Pricing to drive network growth – Aconex Unlimited
It seems almost too obvious to state that getting your price right is critical for a start-up business. But just as important to long term success is working out the best way to price your product. At Aconex we were not just building a new solution for construction - we were building a new business model and a completely new way of pricing software in our market.
In the end, the success of Aconex ultimately came down to the unlimited pricing model that we developed.
Start with pricing principles
Before you think about setting a price, consider your pricing model and what you are trying to achieve. That can be a complex process and there will inevitably be trade-offs. But identifying and managing those trade-offs is half the battle. There are some general principles to keep in mind that will help:
Your price should relate to the value the customer sees in your solution. This is true in terms of the absolute price, but also of the model that you use. The better you match price to customer value, which will vary by customer, the more customers you win at a higher average price per customer.
The model should be as simple as possible for both customers and staff to understand
You will almost certainly need to tweak it over time, but the fundamental model needs to be scalable as the company grows – and that includes working internationally if that is in your plans
Finally, you should ideally take a consistent approach to pricing across all products, as pricing has the power to differentiate your brand.
Narrow down the options
While getting the approach right is critical, there are only so many alternatives. In the SaaS world, of course, subscription is king. That can mean charging per user, per company, by turnover / revenue, by construction project value as we did at Aconex, by location (per store for retail software), by physical space (per m2 for property apps), or some other business metric, as a monthly, quarterly or annual fee.
Don’t be afraid to invent (but carefully test!) a new way to price your product. Beyond subscriptions, consider other methods, such as by transaction, data storage, or services used. And, as the lines between B2B and B2C applications blur, in-product advertising may be a valid way to generate revenue and become part of your pricing strategy.
Some of the questions that can help you hone your specific pricing strategy include:
Do you want to align with how the market currently works or can you use pricing to differentiate?
Can you justify positioning as a premium product, or should your pricing be volume-based?
Seen another way, should you price for market penetration or to maximise revenue?
How does price vary over time? Can you justify an ‘innovation premium’, as Apple has done by pricing new versions of its products, such as the iPhone, high then decreasing over time (also called price skimming)?
Should you allow your team to discount, whether for volume or to win a marquee client?
Should pricing be bundled or unbundled? Should service be included or at additional cost?
Ultimately, your pricing must make sense to customers. If it does not, you are simply creating a barrier to the sale.
Developing our unlimited subscription pricing model
The core principles of our pricing at Aconex became clear early on:
Keep it simple and easily understood by the customer
Use pricing to get more users onto the platform, driving adoption and the network effect
Match price to value, so that it increases in line with size of the construction project.
Keep it simple
In the early days when we were winning our first customers, we explored these principles. The construction industry was new to buying software-as-a-service and it was not easy to express the pricing model in a way that was both easily understood and trusted.
We considered charging by some measure of storage, such as the number of documents, drawings or gigabytes on the platform; by transaction volume, like the number of documents and mails shared or sent; or by the number of users or companies involved in a project. We rejected all these models as we believed they would discourage usage and reduce the value we were able to deliver.
Fifteen years ago, data storage costs were yet to drop to commodity levels and people were far more conscious of them than now. Our first customers were concerned that costs would blow out if we priced on storage or transaction volumes. As construction businesses, they were sensitive to the impact of cost variations on slender margins. To counter this, we offered unlimited use at a fixed monthly fee, a subscription model that met the requirement for simplicity and trust and passed the test of time as the business grew.
With easily understood pricing in place, the next task was to develop the model to drive adoption and use.
Drive user adoption
We had quickly rejected user-based pricing in favour of charging by project value - with no limits on user numbers or any measure of usage. We wanted to get as many people as possible onto the platform, not just to drive adoption and success within a deal (construction project) but also to seed new customers and new projects. We did everything we could to reinforce the inherent network effects in the platform, making us the first SaaS company that I was aware of that didn’t price on a per user-basis. It was a catalyst for rapid growth and the model was eventually adopted by most other software providers in the construction sector.
Even when we had settled on “all-you-can-eat” pricing, there were other decisions to make. For a time, we considered getting every company involved in a construction project to pay its way, but that was an instant blocker to adoption. While the developer or main contractor would see value in the solution, it was a lot more difficult to get subcontractors to pay. Likewise, architects involved in the pre-approval stage of a development saw little incentive to sign up. Without these parties involved, key project information was missing from the platform reducing its value to all collaborators. (In addition, we were set up to sell and close deals of a certain size. Selling to, billing and collecting from so many entities on a single project would have turned our business model on its head).
