By Dick Stark
On January 15, Netflix quietly announced a price increase by an average of 13 to 18 percent. With 58 million US subscribers, that works out to an additional $1.4B yearly revenue increase. How elastic is this type of increase? Will users move to another provider? In my opinion, that’s not too likely. Most may grumble or complain, but in the end what’s a couple of dollars a month increase compared to the opportunity to watch a seemingly unending supply of shows and movies. Let’s face it, we’re all hooked, and will pay almost any price for the chance to keep streaming.
Netflix is the poster child of a cloud based on-demand software subscription-based service provider–not too unlike Salesforce, ServiceNow, Workday and others. RightStar has been a Salesforce customer since we started the company 15 years ago. In the early days of SaaS based software, I had the chance to discuss Salesforce’s success with its former CFO. His comment: “Our customers just can’t get enough—it’s as addictive as cocaine.” And I get it. With any mission critical or semi-mission critical piece of software, the cost of changing to a competitive offering is just too painful, no matter what the cost. For example, RightStar has spent more than $375,000 on Salesforce since we’ve been in business, just for software subscription charges. Had we run on-premise sales automation software on our own server, we would have likely spent no more than $100,000 during that timeframe. Does it matter? Not really, we have received good value from Salesforce over time and have no plans to do anything else.
Meanwhile at some of the larger SaaS-based software enterprise companies this past month, executives have undoubtedly exchanged high-fives as the announcement of Netflix’s price increase made the rounds. This is good news for these SaaS-based companies because very few customers will defect given a price increase. This makes for a very bright future for these SaaS providers.
As far as I can tell, there is no slow-down in cloud-based solution growth. Many large organizations, like Capital One have decided to completely empty out their own data centers and turn exclusively to cloud providers like AWS’ platform as a service (PaaS) offering. This gives organizations that have standardized on a PaaS platform, like AWS, the best of both worlds– reduced capital and operating expenses combined with the opportunity to run on-premised based software solutions, which normally have a much less expensive lifecycle cost basis as compared to SaaS offerings.
For example, we are currently involved in a ServiceNow vs Remedy opportunity. Comparing ServiceNow pricing over five years to Remedy on-premise gives Remedy a significant edge in price. This price difference is more than enough to pay for the cost of computer infrastructure and support required to manage on-premise software in either a corporate data center or on a PaaS platform like AWS. Plus, PaaS platforms provide a good defense against ever increasing SaaS pricing.