Advice on strategy: How do I price a SaaS product when there's no competitive product but demand exists?

Here is a recent query from an online forum, and my response:

How do I price a SaaS product when there's no competitive product but demand exists?

We have built a product which already got traction. Microsoft is using it on pilot basis and loving it Now a big corporate (USD 110 B) wants it and having several test runs and has finally reached price discussion phase. We didn’t plan SaaS but that’s the way forward so any suggestion on pricing it?

Response:

This is a great dilemma for a startup or small business to have. So, let us begin with a few facts and make a few assumptions

• Demand for the solution exists
• The product/solution is being used by Microsoft (a marquee client to have)
• A $110 bn big-corp wants it after test-runs
• You are making the assumption that there is “no competitive product,” which may be true.
• However, you need to research further if an alternative solution or workaround exists in the market (e.g current ways of working may include manual effort, which your solution automates).

Suggestions on the way forward

1. Estimate the “value” of your product to the end-user/client organization. e.g
1. What would it cost for them to build and support the product
2. Estimate the cost of manual workaround/alternative?
2. Use the estimate against your internal cost benchmark (what did it cost for you to build and market the product?).
1. Add an estimate of your annual cost of maintenance and support.
2. Aad a reasonable margin on top of your costs.
3. Other factors
1. Does this product give a the end-client a competitive advantage or productivity gains?
2. What is your current strategy: using the marquee clients as “case studies” to go after other clients, or use them as a cash-cow to generate ROI?
3. Are you willing to walk-away if negotiation fails?

Use data from 1. 2. and 3. to plan your strategy and begin negotiations.

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