The theory is straightforward enough: when you're pricing a service, you simply target the mix of offerings that maximize customer value while, at the same time, meeting your own cost or revenue objectives.  And voila!  At least that's what pricing is supposed to look like from high altitude.

But once you get closer to ground level, the clarity tends to evaporate.  That is particularly the case for providers of Software as a Service, or SaaS - companies whose Internet-delivered products come through cyberspace looking a lot like services.  And those services are, in turn, surrounded by a cluster of other related services - all of which come at a cost.  So just how do you price them?

Mike Naumuk, a veteran of several technology companies including Perot Systems, Respironics, Texas Instruments, and PrintCafe, has had quite a while to figure that out.  He is currently responsible for client services and customer satisfaction at medSage Technologies, a Pittsburgh based company who helps home healthcare providers effectively manage their patient population. And his company's automated patient follow up services, which are unique in the marketplace, don't have competitive pricing as a point of reference.  But that doesn't give them a free hand at setting a price wherever they'd like.

The answer to the pricing question is that a number of factors ultimately influence your decision.  "One is your positioning on the technology and business adoption lifecycle, others are obviously your internal cost structure and revenue requirements."  But your own internal accounting can only go so far, he observed.  "Obviously it's got to be something the customer is willing to pay for."  Yet even in a new product space like MedSage's, there are visible stakes in the sand.

Virgin space

"When we started, we were the only provider of this level of service using Internet-based technology.  Actually, we still are.  But, there has always been competition in the form of outsourced call centers," Naumuk pointed out.  "Instead of automated calls and a web interface to collect and present patient information, they've got people who make and process these calls manually.  So while it's kind of apples and oranges, what you can do is make some inferences about what they'd be willing to pay:  Here's what it costs them internally to do it now, here is the percent of the population that they're hitting, and here's what call centers provide and their fee structure.  Patient follow up using our services have to be less than that.  And it had better provide at least the same level of results."

In the end, though, the price that sticks is the one that's based on what a customer is willing to pay for the value they are getting.  "You usually go through multiple iterations" he said.  "For example, we used to charge a monthly fee per patient being managed on one of our offerings.  Then we would charge separately for any supply reorders generated by the service at a different price point.  But we've gotten away from that.  Although the revenue potential was higher for certain accounts, it was extra work to track the transactions- and to determine the point where you can recognize that revenue and bill the customer."  Instead, they came up with a single per patient fee that benefited both the customer and medSage.

Revenue trails

"When we make calls to patients, we ask them if they're compliant on whatever therapy they're using for whomever we're calling.  And some of the applications have a trailing-supply revenue component to it.  So if they're eligible to reorder supplies based on the data that we get from their billing system related to what they ordered last time, and what insurance plan they're on, and when they're eligible - that has an impact on the value and what you can charge"

It gets a bit more complicated pricing ancillary services.  "A key factor is whether the service is being offered to compliment your core offerings as a value-add or out of necessity. In one case you've got to price sufficiently to cover the cost of having that specific domain expertise on staff in-house while assuring you can generate sufficient demand - and turn a profit. In the other, you really won't be in a position to make money; you basically try to break even and still make sure the customer gets what they need."

Buried costs

Customer adoption is another key factor in pricing.  "Certain customers might be more willing to pay for required services outside of the core offering.  But it's not going to do you much good if you price these services separately and the majority of your customer base decides to opt out. 

"In our case, we provide both fee and no-fee services for each of our customers. For instance, once we deploy a customer, we monitor their activity on a continuous basis, analyze their site performance every quarter, and present our findings either on-site or through web conferencing. It quickly identifies who is leveraging our capabilities to the fullest, who is struggling and why. Our recommendations in turn allow them to manage their business better, while maximizing their revenue opportunity.  We don't charge for any of that currently, although you certainly could." 

So the question there is: Do you bury the cost somewhere else and just not charge for certain services that ultimately drive customer adoption?

Pricing pillars

Industry-wide, base pricing of SaaS applications is now usually built on a tiered subscription basis with monthly or yearly payments.  Those payments may be tied to such metrics as the number of end users, the volume of transactions, the number of instances covered, minimum activity thresholds, or some other productivity measure.  According to Naumuk, these payments would typically cover the use of the software, periodic upgrades, documentation updates, a base level of customer support, and hosting services.  That fee is normally bumped up by a small amount each year to cover ongoing maintenance costs.

Some sort of value-added pricing is more typical for professional services.  It would normally be a fixed price for bundled services, or menu-based pricing, or time and material costs.  And in each case, that price would be influenced by factors including revenue generation, cost protection, customer adoption, and value realization, Naumuk observed.

Future releases

But even with a well-calibrated pricing schedule, common but frequently overlooked software development activities can throw a supplier's service cost calculations completely off track.  "Evaluate the impact that future software releases have on your existing service capabilities and plan to accommodate those needs," Naumuk warns.  Ignoring it can create a serious self-inflicted wound to a company's revenue stream.

"In my experience it has been the most overlooked cost driver.  On the one hand, the customer gives you all these great ideas to make your software and service offerings better.  But the more functionality and features you start adding, the more complex it becomes from a service standpoint.  Why?  Because now, instead of having five configuration options, you've got twenty.  Every time you update the software, you've got to update the materials that go with it - the online training, the user guide, etc.  And all this has to be tested with end-users.  You can't just have developers make changes and then roll it out in production.  You have to do it at a time when it doesn't impact your existing customer base.  And you have to give your customers a heads up because sometimes the functionality totally changes their work flow.  That's where the tradeoffs occur."  

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