Transforming to a SAAS business model: Development of a product packaging and pricing strategy

Abstract

Mediagenix is the world leader in providing software solutions for the broadcasting industry. Today, its Whats’On software is the most advanced platform for managing and programming radio, TV, and online content channels, and orchestrating the content supply chain. The broadcaster landscape is evolving as new streaming players like Netflix have disrupted the market leading to reduced margins. With margins under pressure, broadcasters have been looking to improve their operational efficiency and have looked for economies of scale through M&A. On top of that, customer needs are evolving ever so more rapidly, which requires software providers to be able to deliver software updates faster. Mediagenix wants to seize this opportunity and prepare the company for the challenges of the future by transitioning its traditional One-time license (OTL) business model to Software-as-a-service (SaaS). Transformation to SaaS is more than switching to subscription pricing. It is a complete overhaul of the company which will involve changing the culture and mindset of the employees, obtaining new capabilities in customer success and product development as well as aligning key business processes and KPIs to the SaaS model. The business model transition implies a complete transformation of the company. Overview of the research objectives. The Mediagenix management has hired the Vlerick team to advise the company on three key projects which are part of its SaaS transformation. The first project is to analyze the potential of switching the current long-time customers who have bought the OTL years ago and currently pay a service and maintenance (S&M) fee to a subscription program. The company has asked us to build a revenue model in which different scenarios could be analyzed. The expectation is that the Vlerick team advises Mediagenix on which incentives and possible coercive measures it could use to switch clients to subscriptions. We are further expected to formulate an opinion on the subscription pricing level. The second project is to develop a new product packaging model for Mediagenix. Currently, the company has a product offering of around 110 different software modules, add-ons, and business APIs. Today, these are sold on an “a la carte basis” which leads to exceedingly long sales cycles due to the difficulty for the customer to understand the full product offering and link it to their needs. On top of that, price negotiations are made more difficult by an untransparent and complex pricing process. Mediagenix has asked the Vlerick team to build a product packaging for them based on customer needs and industry best practices. Lastly, linked with the previous question the new product packaging is developed Mediagenix asked us to advise them on setting the pricing levels for the new product packaging. The company has asked us to build a revenue forecast based on the new packages and pricing levels. We summarise our assignment into three research questions we wish to answer: - How should Mediagenix switch its existing customer base to a subscription model? - How should Mediagenix package its product modules to optimally serve its different customer segments? - How should Mediagenix price the new packages? Summary of the methods. OTL to SaaS To analyze the impact on the revenue of switching from an OTL software on-premise to a SaaS Subscription license fee, we will need to build a financial model to measure the impact of migrating current customers from the former to the latter. In order to build different scenarios, we will need to develop assumptions on subscription pricing, costs, benefits offered, discounts, OTL buybacks, customer churn, and the switch rate. We will rely on the results of surveys from the Business Developers Community as well as from the Steering Committee. This will help gauge their idea on pricing, potential value adds, and customer willingness to switch or potential churn rates. Based on this information, we will build a revenue model and analyze a couple of different scenarios. We will then develop recommendations, based on best practices and interviews, on how to switch to SaaS. Product Packaging in SaaS. After having analyzed the transformation to SaaS from a traditional OTL model, we will delve into the product packaging of SaaS products. We will first analyze the best practices in the industry through methodical literature research. Then, with the data gathered, interviews, and analysis of the product portfolio, we will have a better understanding of the customers’ needs which will enable us to build different sketches. Afterward, we will create a thorough questionnaire to be sent to the Business Developer Community. This will help us in our Leader, Filler, and Killer approach so to better match the needs of the current market segment. We will then create a final prototype of the product packaging that will be sent to the Steering Committee in the form of surveys. This will be done based on the Delphi Methodology, whereby two rounds of the questionnaire will be created and analyzed so to create the optimal packaging solution. Pricing. Both the questionnaire sent to the Business Developers and the two survey rounds sent to the Steering Committee will be used for the pricing. Through our literature research, we have gathered an important amount of information about the different value metrics associated with the SaaS industry. These will be analyzed before deciding which metrics to use. We will also go through the different pricing methods we believe to be appropriate in this industry. We will proceed with a Cost-Plus Analysis to establish a lower bound of our pricing. We will also establish the pricing of the packages based on the 2022 existing price list. Based on the Van Westendorp Price Sensitivity method, which will be conducted through the different sets of questionnaires, we will also determine an appropriate price range for the new packaging. And finally, we will be complementing this study by using the standard price based on this industry. We will then offer a comparison between these approaches before offering our recommendations on the pricing strategy. Conclusions & Recommendations. OTL to SaaS Switch. We concluded that Mediagenix should pursue the OTL to SaaS switch with their current client base. Even with OTL buybacks and price reductions, the company could significantly increase its total recurring revenue by € 5.4 million within the next 5 years. We advise Mediagenix to focus on switching clients with OTL’s dating back more than 5 years. We present them with a plan that would offer a one-year soft switch period with price reductions and a hard switch after three years where clients with OTL older than 5 years are forced into the subscription model. We advise Mediagenix to hold off on the switch to subscription for clients with OTL younger than 5 years for one year to reduce the cost of the OTL buyback. We advise them to work on a similar trajectory with a soft switch period with incentives and a hard switch period. Lastly, we advise Mediagenix to consider the wider implications of the transformation in terms company of culture, product development, sales enablement, and customer success capabilities. Product Packaging. We advise Mediagenix to adopt and further refine the hybrid product packaging model we have developed for them. We believe combining the Platform Plus Bundles model with Good Better Best tiers in the base platform will allow the company to create more structure in its product offering while maintaining flexibility for specific customer needs. We advise the company to build an internal team to further refine the packaging and test the prototype with trusted clients for feedback and review. We further advise Mediagenix to push their existing customers to sign up for the new packages in order not to have two pricing systems. Lastly, we advise the company to investigate feature gating some functions in their software to help upsell clients and create more clear distinctions between the packages. Pricing. Based on our research and revenue modeling we advise Mediagenix to adopt the pricing we obtained from the Van Westendorp surveys for all packages apart from the good package where we advise the cost-plus margin pricing. This combination offers a combination of revenue growth at higher margins. Based on our cost assumptions and pricing exercise we call into question the feasibility of launching the good package to the small media market as the cost vastly exceeds the target customer’s willingness to pay. We recommend the management to review the strategic decision of entering that specific market segment. We further advise Mediagenix to test pricing levels with short-term contracts of 1 to 2 years for new clients to test pricing levels.