How to charge a customer for my product...

Tmac

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Greetings Firelings,

I have a SAAS product where I charge customers based on volume of business they do. For example, if they move 100,000 ton of goods per month, they'll pay $0.04 per ton per month, or $4,000. This is a high volume industry.

We did about $250,000 in our first year and will probably do that in our last quarter this year, maybe, if I'm lucky. I have three products that I sell, each at $0.04 per ton per month. One of our current prospects doesn't want to pay as much as we're asking and have asked for a special deal, which I'm going to give to them, because dollars.

However, I need to figure out a way to model my price so that I still make good money, make even more if they grow bc our software is that good, but still make the price palatable to them. This company wants to use three of our products ($0.12 per ton per month) and they probably move 2m tons annually, which would be $240,000 annually. They've already said they won't pay $200,000. They're also willing to pay for additional semi-custom work, but that's another issue altogether.

I found this article on volume pricing and was already leaning toward the incremental pricing model. However, the all units pricing model (you make less money) and package pricing model (by getting them to pay up front) seem to have their own benefits as well. I'd like to nail something down now, so we have a precedent when this sort of thing comes up again. Also, if the incremental model is the direction I should go, practically speaking, how should I model it?

So, how to model?
 

a_skeleton_03

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I would scale it where they pay full price for the first million tons, 2/3 price for the second, and 1/3 for anything above that.

The million could be down to 500k or any other shift. I would err on the side of getting a good bulk on it up front and then start dropping discounts in as they get more successful. That might seem backwards. It gives them that “it only gets cheaper from here” feeling though.

That is all as long as more tons don’t require more scaling of resources.
 

Tmac

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How much data do you have on your next closest competitor?

A decent amount. They actually offered us $250,000 in exchange for 35%-40% equity a few months back.

They have a completely different model, based on customization and support. To make a long story short, they have a 13 year old product, but still offer customizations, which means they have a basic widget they offer to people for $5k and then upcharge them on any extra stuff they need to have "developed", except it's a 13 year old product and all the shit is already developed.

Then they also charge them for support, so they have to buy "credits" or hours to get phone support and stuff like that. I actually leverage this against them in meetings and tell my customers, "Why would I build my business model around an incentive to require my customers to buy support? What we've built is easy to use and doesn't require support."

I also know that this company spent $160,000 to have some other kind of hardware/software installed and pay $30k annually for that.

Folks in my industry are definitely not used to paying as much as we charge, but they're also not used to getting the value they get when they use our software, so we're still testing our price. Crazily enough, we're having some success, and I think down the road we could charge even more.
 
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Tmac

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I would scale it where they pay full price for the first million tons, 2/3 price for the second, and 1/3 for anything above that.

The million could be down to 500k or any other shift. I would err on the side of getting a good bulk on it up front and then start dropping discounts in as they get more successful. That might seem backwards. It gives them that “it only gets cheaper from here” feeling though.

That is all as long as more tons don’t require more scaling of resources.

More tons don't require more scaling.

If we use a volume discount at 1, to 2/3, to 1/3, that means we discount the first stair step $40,000 and $80,000 on the second stair step. That seems like a huge windfall. It definitely gets them under the $200,000 mark, but what if they double their production in the next two years? They end up with an exponentially great discount, which seems short sighted. But, maybe that's just the cost of doing business?
 

a_skeleton_03

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More tons don't require more scaling.

If we use a volume discount at 1, to 2/3, to 1/3, that means we discount the first stair step $40,000 and $80,000 on the second stair step. That seems like a huge windfall. It definitely gets them under the $200,000 mark, but what if they double their production in the next two years? It doubles down on the discount. But, maybe that's just the cost of doing business?
You get the guaranteed up front and if the scaling isn’t hurting you it’s still good money. Put a yearly renogatiation option into the contract. You could also move the last part of 1/3 to the 3M mark so they have a goal so it’s not as deep the first year.

You give no discounts for custom work though because they are going to want that for sure and they are going to get addicted to it.

SaaS pricing is pure voodoo when there isn’t a server scaling cost involved.
 

Control

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However, I need to figure out a way to model my price so that I still make good money, make even more if they grow bc our software is that good, but still make the price palatable to them. This company wants to use three of our products ($0.12 per ton per month) and they probably move 2m tons annually, which would be $240,000 annually. They've already said they won't pay $200,000.

Just to toss a few thoughts out: If you really want them, and you're confident that they won't pay up, then what else could they do for you to make up the difference? Sign a contract with a minimum, so that once they sign, they're on the hook for $200k and you have some security? Instead of a bulk discount, maybe it's a promotional discount on their first year so it's easier to raise the price if they want to continue using your product next year? Once they're benefiting from it, it's harder to stop. Or a discount for prepaying the entire year up front? Maybe first month is free? (Saas's commonly knock off a month or two if paying/committing for a year, though this scale may be change things.)
 
