Author: Vikram Shetty

Pricing is one of the most important financial levers that companies have at their disposal to influence the financial success of their business. However, it is not an easy task.

Firstly, pricing affects multiple stakeholders, both inside and outside the company. Experimenting with pricing is therefore not a task that should be taken lightly. Secondly, finding the right price is notoriously hard. Customer preferences are hard to gauge ex-ante, and internally, it can be difficult to foresee the effects of pricing changes on the financial performance of a company. And finally, of course, pricing doesn’t happen in a vacuum. In any competitive market, pricing changes can often lead to retaliatory actions which end up canceling out the intended effect of the pricing adjustment.

With this in mind, techniques and methods for getting around these challenges are extremely useful.

In my experience, having co-founded a developer tools startup that uses a SaaS model, I have come to appreciate the SaaS business model as being, amongst other things, very pricing-friendly. The intrinsic characteristics of SaaS and its delivery mechanism have important ramifications related to pricing which, in turn, can be extremely useful in the financial management of your company.

In this article, I explore in more detail what these are and how they can benefit your business from a financial analysis and management standpoint.

What is SaaS?

Software as a Service (SaaS) is a software licensing and delivery model in which software is licensed by a third party and delivered to clients through the internet. Compared to locally hosted software models, SaaS clients do not have to install the software, update it, maintain it and integrate it. The vast majority of technical aspects are “taken care of” by the SaaS provider so that the client can start using the SaaS product with little effort.

The ramifications and benefits of SaaS versus other types of services are displayed graphically in chart 1 below. As you can see, with traditional on-premises software, the client has to manage most of the activities related to setting up and running the software. At the opposite end of the spectrum, SaaS takes care of all of this on the software provider’s side. There are shades in between; for instance, Infrastructure as a Service and Platform as a Service.

The pros and cons of SaaS are fairly straightforward. On the one hand, SaaS is much easier to set up and run. It doesn’t require local servers, storage, management, etc. On the other hand, it doesn’t allow the same level of customizability that on-premises software can provide.

The change from locally hosted software to SaaS has been happening for some time, and is part of a more general shift in the IT industry to cloud-based applications. According to FTI Consulting, 69% of businesses today use at least one cloud-based application.

The shift to SaaS from on-premise services can be seen nicely when one looks at Adobe, one of the industry’s most well-known players. As can be seen in chart 2, courtesy of Tom Tunguz, Adobe’s non-SaaS product revenue peaked in 2011 at $3.4 billion and halved to $1.6 billion in just three years. Such a drop in revenue would normally have huge ramifications, but Adobe has also been offering a suite of SaaS products, which have increased in revenue five-fold, from $0.45 billion in 2011 to $2.1 billion in 2014. Adobe’s changing product mix is indicative of the overall industry’s shift away from locally hosted software towards cloud-based software provision, such as SaaS.

All indications are that this trend is likely to continue. Gartner estimates that SaaS application software was a $144 billion market in 2016 and that, by 2020, businesses will be shifting to cloud-based software to the tune of $216 billion a year.

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In recent days especially Brexit and US presidential elections, Indian IT Services company have lost handful of projects. There has been series of articles written about the layoffs happening in India. There were questions on skills of Indian IT professional. I cannot argue on the data which is out there. It is very difficult for one who have lost job. 

My argument is you cannot downplay following skills of 4 million individuals:

1. You are educated mostly with a higher degrees.
2. You are well versed with use of computer & mostly you know technology.
3. You have worked with at least one international team, so you know other culture.
4. You have an internet connection. (That’s why you are reading this post 😉 )
5. You have worked with team on projects that runs for years.

This list can go to multiple digits. I will leave it your skills and imaginations.

Certainly there could be slow down of India IT for the standard it have seen in past 2 decades. However we have matured as an Industry and to get work will not be easy without specific advance skills.

Following are my 2 possible solutions or you can say my point of view:

1. Application Technology: Any application related technology primarily does three things:  Saves Information, Apply Condition, Loops Action. The super nerdy out there, might think this is misleading. My point is the core is something similar. It is similar for most of the application technology. So if You have to spend 6 months to learn a new technology and get 44% job hike. Isn’t it worth it? So do it RIGHT NOW, while you still have the job rather than waiting for you to be sacked. So learning new skills is important because you are in the era where a person changes at-least 5 roles/industry in a life time.
2. Self Employment: I am running my business so I am pro enterprise, having said that it is not for every one. Let me break it down for you in a different way, You must have had got a chance to work with someone whom you liked to work. I myself have been in the industry for 10 years before I started my business. You text few of your friends/mentors/juniors (this applies If you are currently out of job or check how your employers policies) and you start brainstorming on some ideas. Plan it out and try a MVP. Start small and see if you can connect with something. You can see today making a mobile friendly web app and hosting in Amazon cloud is inexpensive. If you don’t have money sell your phone and borrow your friends old phone. You should be fine for an year.  Create a light weight product throw it out to early adopter and see if it sticks.                                                                                                                                               Try – Test – Rinse – Repeat                                                              If you have any doubts and questions you know your friend Google is always there to help. Think global you can sell a web based product/service to any one in this world. It has been never so easy to reach any person in the world in the history of the mankind.

