Archive for December, 2017

A Killer Feature For PFM On The Eve Of PSD2

Friday, December 8th, 2017

Personal Finance Managers and Mobile Money Management Apps (herewith “PFM”) have been around for over a decade. So far, PFM has focused on budgeting by offering tips to save money on everyday expenses such as the proverbial $5 coffee. For reasons highlighted in Innovative Fintechs Don’t Need No Open Banking Regulation, PFM’s value proposition has so far been disproportionate to the level of account access it has demanded. On top of that, it has called for change in behavior.

Changing consumer behavior is hard in any product category. But it’s virtually impossible in PFM because consumers think the category can add a lot of value on top of their existing behavior. IMO, this explains the lukewarm reception received by PFM so far.

Will PSD 2 / Open Banking change this?

That depends on how well PFM uses the new regulation to enhance its value proposition.

I can think of at least two ways for PFM to do that.

First, do what customers are asking for.

Second, exceed customer’s expectations.

Here’s a partial wishlist of what customers and prospective customers are expecting from PFM:

  1. Earn $$$ by sweeping X amount from a checking account to a savings product – My blog post Innovative Fintechs Don’t Need No Open Banking Regulation
  2. “Moven are not telling me that, by moving credit card with provider X to provider Y, I would be Z pounds a year better off based upon my usual behaviour. That would really add some value.” – Comment from anonymous Finextra Member on “HSBC moves into open banking
  3. “Not generic offers, but ones that use your data to *show* you how much a service saves (or makes) you.” – Bradley Leimer via Twitter.

As you can see, the common theme is, make money by capitalizing upon external factors.

If PFM can uncover ways to help consumers to do this without needing them to change their behavior, its value proposition will go up one level.

With the kind of banking information that would be available under PSD2, it should be easy for PFM to deliver personalized offers that make (or save) money for its users.

Until recently, I thought that was all PFM could do.

But I changed my mind after a recent experience with my Mobile Network Operator.

My current mobile phone connection was given to me by my then employer 15 years ago. When I quit that company, I transferred the connection to my personal name for the sake of continuity. I use it now exclusively for business and charge it to my company’s account. The bills started attracting 18% Goods and Service Tax from 1 July 2017. As a B2C connection, the tax was a net cost. I heard that B2B connections were eligible to reclaim the tax by way of Input Tax Credit. In other words, I’d be able to earn a few $$ by transferring the connection to my company’s name.

I approached the MNO for the transfer. I was asked to cancel the connection on my personal name, place a purchase order for the same number from my company’s name, and fulfill KYC for my company. The entire process took three visits to the MNO’s store, two visits of its representative to my office for doing physical verification and tons of documentation.

Long story short, the transfer proved to be far more cumbersome than I’d anticipated.

I’ve one more connection in my personal name but I’ve decided to forego the money-making opportunity because it’s not worth the hassle of transferring it to my company name.

This is when it struck me that PFM-like technology could help execute the transfer.

I had a repeat of this epiphany moment a few days later when my credit card issuing bank called me to offer a free upgrade to another credit card that provided more rewards. This mirrors #2 in the above wishlist, just that the opportunity to make money was surfaced by a bank and not PFM. I’ve placed my existing credit card on file with my website hosting provider and many other merchants who follow recurring billing for the services they provide to me on an ongoing basis. If I change my credit card, I’d have to update my card on file with all of them. I thought that’s too much trouble and declined my bank’s offer.

If only PFM changed my card on file with all those merchants. I’d accept my bank’s personalized offer in a jiffy.

It’s not just this MNO or this bank.

With the constant closure of branches and dumbing down of remote channel staff, changing plans and service providers has become very painful.

I’m sure many readers regularly come across opportunities to make / save $-$$ by switching from one product / plan to another or $$-$$$ by switching from one service provider. I’m equally sure that they let many of those opportunities pass because of inertia, lack of time or the disproportionate amount of efforts required to actually effect the switch – remember the old saying about switching banks being more painful than root canal surgery?

If only PFM does the heavy lifting by switching the product, plan, and service provider on our behalf.

This would surely be a killer feature.

By executing its recommendations automatically, PFM can take its value proposition to a totally different league.

I’m not sure whether the access provided by PSD2 will be sufficient for PFM to execute all of its recommendations entirely automatically. To that extent, I may just be eating my own dog food by being aspirational.

But I do believe there are many recommendations that could be executed by PFM with little or no user intervention. Take the one about switching credit cards described above. With the account access provided by PSD2, it can’t be rocket science for PFM to parse through my transaction history, figure out who are the merchants automatically charging my existing credit card, and update my new card on file with them.

By delivering this killer feature, PFM should be able to charge a fees equivalent to a certain percentage of the gain it delivers to its customers. This would provide PFM providers with a sustainable business model.

How Much Should You Charge For Lifetime Access Of Your SAAS Software?

Friday, December 1st, 2017

As I highlighted in my blog post titled SAAS – What’s In It For Vendors?, the total recurring costs of a SAAS software often exceeds the upfront cost of an equivalent onpremise software after 2-3 years from date of purchase of the software. Many buyers are cottoning on to this lately.

