revenue can add $0.70 to your profits & $9.5 to your enterprise value. Which makes for – Pricing, the single largest needle spinner (after the product and service, of course) in a SaaS companies life. Looking for that one small thing that makes a big change?

Start here.


First of all, is re-evaluating pricing today really a good idea for us?

Every business has certain levers that are some of the most important areas that the business needs to consider. For a manufacturing company, it could be scale-up costs, raw material costs and marginal cost. In a SaaS business, it becomes a lot more complex as the marginal cost could be as low as 0 with the initial outlay in the millions of dollars. Lets challenge some fundamental assumptions that SaaS companies don’t follow.

Let’s play a game of Myth/Truth.

Which of these statements are a Myth and which are the Truth?

2

Answers

4

Credits: OpenView Partners: 2018 Expansion SaaS Benchmarks Survey | Price Intelligently: The Anatomy of SaaS pricing


Ok. I’m open to the idea. Why should I re-evaluate my pricing for my SaaS product though?

3
5

That makes sense. So what are the others doing then?

6

We do the same thing too. Is there something we should be doing differently then?

6

Wow! Really? Guess I’m not alone.
What should I do instead?


Answer: VALUE BASED PRICING

Instead of looking inside, Value Based Pricing looks at the inherent value of the solution to the customer. While this takes more dedicated effort to achieve, it could significantly improve the speed of adoption and retention of the solution in the long run.

7

Is this worth the effort though?

8

Wish to navigate to the other articles in this series? These links will help.

Part 1: Pricing, why so important? How are the others doing it? [ This one! ]

Part 2: Value based pricing, what, when, how, why [ links to be updated ]

Part 3: Start pricing you SaaS product in these steps [ links to be updated ]

Part 4: 2 great examples of SaaS pricing pages with some resources you need to have[ links to be updated ]

Part 5: Looking to price your SaaS product? What can I do? [ links to be updated ]

Go right ahead and download the full whitepaper: [ Download ]


Credits and special thanks to:

1/ Price Intelligently, The Anatomy of SaaS Pricing Strategy

2/ OpenView Partners, 2018 Expansion SaaS Benchmarks

3/ Chargify Blog, How Innovative SaaS Companies Leverage Pricing And Packaging To Beat The Competition


Disclaimer: Please note that these are our views are based on our experience in being advisors and working with 300+ organizations across 20+ industries in 20+ countries. They are for the limited purpose of educating the leaders of a company. The rationale and the procedure to be followed can vary significantly based on the context, exact nature & size of the business. 


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business, CFO, Finance, Investment Banking, management, Strategic Finance, Uncategorized

What are the differences between a finance manager and a CFO?

We get asked every other day by businesses we meet – So what is it that you do so differently? While this has become a part of our standard conversation, we thought of putting these thoughts together in a whitepaper that every SMB can use to define what they should be expecting from this new wave.

Disclaimer: Please note that these are our views are based on our experience in being advisors and working with various organizations. They are for the limited purpose of educating the officers of a company. How this applies to your business can vary significantly based on the context, stage, exact nature & size of the business.

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CFO, Finance, Investment Banking, management, Mergers, Strategic Finance, technology, Uncategorized, Valuation

The anomaly that is strategy (in finance)

The only way people can really be excellent is with truth, so you have to have a CFO who will have the intellectual capacity & the conviction to tell you that you’re wrong and try to support that with data. 

– Anthony Noto, CEO of SoFi

Why this and why today?

Traditional finance is dead. Business has changed significantly over the last 2 decades. While this has opened up a new set of opportunities to reinvent the concepts of finance, a lot of businesses are being left behind as they grapple with issues that a proactive approach to finance could have easily avoided. All hail the new king of financeStrategic Finance Thinking.

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CFO, Finance, Investment Banking, Mergers, Uncategorized

Mergers & Acquisitions, simplified and jargon-free

Coming together is the beginning. Keeping together is progress. Working together is success.

– Henry Ford

In today’s highly competitive world, the playing field has levelled. This has opened a new world of possibilities for the medium sized companies but has also allowed larger companies to become real competition. Larger companies have internally, aided by available resources, have tweaked their business models to allow them to be more competitive to SME clientele. The easiest, and in many cases the fastest, way to stay competitive and maintain the speed of growth amid competition is to collaborate. But collaboration sometimes lacks the flexibility the time commands. Enter M&A.

So we thought of putting these thoughts together in an instructional bible to help SMBs ease up and look at making the most of coming together and working at building something larger.

Disclaimer: Please note that these are our views are based on our experience in being advisors and working with various organizations. They are for the limited purpose of educating the officers of a company. The rationale and the procedure to be followed can vary significantly based on the context, exact nature & size of the business.

 

Why M&A?

Is this something I should be considering?

There is nothing more powerful than the coming together of like-minded minds working together on a common mission. This is the foundation on which all successful partnerships work. However, most organizations tend to only realize the importance of working together with their internal people and tend to forget the power of coming together with other businesses and look at long-term synergies.

  • Simplify the understanding and help create a foundation
  • Consider M&As as an important strategic move
  • Demystify and present options for consideration
  • Execute more well thought out M&As

Honestly though, is this a nut worth cracking?