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Tmac

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Just to toss a few thoughts out: If you really want them, and you're confident that they won't pay up, then what else could they do for you to make up the difference? Sign a contract with a minimum, so that once they sign, they're on the hook for $200k and you have some security? Instead of a bulk discount, maybe it's a promotional discount on their first year so it's easier to raise the price if they want to continue using your product next year? Once they're benefiting from it, it's harder to stop. Or a discount for prepaying the entire year up front? Maybe first month is free? (Saas's commonly knock off a month or two if paying/committing for a year, though this scale may be change things.)

We've had people pay up front in the past ($250k last year) and while it's nice to have cash-in-hand, I don't really like the lack of cash flow and think it hurts us in the long run.

I do like the idea of a promotional discount for the first year though. That makes it apparent to all parties that the price isn't locked in stone and creates the expectation for renegotiation, where everyone has to be aware of the value. It could even give us some empirical data to use in future pricing/modeling.
 

3301

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If you don’t accept their sub $200k offer, is there any competition they can go to? If not maybe offer them $200k or a bit less, but they pay it now instead of over the year. Nail them on overages.
 
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Soygen

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We like to work rebate programs with our highest volume manufacturers. % rebate at end of year based on minimum of X amount of annual sales.
 
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Tmac

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If you don’t accept their sub $200k offer, is there any competition they can go to? If not maybe offer them $200k or a bit less, but they pay it now instead of over the year. Nail them on overages.

They can't go anywhere else, but we're still new, so technically they wouldn't have to feel like they're missing out. We've had customers walk bc they're used to paying $5k annually (or nothing at all) and can't get over the hump. But, that's why there are early adopters and the rest of the market. We're still onboarding the early adopters.

So, they pay $170,000 today and then we charge them $0.12 on everything over 2m tons?
 

Tmac

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We like to work rebate programs with our highest volume manufacturers. % rebate at end of year based on minimum of X amount of annual sales.

Can you give an example?
 

pharmakos

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We've had people pay up front in the past ($250k last year) and while it's nice to have cash-in-hand, I don't really like the lack of cash flow and think it hurts us in the long run.

getting the money up front should always be better, as long as you its used well/responsibly. it gives you more flexibility, and you can start investing in whatever earlier, which means an earlier return on your investment, etc.
 
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Soygen

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Can you give an example?
With our largest manufacturer we do a tiered rebate(we are the customer in this situation). We do around 20 million a year with them. If we hit that 20 million mark, we get a 2% rebate. If we do 22 million, we get 3% and if we hit 24 million, it's 4%. This is basically incentive to keep/grow our business with a nice check at the end of the year, while not giving us a straight discount on the product/service itself. We'll likely hit the 3% this year.
 
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3301

Wake Up Man
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They can't go anywhere else, but we're still new, so technically they wouldn't have to feel like they're missing out. We've had customers walk bc they're used to paying $5k annually (or nothing at all) and can't get over the hump. But, that's why there are early adopters and the rest of the market. We're still onboarding the early adopters.

So, they pay $170,000 today and then we charge them $0.12 on everything over 2m tons?

Higher than twelve cents but yeah. Or do a yearly agreement with a monthly payment plan, 167k tons a month for $15k , unused can be carried forward (up to the 2M, per year), however any overage in any single month is extra. $0.18/ton.

So say month 1 they do nothing, they carry over 167k tons, so month two they can do 334k tons for $30k (month 1 payment plus month 2 payment). If they do 500k tons on month two, they are paying you an extra almost $30k.
 
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Tmac

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My dad talked to one of the brothers today and he asked him what he was thinking and this was his suggestion:

Try it out on two crews (7,000 tons per week) for 6 months and pay everything up front at $0.06 per ton, so $10,000.

He said it would be a pretty huge endeavor to switch everything over to our platform, so they wanted to try it out for a few months. I'm not particularly enthused about the idea.
 

Siliconemelons

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Didn't we have almost the exact thread a few years ago? It all is seeming very deja vu to me... like everything- SaaS product, scale pricing - asking how to do things, competitor does thing in a complex old billing method etc.

Soo...soo strange
 
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3301

Wake Up Man
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My dad talked to one of the brothers today and he asked him what he was thinking and this was his suggestion:

Try it out on two crews (7,000 tons per week) for 6 months and pay everything up front at $0.06 per ton, so $10,000.

He said it would be a pretty huge endeavor to switch everything over to our platform, so they wanted to try it out for a few months. I'm not particularly enthused about the idea.

Shorter commitment = higher pricing. Discounts are earned with money. $10k is not money.