You are welcome VSearch. I always enjoy civilized discourse.
I apologize for the double post. A bit of crossed communication on our part, but they say essentially the same thing. I think the second post is a bit better.
You raise an interesting issue on pricing power. An early stage SAAS company with pricing power at contract time is almost an oxymoron. They hardly exist. Even Salesforce.com was virtually giving away its early version software to get user traction. They key is that revenue per customer should be climbing in a company that is growing ARPU.
Most SAAS companies have some or all of these features :
- Most SAAS companies have a freemium product. This is a base product that is actually free for SME's to download. It will be good enough to please, but be missing a few frustrating features that tempts the user to upgrade.
- At quarter ends and year ends the software salesmen go into a frenzy of trying to hit targets. They will offer "special" discounts etc that expire on December 31st or June 30th. Enterprise customers know this and always expect a discount.
- Early stage companies are all about growing the ARR, so they dont like straightforward discounts because that reduces ARR. If SAASCo. sells $100,000 book price of software at a 25% discount for $75,000 in the first year, then they book $75,000 of ARR. However if SAASCo. sells $100,000 of software at full price with 3 month installation allowance for customer to get up to speed (essentially first quarter for free) then they book $100,000 ARR. In both cases, the customer is paying $75,000 for 12 month license but no prizes for guessing which method the SAAS companies like to choose.
- The point is that SAAS companies like to get in the door, get traction, get sticky with the customer and then gradually sell a larger bundle at a fuller fee.
So, in our humble opinion, the 6 month lag between ARR and cash receipts that is so common in early stage growth SAAS companies, is partly due to installation, credit terms etc but there is also some discounting going on there. I am not shocked
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