Short answer: The whole is always greater than the sum of moving parts.

Long answer: Businesses, each in their unique way, develop strategies to be able to do more with less. This may make them unique and efficient in many ways in their use of talent and capital. Further, each unlocks value in its own ways and can boast of success stories at it. These success stories and learnings which are unique can be carried forward to the combined benefit of the merged enterprise.

 

What kind of benefits?

Is there something more than I am seeing?

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entepreneur, Finance, Strategic Finance, technology, Uncategorized

Leveraging the power of collaboration in tech companies

Tracing back to the advent of collaboration

From the year 2000, a massive shift occurred quietly to most, but daringly to a few. A few large organizations saw the change that was occurring. In 2007, when I was consulting with a large $Bn technology bellwether from my alma mater, I remember how this disruption, so new and so unique, was being viewed as the single largest transformation in the industry way before most of the world heard of this disruption. This arrived with the perfect storm co-created by cloud system deployment capabilities and the penetration of high speed internet. With these forces aligned, it created the SaaS disruption. It took 10 years though for its proliferation to be the product of choice for all industries. It uniquely positioned itself to productise systems and frameworks and create workflow environments which were hitherto accessible only to the big companies at a fraction of the expense. It did something else which was more succinct though. Now companies were suddenly getting familiar with having open systems and integrations and allowing outsiders in – a fundamental shift in thinking which has changed everything.

How has this affected collaboration?

A precondition to any collaboration is an open mind. Where one can freely discuss synergies than be worried about theft of intellectual property by sheer discussion itself. With an open system environment, companies began to see how great technology could be accessed by everyone for a fraction of the cost, establishing that letting someone in can save money. Now organizations needed a nudge to say that collaborations can add business value. In 2009, I remember how an acquisition by another big bellwether of a small technology outfit in Europe was of strategic importance to them. Making less than 1% of their own top-line, this large technology company was ready to take the plunge of letting in a small team of engineers join them rather than do what might come to them easier – build their own team. A surprising move, but it gave them access to a downward integration possibility which could get them into market 3 years sooner and maybe worth billions in years to come.

Why would a tech company have this internal conversation though?

Collab 1

Phase 4

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CFO, entepreneur, Finance, Investment Banking, Strategic Finance, Uncategorized, Valuation

How to value a running business for a stake sale – a practical approach

SFO Valuation Study

2017 was a harbinger of times to come. Reported PE exits in India hit an all-time high crossing Rs. 80,000 crores across over 300 deals (Rs. 377,000 crores in the US). This is apart from the thousands of stake sales which occurred across the country in the VC and Angel Investment space and thousands more not covered by the media houses owing to their private nature. Interestingly the Indian Government was also a significant participant as divestment measures were at an all-time high in 2017. But how different is a valuation for a stake sale? What does one need to do differently?

What differs?

Valuing a running business for investment is slightly different from valuing a business for a stake sale. The fundamental difference being an understanding of partnership in the future as against liquidating a position today. While an investment transaction may be quite satisfied in a multiple or DCF valuation, a stake sale/ secondary transaction requires establishment of a reasonable price for a transaction. While reasonability is a factor of the high price of ownership or auction fever (Research published in the Journal of Consumer Research) and buyer-seller expectation management, practitioners deploy more than one method to ensure that reasonableness can be as less subjective as possible.

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CFO, entepreneur, Finance, Innovation, Strategic Finance

How & Why Tech companies today are seeking help today

It may come as no shocker to tech firms across the world that ‘Tech development’ as an industry has been slowing down. Large enterprises don’t seem to be buying as frequently and fervently as before. Smaller development projects seem to have dried up. Growth estimates (Gartner Q1 2017) to 2020 hint at a 3% CAGR over the next 3 years.  At the same time, for the first time in history, 6 among the 10 most valuable firms in the world are technology companies! If the logic of stock price being indicative of future earnings, something seems to not add up. What is really happening and what should a tech company be doing?

Understanding it takes some retrospection.

What happened while I was working?

Over the 20-year period beginning in the mid-80s, there was a flurry of businesses which jumped on the convergence of affordable computing and leap in telecommunication and the opportunity it threw up for businesses across the world. Large enterprise technology development efforts with large organizations starting to implement technology as infrastructure to add efficiency in operations and bring data sets together became the new age conquerors of this portion of the information revolution. Some big names that emerged were the IBMs & Oracles of the world and closer to home, the Patni, Infosys and TCSs of the country.

Around 2005, a new buzzword emerged with the improvement in telecommunication ecosystems across the country – Cloud. Information could now be stored anywhere and accessed anywhere. One did not have to maintain physical infrastructure to be able to house information, which meant that a small business could now hire only the infrastructure they needed at the efficiency of a large data center. Smaller organizations now jumped in as infrastructure costs and setup costs was virtually nil and barriers to entry were virtually eliminated. A few years in, a tiny revolution was brewing with the name of SaaS. A new revenue model of charging for use and value rather than the committed models that existed. This picked up immediately as now the cost of subscribing to technology solution was close to nil. The ‘innovators’ and ‘early adopters’ of early 2005 now made way for the ‘late majority’ in less than 5 years.

Business as usual was threatened for the first time.

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