1. Monetizing SaaS: Pricing, Margins, and Loyalty

There are only three ways you can make money in SaaS.

The first one is pricing power. 

Pricing power is effectively the ability to raise prices. When you are starting out, you have to create pricing power. Without this, you can’t survive and make money.

Pricing power comes from creating leverage. You should be able to say ​“You know what? My product will amplify your people to a multiple — sometimes it’s an order of magnitude.” 

When CleverTap says that I can send 5 million notifications per minute, customers can’t do that. You need innovation. You need breakthroughs. That is what gives you pricing power.

Two is gross margin.

This is simple. For every ten rupees you pay me, I have eight left over from my cost of goods sold. This might get spent. That’s fine. You don’t need to be EBIDTA positive from day one. But you need the margin. If your cost is only 2 rupees for every 10 rupees a customer gives you, that’s a good company.

Third is loyalty. 

This is the third way to make money in SaaS, and Indian software companies really understand it. Pricing power and gross margins can fail you without loyalty. You cannot write $1 million contracts without customer loyalty.

When determining which of these ways to make money is best for your business, you need to ask, ​“What kind of SaaS company are you?” and ​“What is your main value proposition?”

Database is a unique way of processing data. This is where core innovation is required. The second one is Workflows, where you automate some manual work and save time or make it much easier, and the third one is services. Many companies confuse services for custom jobs. The key here is that you do custom jobs for customers, but only on your product. These are three kinds of value propositions.

The first of these — the database — gives you pricing power. Workflows give you gross margins, and the third, services, get you loyalty because customers use your people. In India, it is very hard to make a gross margin on people because talent is very cheap, so if you’re selling services, you’re only creating loyalty.

Pricing is both a science and an art. Of the three ways I discussed to make money in SaaS, two involve price. But the question is, how do you charge?

In India, because salaries in some segments may be low, you don’t want to rely solely on seat-based pricing. I’m not saying seats won’t work in India; I’m saying you need to understand how people perceive the value of your product and whether they can match that value to the price.

Regarding your gross margins, you should start by seeing if you can get five times your cost using whatever method. Then, you should check if anyone accepts an 80% gross margin.

If you don’t raise prices consistently, you better be doubling your gross margin or lowering your costs — halving your costs. Either you’re doubling your price or halving your cost because that’s the only way you’ll grow.

So initially, you will typically test — the easiest price to test is cost plus some fixed margin. That is your price.

One thing that a lot of people will tell you is to charge for value delivery. But that is an advanced, high-level game. Don’t play that at an early stage. People say, ​“Sir, if you’re getting $100 of value from me, give me half of that.” But that doesn’t happen.

You need to get that metric as close to the outcome as possible — as close to the outcome delivered.

Pick a pricing metric you want to test. I typically tell people that the hardest pricing metric to sell is seats. Sometimes, it’s the easiest, depending on what you’re selling. But try to have a performance billing metric.

The greatest-selling software in the world is Meta’s advertising engine. Because you get paid per impression, paid per conversion. That’s why it’s called performance marketing — when there’s performance, you pay. And with performance, you can charge almost anything; people will pay. That’s pricing power.

Another common mistake people make is that when they reach Series A funding, they are often required by their Shareholders’ Agreement (SHA) to hire a finance person. However, they try to cut costs by hiring a part-time CFO. From the beginning, I avoided this cost-cutting approach. My first VP or Director-Level hire was my Head of Finance.

If your accounting is outsourced and you’re not fully involved, then you won’t truly understand the details.

You need a finance person to predict the future because pricing is about the future. A finance person will tell you, ​“Sir, don’t calculate gross margin like this; calculate it like that.” They will tell you, ​“Sir, this is a low gross margin deal, but it’s okay; we can make it bigger next year.”

Your finance person will also ensure that your contracts are enforceable and clean and that payments are timely.

Also, any company that doesn’t have a Head of Finance often pays at least twice the rent they should. For example, our first office cost us 10 lakh rupees a month. The same office today costs 1.5 lakh rupees a month.

So, the first thing a Head of Finance will do is save you enough money to pay their own salary. They know how to ensure their job is secure by saving money. This helps in procurement as well. If you’re negotiating with Salesforce, connect them with your finance person. They’ll handle tough negotiations on your behalf. You need someone like that when you’re purchasing anything.

Again, as a standard principle, once you have two or three customers and revenue of one or two crore rupees is coming in, you need a finance person — if you have the money. But I don’t like part-time CFOs because they might not obsess over your finances.