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Why the price and the calculation of a SaaS service are never identical

Before we take a closer look at the calculation of “Software-as-a-Service” (SaaS) products, it is important to understand the difference between the production costs and the price of a service or product. Production costs are the costs incurred for the manufacture of a product or the provision of a service. They include all costs that are directly related to production costs, but also to administrative distribution. The production costs of a SaaS product are usually the development costs of the software.

The price, on the other hand, is the amount that the customer has to pay for a product or service. Ideally, the production costs are the basis for pricing, as the price should be sufficient to cover the production costs and generate a reasonable profit.

Especially at the beginning of self-employment, when a start-up does not yet have a comprehensive sense of the costs in the company, the number of customers and the prices of competitors on the market, a price is often communicated based on gut feeling.

This is also not a problem at the beginning because the number of customers is still very low. However, the managing directors of the start-up should focus intensively on the costing of their service within the first year of the start-up. This does not inevitably mean adjusting the sales price, but determining the marginal costs is very important in order to determine the minimum number of users required to cover the running costs. If it is a scalable business idea, the number of customers can be increased with the respective marketing measures.

The following costs arise during the development of SaaS software:

1. Development costs: These are the costs for the development of the SaaS product, including the costs for developers, designers, project management and infrastructure.

2. Operating costs: These include the costs of operating the SaaS product, such as hosting a website, cloud infrastructure, databases, security, scaling and customer support.

3. Marketing and sales costs: These are the costs of marketing and selling the SaaS product, such as marketing campaigns, advertising, lead generation, sales teams and sales commissions.

4. Customer acquisition costs: These costs refer to the costs of acquiring new customers, such as costs for marketing campaigns, advertising, lead generation, customer demonstrations or presentations.

5. Maintenance and support costs: These are the costs for the maintenance and support of the SaaS product, such as troubleshooting, updates, training and customer support.

6. Scaling costs: As the SaaS product grows and gains more customers, scaling costs may be incurred, e.g. for additional server capacity or scaling the infrastructure.

The actual calculation consists of allocating the costs listed above to a product or service with the help of allocation keys. If a start-up offers freemium products, the paid products must cover the costs of the free products. This challenge can be solved with the help of a mixed calculation.

As there are various pricing models for SaaS products, such as monthly subscriptions, usage-based prices or tiered prices, these must be reflected in the calculation.

Finally, the common calculations for SaaS as a subscription are presented:

1. Cost-based calculation: This includes the classic calculation presented above and is based on the costs of your SaaS product. Add up all costs associated with the development, operation, marketing, support and other aspects of your product. Divide the sum of all costs by the expected number of paying customers. In this way, the minimum price required to cover all costs (marginal costs) can be determined. The subscription fee can therefore be determined by adding additional margins.

2. Competitive calculation: Another method is to set the subscription fee based on your competitors’ prices. Analyse the market and determine the price of other SaaS products with similar functions and target groups. Consider the added value and unique selling points of your product compared to the competition. Based on this analysis, you can try to set a competitive price. However, this does not guarantee that the total costs of your start-up will be covered.

3. Value-based calculation: In this approach, the price is set based on the perceived value of the product for the customer. Investigate what benefits and added value your SaaS product offers your customers. The benefit or added value will often lie in saving time, increasing efficiency or solving specific problems. Ultimately, a certain percentage (usually 10%) of the cost saving is set as the price. If a company saves €120,000 per year by using your software, the annual fee would be €12,000 per year, or €1,000 per month.

4. Price tests and customer feedback: You can also carry out price tests and obtain feedback from your potential customers. Offer different price models and analyse customer reactions and purchasing behavior. This can help you to determine the best price for your subscription fee.

In any case, it is helpful to contact a specialist from our team or attend an open workshop on digital start-ups. They help you to create a well-founded and meaningful calculation.

Conclusion:

In conclusion, careful costing is crucial for a Software-as-a-Service (SaaS) company to ensure the financial health and long-term growth of the business. In the first few years, the calculation can be used to check plausibility due to the small customer base. The selling price of the service is initially lower than the production costs, as the high initial costs cannot be passed on to customers. Nevertheless, the calculation shows very clearly how many customers the young company will need in the future to at least cover its total costs (marginal costs). The focus in marketing should be on acquiring new customers, as sales will increase disproportionately to costs for scalable services.

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