We also made the decision early on to include in the price all aspects of service (implementation and set-up of the software, user training and helpdesk support). This was unusual for a SaaS company, and our all-in pricing seemed premium compared to competitors, who could discount the initial license and later charge for services to compensate. But we wanted no barriers to adoption - and providing unlimited service forced us to develop an efficient delivery model.
Finally, the unlimited model also solved the incremental user problem. Companies will draw a line on the number of users they are prepared to buy a software license for, at a point where they perceive the cost to outweigh the benefit. The unlimited model overcomes this issue by encouraging every potential user onto the platform – including very occasional users who, often as not, can be senior executives.
Align to customer value
Our third principle was to ensure that pricing was aligned with customer value.
Quoting based on the construction budget of a project instantly aligned the cost of using Aconex to project scale - and to the value the client received. While we always stayed true to this principle, we found ourselves refining it as the business grew:
The initial market for Aconex was in residential high rise such as Melbourne’s Eureka Tower. As we began to service airports, hospitals, mines and other developments, we took the opportunity to strengthen the price/value alignment by working a ‘complexity-factor’ into pricing
When the product footprint grew organically and through acquisition, pricing evolved to include optional modules integrated with the core platform. But we consistently stuck to the principle of unlimited usage for whatever parts of the solution the client needed
Over time many customers moved to enterprise-wide contracts, which covered unlimited use across all their projects for three, four or more years. By committing, they benefitted from volume pricing. In ANZ, our most mature market, we eventually reached the point where around 75% of revenue came from these enterprise agreements.
How we dealt with other pricing decisions
Even if you have settled on the ideal pricing model for your business, there will be no shortage of decisions to make along the way. Some of those we encountered at Aconex included:
Setting the price itself. Arriving at a price (which eventually averaged 0.1% of project value) was achieved through testing different levels with customers. We could probably have pushed for a higher rate, but we wanted above all to drive long term penetration and this seemed to be about the right level for most customers.
Taking a position on discounting. We allowed discounting, as our market was conditioned to expect it - all contractors negotiate heavily with subcontractors and suppliers. But we learned to manage it carefully, with limits applying to salespeople, managers and regional directors, and escalation paths for exceptions. This approach helped us to main a premium list price while keeping the flexibility to offer a discount for the first project.
Discounting becomes more difficult to manage as volume increases, so I wouldn’t recommend it for high volume SaaS products.
Exploring freemium models. Free trials or freemium offerings can be powerful, but we avoided them, and I am yet to see them really work to generate enterprise sales in construction. Our view was that if people didn’t believe in the value of the product up front, they were not going to be great, long-term customers.
Bundling. For some time, we bundled products and presented them as a single, homogenous platform. Eventually this evolved, and we charged additional fees for add-on modules. Later again, we began the process of defining three or four product / pricing levels (as Salesforce.com and many other SaaS businesses with wide product ranges had done).
But … no pricing model is perfect
At Aconex, even though the unlimited pricing model supercharged our growth, it was not without its downsides.
It didn’t fit with the standard ‘per user’ SaaS pricing model that had emerged from Silicon Valley. In particular, it couldn’t be explained on a simple web page in terms of Gold, Silver and Bronze tiers, which people increasing looked for as they researched B2B tech solutions.
Customers that were particularly demanding when it came to support were effectively being subsidised by others. We quickly learned to track overall support costs to ensure they didn’t get out of control and in the end we also put (quite generous) fair-use limits on the implementation services we would provide.
Even after a decade of success in other parts of the world, US customers tended to be sceptical of unlimited pricing, feeling that they were paying for users, services and support they would not need. To counter this, we eventually introduced a user-based pricing option in the US. Our thinking was that this would act as an onramp for clients who would eventually want to switch to unlimited – and this is generally what happened.
Aconex Unlimited as our North Star
For the best part of 20 years, the unlimited pricing model was something of a North Star for Aconex. It was straightforward enough for the first customers to understand and trust. In time, the market came to see that the total cost of ownership (TCO) was lower than with traditional software pricing. It drove network growth by increasing adoption both within a project and, later, across the industry. And it adapted to the demands of different project types and commercial arrangements as we diversified.
Above all, while it delivered for customers, it also produced a revenue profile that investors valued highly. They will always pay a premium for clarity and certainty around revenue, which is why SaaS businesses receive higher revenue multiples than transaction-based and other variable models.
What was seen at first by a conservative construction industry as an unproven innovation was embraced because it made sense. Our unlimited pricing model was key to Aconex becoming a rapid growth business with an enviable record of generating recurring SaaS revenue.