Charging SAAS subscriptions to credit cards and expensing them has become a thing of the past. According to Ben Horowitz, cofounder and general partner of the venture capital firm Andreessen Horowitz, the formerly rampant practice has actually become a firing offence in many companies nowadays. SAAS has become like any other item bought by a company and subject to the cumbersome invoice approval process.

The combination of these two factors is driving many prospects to demand a onetime fee for lifetime access of  SAAS software.

This in turn is making SAAS vendors wonder whether to agree to their prospect’s demand and, if yes, how much to charge for lifetime access. The OP of the following question on Quora is a case in point.

How much should I charge for a lifetime access to my SaaS that costs $100 per month?

The natural reaction of many SAAS vendors is to reject the prospect’s request: After all, who’d want to provide unlimited service for a limited fee?

Not surprisingly, many people have encouraged this reaction in their answers.

I’m going to go against the tide. In this post, I’ll be making the case for SAAS vendors – especially those in the growth phase – to accept their prospect’s demand.

Not only because it’s inevitable but also because, if you don’t, your prospect might find another vendor who does.

Ditto even if your existing customers make a similar demand. If you decline, you’d be running the risk that they’d churn out to a competitor once their contract with you ends at the end of the month, or at most, year.

Of course, in this same post, I’m also going to tell you how to make money by providing lifetime access for a onetime fee.

Before doing that, let me take you back in time and tell you a small story.

Many years ago, 3M used to sell floppy diskettes under the brand name IMATION. Its USP was that it carried a “lifetime warranty”. It was only when someone approached 3M with a warranty claim that they learned that “lifetime” meant the lifetime of the diskette! The first time the diskette failed, its lifetime was deemed to have ended. Ergo the warranty had expired. Quite often, this happened within the first year of purchase of the diskette. Effectively, 3M’s so-called lifetime warranty covered a shorter duration than the standard one-year warranty provided by its competitors.

While sourcing the picture you see on the right, I was shocked to find out that brand new 3M floppy diskettes are still available for sale! Some things never seem to go away!! But I digress.

I’m not advocating 3M’s strategy to you but I made this short trip down memory lane just to open your eyes to the alternative ways in which your competitor might interpret your prospect’s request for “lifetime access”.

With that out of the way, let’s assume that “lifetime” means the lifetime of your prospect’s company.

The real issue for you is, what if the prospect-turned-customer lives forever and uses your software forever? You’re stuck with a finite fee for an infinite service.

While this poses a big risk, there are many other possibilities:

  1. Your prospect-turned-customer might fold up
  2. Someone may acquire your prospect-turned-customer and not wish to use your software for the merged entity
  3. Your prospect-turned-customer may junk your SAAS at the end of the current contract for extraneous reasons.

In these days of VUCA, any of these alternative scenarios is just as likely or unlikely as the “live forever use software forever” primary scenario.

If any of these alternative events occurs, your customer would stop using your software.

If you’d agreed for a onetime fee for lifetime access, you could be in the money.

On the other hand, if you’d declined, your monthly billing would stop when any one of the above three events transpires. What you bill until then might not even cover your Customer Acquisition Cost (in the worst case scenario).

Business is all about taking calculated risks.

So, you should accept your prospect’s demand for a onetime fee for lifetime access of your SAAS software.

Next, we come to the question of how much you should charge for providing that lifetime access.

The figure should be big enough for you to make money on the deal and small enough to be attractive to the prospect.

I suggest the following formula to arrive at the optimal figure:

Onetime Fee for Lifetime Access = $X + $Y + $Z, where:

  • $X = 7 years of Annual SAAS Subscription Fees
  • $Y = 1.4X, to cover 7 years’ AMC @ 20% per annum
  • $Z = Miscellaneous Fees

Most companies depreciate their investments in software fully in 5-7 years. Since the book value of your software would become nil at the end of that period, your prospect-turned-customer might buy a new software. Which means, they’d stop using your software anyway at that point. Ergo the figure of 7 years in the above formula. (Modify the number suitably to suit different depreciation policies but anything below 5 could be detrimental to your company’s financial well-being).

While working out the Annual SAAS Subscription Fees, an important parameter to be considered is the number of users. This is rarely constant over the lifetime of a software. In most cases, it begins with a conservative figure and rises progressively over the years. The actual figure at any given point in time depends upon the size of the company, nature of the software, and many other factors. As the vendor, you’ll want to set this figure at the peak number of users during the lifetime of the software. On the other hand, your customer will want to peg it at the number of users at present. Some haggling will be involved but, in most cases, you should be able to settle for the average of the two figures.

Hosting charges is one item I can think of under Miscellaneous Fees. To fulfill your commitment of lifetime access, your product’s SAAS architecture might require you to ringfence the version of your software for this prospect. In that case, we’re talking “private cloud” and you might want to add hosting charges for seven years to your upfront price.

Specific customer situations might involve complications – in fixing the user count, for example – and call for customized pricing of the lifetime access charge. Please contact us if you need any assistance.

Happy Selling!