Recently, had an interesting discussion with an industry colleague who wondered why enterprises have not adopted Pay Per Use pricing model for SAAS. He further questioned as to why if enterprises could consume services from BPO vendors based on Pay Per Use (e.g. pay per new business applications processed or claim processed etc) then why not from SAAS providers. A very compelling argument.
First of all, organiasation must be clear about its objectives & benefits for going for SAAS. If SAAS is indeed the strategy, then the organisation must be willing to deal with a pool of SAAS providers, and also the Information & Integration Architecture associated such an IT landscape. Once this is achieved, organisation must also decide the about the pricing model. This article discusses the challenges associated with Pay Per Use pricing model.
From SAAS perspective, enterprise software systems can be classified into 2 types:
1. Plug & Play Systems: Where systems are hosted on a public cloud, are multi tenanted, are mostly used on “as is” basis without any customisations, and without any or minimum implementation efforts. Email, Collaboration software, Help Desk Systems are the best examples of this. Depending on organisation maturity, for some organisations even HRMS, CRM, LMS, Learning Management System could also fall in this category.
2. Customised Systems: Where systems are customised and involve significant implementation efforts. Enterprises prefer dedicated instances of such systems as mostly these are mission critical systems consuming “IP” of the company in the form of business policies, processes rules & critical data. Sometimes these are also governed by regulatory and compliance requirements. Core Applications, Digital Transformation Platforms & Solutions are typical examples of these.
SAAS Pricing model for Plug & Play Systems are much simpler (typically either per user or per usage period say per month or year) and involve a lot less debate. However, SAAS pricing becomes much complex for Customised Systems. And that is because of the complexities associated with the Total Cost of Ownership (TCO) of such systems. Typically when a new system is bought either On Premise or SAAS, enterprises have criteria such as IRR, Payback periods or TCO to evaluate the proposed investment / expenditure. In case of TCO, organisations expect TCO over say 5-7 years period is at least either equal to or less than the prevailing expenditure; provided that business benefits such as cost reduction or productivity or revenue increase are similar in either scenarios.
The TCO of any conventional on-premise system includes the following:
- License fees: One Time (Capex) & on need basis
- Implementation fees: One Time (Capex)
- Infrastructure (H/W & other software such as OS, App Server, DB servers) Cost: One Time (Capex) & need basis
- AMC Fees: Annually recurring (Opex)
- Maintenance & Support fees (includes enhancements/CRs): Annually recurring (Opex)
- Upgrade Implementation fees: Both tech as well as functional upgrades (Capex), Need basis.
Now the biggest challenge to accurately estimate TCO from above are Infrastructure Cost and Maintenance & Support fees. In both the cases it is is difficult to estimate the hardware & system enhancement requirements, particularly the later. In case of “On Premise” conventional software system models, organisations could leave with the ambiguity. However in case of SAAS long term rate contracts where “Pay Per Use” model is desired, absolute clarity is required on the volume of “Use”, Hardware sizing requirements, and Maintenance & Support efforts. In the absence of which, both the organisation and SAAS vendor hesitate to commit themselves to get into Pay Per Use model of engagement.
So what are the possible solutions? First of all, one needs to assess the need for “Pay Per Use” model. Any model, as long as, it is a win-win for both the user organisation and SAAS vendor, should be fine. But assuming that “Pay Per Use”model falls into such a category, one possible way forward is to have a rolling rate contract. Both the user organisation and SAAS vendor should objectively assess the actual costs for the previous period (Quarter / Six Months / One Year) and then adjust the same for the following period. Such an approach would require Spirit of Partnership and Flexibility so that the model delivers the desired results for both the parties.