Dude, Where’s My Predictable, Growing Revenue? XaaS Key #2

Right Product And Service Design

Part 1: Good, Better, Best

A durable goods manufacturer I worked with saw the benefits of the XaaS model and made bold commitments, setting a 5-year goal of 30% of revenues from recurring sources.  After 5 years of hard work, designing new products with IoT technology, learning customer needs, creating value propositions, designing offers, training and rethinking the channel…less than 1% of revenues were recurring.

A software company I worked with successfully transitioned its user base over to an XaaS model, with great results.  But in the strategic planning process, the XaaS team forecast stalled revenue growth in 2-3 years, setting off a minor internal panic.  

What happened?

I Thought You Said XaaS Was Wonderful!

I didn’t say it was easy!  Yes, customers, investors, and you will love it – if you do it right.  

All too often, I hear the following:

• “Just bundle everything together in one package, one price – so simple, it sells itself!”
• “Just take the perpetual (license/ownership) price, and divide by lifetime of product/service – boom, there’s your monthly subscription price!  How simple!”

This is usually followed a while later by this:

• “Why are our recurring revenues still so small?”
• “Why have our recurring revenues stopped growing?”

It’s easy to fall into the trap of slapdash product, service and pricing design.  I will walk you through the traps in each of these, identifying the common mistakes to avoid, and the right approaches to adopt.

One Size Does NOT Fit All!

Bundling – collecting several products or services into a single package, at a single price – is a great concept.  It simplifies sales – because you’re only selling one thing.  It simplifies marketing – because you don’t have to target different segments.  

But bundling can be taken too far.  One size does not fit all; there are always going to be segments with different needs, and different spending appetites.  Pursuing a “one size fits all” approach leaves money on the table, and surprisingly, is more costly than having multiple package offers.

The Solution:  “Good-Better-Best” Packages.  

Why is Good-Better-Best product and service design so effective?

1. Segmentation: we're not all alike

For example, for accounting SaaS, a gas station owner in the countryside is not going to have the same needs as a pawn shop which won’t have the same needs as a law firm.  They need different functionalities – and have vastly different appetites to pay.  

Customers with basic needs won’t buy a high-priced package that offers them more than they will use; customers will more complex needs and greater appetite to pay may think an affordably-priced package isn’t offering them what they need.  Different packages at different price points maximize your revenue.

2. Psychology:  I’m not just good – I’m GREAT!  

When was the last time you thought to yourself, “you know, I’m not the best, I’m not even better, I’m just plain old good”?  Generally, only 10% of your customers to take a “basic” package, mainly out of affordability reasons.  Around half will go for the “better” package – because who isn’t at least “better”, right?  Around a third or more will think, “I’m the best and I deserve the best, whatever the price” – and will very quickly take your highest-level package.  

High-end retailers like Nieman Marcus played psychology like this to perfection for years.  I’m not suggesting that you (or Nieman Marcus, or anyone for that matter) exploit your customers.  Instead, I’m suggesting that you maximize their satisfaction and perceived benefits in their overall experience with you.  They will reward you for that.

3. Cost:  For just a few pennies more…  

For SaaS, there’s no incremental development cost and very little incremental operating cost between basic/good packages, and high-end packages.  Features and functionality are simply “turned off” or “turned on”; there’s just one product, with on and off switches.  As a result, the margins on higher-level packages can be incredible.  This may differ in the hardware world – I’ll discuss that shortly.

4. Upsell:  But wait, there’s more!  

Once customers enjoy your basic or middle-level offers, it becomes much easier to convince them to upgrade to your highest-tier offers.  Also, as you learn more about them, it becomes easier to sell them other products and services.   This provides a growth path even if you have high market share, or have converted an existing customer base from perpetual to XaaS models.

Success Case Study:  Salesforce.Com

Salesforce.com, one of the pioneers of SaaS and an incredible disruption success story, uses this “cascade” of packages extremely well.  Consider below the offer cascade for their flagship CRM product:

Source: Salesforce.com

Note how well Salesforce.com designed this cascade of offers:

1.     4 separate packages;

2.     A clear indication of increasing features and functionalities by package;

3.     “Good” (Essentials) clearly positioned as a basic, entry-level package;

4.     Salesforce.com clearly steers customers to the “Enterprise” package, helpfully telling us it’s their “most popular” (which means:  this is the one you need, the others are good and deliver value, but you really need this one); 

5.     “Unlimited” is priced 10X “Essentials”!  Salesforce.com has determined not only what their different customer segments need, they also have a good sense of how valuable the increased features and functionality are to them.  

In my next article, I’ll continue with discussing XaaS pricing:  common mistakes, how to avoid them, and how to do it right.

I’ve worked on successful business model transformations in three of the world’s leading technology companies, covering all geographies. Are you looking for a strategic “secret weapon” to advise you on your business model transformation, without excessive hype or exorbitant information technology bills? I’d be delighted to discuss how I can put my experience to use on your business model transformation.  Contact me. I am here to help.