The pricing of software, software-as-a-service (SaaS), and digital services is subject to different conditions and complexities than the traditional sale of physical products. On the one hand, the absence or negligible marginal costs of many standardized digital offerings presents not only a significant opportunity but also a risk for pricing. On the other hand, the optimal strategy for monetizing digital services raises numerous questions for companies and their pricing approaches. Highly configurable software and digital services also create considerable complexity when developing a targeted pricing logic. These challenges apply both to the commercialization of software (SaaS) and to digital services whose business models are built on software as their foundation.
Marginal costs as both an opportunity and a risk for pricing digital offerings
Many standardized offerings in the field of software (SaaS) and digital services have negligible marginal costs. This means that additional customers and users of an already developed digital offering generate little to no additional cost for the provider. This creates expanded opportunities for revenue and profit optimization in pricing, as greater price differentiation between customer segments becomes possible due to increased pricing flexibility. At the same time, however, marginal costs also pose the risk of setting prices too low or offering excessive discounts, which can undermine customers’ perceived value of the offering in the long term. Particularly with bundled offerings (physical + digital), we often observe suboptimal monetization of the digital components in practice—partly reinforced by customer expectations (“I already pay for the product as a customer—so why shouldn’t I use the software for free?”). In addition, even with low marginal costs, variable cost components should still be considered when defining a minimum price for the offering. This includes areas such as service and support, and—especially for software-as-a-service (SaaS) offerings—the costs associated with providing cloud infrastructure.
Definition of the digital pricing model, pricing metrics, and prices as a complex challenge
The optimal strategy for monetizing software (SaaS) and digital services raises many questions. These range from balancing objectives and selecting the optimal pricing model to defining suitable customer- and value-oriented pricing metrics and prices. In this context, there are many success factors that are often not sufficiently considered. Clearly defining monetization objectives forms the foundation of the strategy—for example, digital products can serve as an “enabler” for selling other products or for directly generating revenue and profit. A structured evaluation of different pricing model options, followed by model selection, sets the framework for defining value-based pricing metrics that scale with the value delivered to the customer. Value-based methods can then be used to determine prices within the model while taking these pricing metrics into account. In addition, traditional software developers and providers often need to establish an effective service pricing logic to monetize classic services such as implementation projects, maintenance contracts, or the execution of updates and upgrades. Since these services frequently require direct human resources, a well-designed service pricing model is a key factor in ensuring long-term profitability in the service business and reducing the risk of an imbalance between effort and return.
Very high complexity due to highly configurable software and digital services
Highly configurable software and digital services create additional complexity for the pricing of such digital offerings. Different software variants and functionalities, as well as combinable options, enable almost unique customer configurations of digital offerings—these represent the opposite of a standardized product. In the case of configurable software and modular digital offerings, providers are therefore first faced with the task of developing meaningful bundling or targeted packaging of modules and options. This also requires a clear distinction between a basic or standard scope and additional (optional) features and extensions. Highly configurable digital offerings also require a structured pricing logic in the sense of a CPQ approach (“Configure-Price-Quote”), which takes into account the value contributions of different modules and options. A central requirement of the pricing logic is to reflect every possible configuration in a consistent and sufficiently value-based way. In practice, however, we often still see unstructured approaches or prices that are not systematically derived, meaning that orders are either not won or willingness to pay is not adequately captured. In the worst case, employees have to “invent” a new price for each new request—leading to significant additional internal effort and costs.
Optimal monetization of software, SaaS, and digital services through structured approaches and practical expertise
As an experienced partner, we support you with our expertise in the targeted development and refinement of the monetization strategy for your software, your “…-as-a-Service offering,” or your software-based digital services and solutions. Using our proven and structured approaches, we help you holistically define monetization objectives while taking your full portfolio of offerings into account. With our systematic evaluation models, we advise you on selecting and designing the optimal pricing model (e.g., “subscription” or “pay-per-use”) and on subsequently defining value-oriented and scalable pricing metrics within the chosen model. We apply our specialized set of methods together with you in an effective and efficient way to systematically derive value-based prices for your digital offering. In addition, we are happy to share our expertise in the field of value selling, enabling your marketing and sales teams to optimally support the sale of your software and digital services as well.
Project examples
In recent years, Prof. Roll & Pastuch has worked together with clients from a wide range of industries to develop successful concepts for the commercialization and pricing of digital services, products, and software including:
- A scalable pricing model for a Software-as-a-Service (SaaS) solution with suitable metrics for law firms of different sizes
- The development of a differentiated packaging and pricing model for a major data provider
- The blueprint for designing pricing models for various digital products for a technology company – from simple embedded modules to production control software
- Support in the pricing transformation from a “one-time purchase” to “subscription/SaaS,” as well as pricing for industry-specific software solutions of a large independent software vendor
- The design of a SaaS pricing model for analytics software in radiological diagnostics to generate higher revenue potential for the manufacturer
- The development of a bundling of digital modules for a manufacturer of machine tools in order to minimize sales effort
Success factors for the commercialization of digital products, software, and services:
Clear customer segmentation
Which customer groups should be prioritized in order to build a sufficiently large customer base for the product as quickly as possible through a targeted strategy?
A differentiated product offering
How can the product be offered in different performance tiers, for instance as editions or bundles, in order to address different willingness-to-pay levels?
Customer-centric value assessment
What are the key value drivers of the different options for each segment, and how can they be quantified most effectively?
A scalable business and pricing model
How can customer value be translated into a scalable business and pricing model with an appropriate pricing metric (pay per “X”) that grows with both value and willingness to pay?
An effective sales model
How can the digital product be brought to market most effectively? Which levers in pre-sales and aftersales reduce churn while driving retention, recovery, expansion, cross-selling, and upselling? Which functions, be it for example marketing, customer success, or revenue management, are needed and what kind of sales organization should support them?
Optimize the pricing of your software (SaaS) and digital services and fully unlock revenue and profit potential from your digital portfolio.
We are always available for a phone call or personal discussion regarding your questions and challenges, as well as our suitable solution approaches.
Kai Pastuch
Kai Pastuch is Managing Partner of Prof. Roll & Pastuch. Before joining as Managing Partner, he was Director at a leading international strategy and marketing consultancy. As a graduate in business informatics, he also manages our software company nueprice, which specializes in the pricing of spare parts with the product of the same name. Mr. Pastuch has extensive project management experience from numerous projects for large international companies and German medium-sized businesses in the areas of price management, marketing, sales and strategy. In addition to numerous publications in renowned journals and the publication of the reference books Praxishandbuch Preismanagement and Big Deal Management, he is a sought-after moderator and speaker on all aspects of sales and pricing. As a practice-oriented manager, he likes to get personally involved in our projects and contributes his broad experience in workshops and steerings.
