Tag Archive for 'Pricing'

Web 2.0 and monetisation…

Published by Ben Kepes on July 24, 2008 in Business, Design, IT and Strategy. 10 Comments

A year or so ago a friend and I were discussion SaaS and Web 2.0 in general. He said something which resonated for me;

Yeah, I still worry about the whole web 2.0 show me the money thing

His concerns (and those of many if they’d admit it) come from the ever increasing trend towards giving products away and business models based almost purely on the value of membership rather than the value of dollars.

There’s an interesting post over on the Many Niches blog. Brandon says that;

There’s a reason that “free” and “fail” both start with “f” and have four letters.  “Free” is my new four letter word.  A business model that is based on free is frail and bound to fail…. The free movement is completely wrong minded…. Developers need to be paid, and they don’t accept page views.

Now it needs to be set that Brandon is somewhat biased, working as he does for a reasonably large company based in Redmond who make significant money out of charging significant amounts for software. Clearly there are alternative models, advertising supported software (even if I’m dubious) or third party partnership supported models - but it’s also easy to see that both of these models aren’t free, they just shift the locus of transaction to another party.

But if we’re talking about truly free - that is software that has no direct or indirect monetisation path - that is a totally unsustainable model - both 37signals and mashable cover it well.

To put it simply..

  • bandwidth costs money
  • development costs money
  • administration costs money
  • founders need to eat

Any business that thinks they have something viable that is based on a true free offering (and I mean true free as opposed to user free) is crazy.

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A foil to Anderson’s “trend to zero” theory…

Published by Ben Kepes on June 11, 2008 in Design, IT and Strategy. 1 Comment

A couple of related posts in the last few days on what things should cost and the corollary, that is what we should expect to be free.

Firstly Skype journal comments on the expectations of consumers that they should not only receive a premium product, but also full support and excellent uptime.

It’s bad enough no one wants to pay for anything, but the expectations placed on free services to deliver 99.99999% reliability are astounding. Come on, what do you expect for nothing? There is this weird idea in the air that if something is free to a user it is free to produce, and thus must still reach all those other norms we take for granted in paid-for services, like reliability, privacy etc.

Skype journal contends that it’s a rare service indeed that can provide, on an ongoing basis, both a good product and great service delivery. Skype is a rare exception, relying as it does on a peer to peer network. But even Skype suffers when it comes to customer service, and even Skype offers premium charged services like SkypeOut.

The over on Socialwrite there is a post asking the three important questions;

  • What should you pay for?
  • What should be cheap?
  • What should be free?

Both the original post, and most subsequent commenters agree that users should be prepared to pay for support, for good uptime, for the user experience and for future innovation. The cheap offerings should be hosting and integration and all else should be free. Julian takes a slightly different tack and determines value based on a differentiation of service levels;

  • Expensive:
    • ROI (Great)
    • Support (1-2hrs)
    • Features (Heaps)
  • Cheap:
    • ROI (good)
    • Support (24hrs)
    • Features (standard)
  • Free:
    • ROI (none, ie: Twitter)
    • Support (none)
    • Features (few)

All interesting comments and definitely something for young companies coming into these turbulent times need to think about.

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The impact of Scale and Economics on SaaS and broadband

Published by The Unreasonablemen on February 25, 2008 in SaaS. 0 Comments

NOTE: this is a mirror post of my unreasonablemen.net blog. There have been a few posts recently about broadband in NZ, some well thought through, others not so. The crux of this issue is about scale & economics. This of course is massively applicable to SaaS too. So in the interests of clarifying things I thought I’d do a laymans explanation of scale the impacts of economies of scale & pricing.

First up, lets accept the premise that any company, public or private is in business to make money. To that end they aren’t going to do things for ‘free’ just because people think they should have better services. Secondly lets clarify what we mean by ‘scale’. Scale as its used here means having a lot of use or users on a system, platform or service. The more scale you have, the larger you subscriber base.

Scale is very important when you are doing infrastructure based services because your capital investment is normally very large and directly affected by the amount of scale you have to build for. It also impacts the potential returns you will get and the price points you can charge.

Simply put, when you are preparing to invest or build some infrastructure like a broadband network or a SaaS application / platform you have to outlay enough to support scale while betting you actually will get that scale.

I’ll illustrate this with a couple of diagrams. Lucky enough in this example, the infrastructure can scale to well over 1 million users :-)

scale-1.jpg

In the first diagram the infrastructure provider has not achieved scale. What this means is that their only customer will effectively end up paying for the entire infrastructure bill. To keep it simple i’ll use round numbers. A $1m investment in infrastructure then gets transferred to that one customer (this ignores infrastructure running expenses, overheads, margins and other expenses which must also be covered). So the price is $ 1m and the market size/ opportunity small. Not many can afford it.

scale-3.jpg

In the second diagram I am showing 10 customers subscribing to the service. This means that the price to them is only $100k. If you get 100 000 customers the price is $10. If you get a million customers and the price could be a dollar, but why would you? If the market is willing to pay $10 why wouldn’t you hold it at that level and aim for a million subscribers. This illustrates pricing for infrastructure perfectly.

This is the power and paradox of scale. If you get it right you can make good profits which is economically reasonable because you are taking large risks initially. Get it wrong, then you’ve spent a huge sum on a piece of infrastructure and you don’t have the income to cover your costs.

How does this affect broadband & SaaS in NZ? Having a small population definitely impacts our chances of getting scale. Having huge cities like Tokyo and LA where there are circa 30 million people living in the nearly the same geographical area as Auckland’s 1 million simply means that the Telco’s and SaaS providers there can get scale benefits easier. Added to that, these providers don’t have to worry about providing services the length and breadth of the country to get that scale, in fact they either ignore them or use the huge metropolitan based scale to fund the rural program. NZ doesn’t have that benefit. This isn’t a “tired old excuse”, just economics at work.

SaaS does have one potential key scale advantage over broadband. The internet isn’t geographically limited, so we could sell to these larger populations. In this respect Xero has it spot on, going after AU and the UK markets. The reason for this is scale, pure and simple.

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