In conclusion I would like to end this with just saying don’t play a role of a victim. You have see the down fall of year 2000, 2008 and there will be one coming soon as per the experts out there. I don’t know. However I know there will be ups and downs in Indian IT and now is the time to change course and bring the different flair to it and make it more Independent

All the Best!

College always creates a nostalgic feeling. You think about college and all the good memories comes. College plays an important role in your career. Principal and teachers are the guiding force to jump start your life. We cannot thank enough to them. Couple of years back I visited college in one of the college’s reunion “Nostalgic”. I felt like I should connect back to college, I was not sure how could I do that. After an year I had an idea of guiding student with their final year projects. The idea was simple, I had a decade of industry knowledge. I can put the current software development practice and experience to student’s project development. I along with my business partner decided we should go with it. We both discuss on what all should we include in and shortlisted few things that should be there. One of the top thing was complexity of the project. We thought of making the project complex and unique, thus they will have a good learning experience.

We thought of talking to the Head of Department in Information Technology. We had an hour long discussion on how to go about the idea. The methods we will follow and the Head of Department was very curious and helpful to us.  We took the appointment of our principal and she gave us the green flag to go ahead. We immediately thought of having the projects started. We had an introduction meeting with all the students who were participating. We asked them if they have any project in there mind and some did had. Once the project was allocated we had some online systems in place and some follow up emails. We thought we were all set, But it was a totally different experience. My respect to all my teachers went up because I had to keep a lot of patience. However we had long project sessions conducted over the weekends with the help of teachers and lab staff. It was tiring long days for me, my business partner and my colleague. We had to keep answering questions all day long and keep solving the problems. However we stick to the plan and followed the rules we had set at the start of the year. The year long project came to an end and every one had competed the project. We are waiting for the results now.

It was a great experience for us. We thoroughly enjoyed being in college for those many weekends we had. There was up and downs and we felt as if we are re appearing for the exams. While helping the students I thought if we all can just help the students. Make use of the technology available. Even if you are not in the country conducting a talk via online video conferencing. There can at least an idea pool of things that can be done in college and you get a chance to be back in college. I always enjoyed to be in college and hope to see few of you reading this in the campus.

I would like to end this story by words that meant a lot to me. It was during one such meeting with Principal Madam, She said

This is all we want from alumni.

I really thought that moment college never expected any thing from me and it will never expect. After all things college had given me, it is just asking few hours in few days of my time to help many students. It in returns gives me the feeling of belonging.

 

​Following are the direct definition of following terms:

1. Sales 
2. Cost price
3. Markup
4. Gross Profit
5. Gross Profit margin 
6. Gross Contribution margin 

Below are simply the first definition from search. 

sale

seɪl/

noun

plural noun: sales

1. 1.

   the exchange of a commodity for money; the action of selling something.

   “we withdrew it from sale”

   synonyms:

   selling, vending, disposal;

cost price

noun

1. the price at which goods are or have been bought by a merchant or retailer.

markup

ˈmɑːkʌp/

noun

1. 1.

   the amount added to the cost price of goods to cover overheads and profit.

   “a mark-up of 50 per cent”

Gross profit is a company’s total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.

Gross profit margin is a financial metric used to assess a company’s financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). Gross profit margin, also known as gross margin, is calculated by dividing gross profit by revenues.

Gross Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales.

Let’s illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its Cost of Goods Sold consisted of $120,000 of variable costs and $200,000 of fixed costs. Its selling and administrative expenses were $40,000 of variable and $150,000 of fixed expenses.

The company’s Gross Margin is: Net Sales of $600,000 minus its Cost of Goods Sold of $320,000 ($120,000 + $200,000) for a Gross Profit of $280,000 ($600,000 – $320,000). The Gross Margin or Gross Profit Percentage is the Gross Profit of $280,000 divided by $600,000, or 46.7%.

The company’s Contribution Margin is: Net Sales of $600,000 minus the variable product costs of $120,000 and the variable expenses of $40,000 for a Contribution Margin of $440,000. The Contribution Margin Ratio is 73.3% ($440,000 divided by $600,000).