Understand the Cost and Pricing Aspects for Your Industry Cloud Solution.

Author’s note – This blog post series is for SAP’s channel partners and PE sell partners, but might be interesting for any partner considering building an industry cloud solution on SAP BTP, leveraging the PE build program.

One of the great opportunities for channel partners with SAP’s industry cloud is to elevate their Intellectual Property (IP) to Software as a Service (SaaS) solutions and be part of SAP’s industry solution strategy.

In this blog post I will discuss cost elements a partner should have in mind when building a solution, and what to consider when determining the sales price for their solution.   This blog post is very much based on discussions with channel partners who already build or are building industry cloud solutions.

SaaS

Understand Cost Elements

Here is a list of the main cost elements a partner needs to understand for their industry cloud solution:

  • Development system: partner need to pay SAP for having a development system. A development system is obviously needed when creating the solution, but also as test, demo and support system when supporting customer using the solution productively.
  • Code development: partner need to pay the salary of their staff to develop the solution.
  • SAP BTP services: partner needs to pay SAP revenue share for the SAP BTP services used by the customer to run the solution
  • SAP Store: Just to be clear: there is NO additional cost for a PE build partner to list and/or sell their solution on the SAP store.
  • DevOps: partner needs to do provide development and operation for their own code. This might mean extra resources allocated to monitor the solution etc.
  • As sales success takes off, a partner might consider allocating staff to customer success management.

Having a good understanding of the cost is crucial to determine the price.

One of questions often raised by partners is related to the development environment.  Many partner struggle with the fact that they must pay SAP for a development and test system.  The reality is that there are real costs related to run these development systems, and the cost differ from partner to partner and from solution to solution.  SAP’s model is that partners should pay for what they request and use.  The more efficient a partner is, they less they pay.  In general, SAP works hard to keep these costs as low as possible.  The idea is to enable partners to move to the cloud.  In my opinion, a development system is part of the cost picture of delivering SaaS solutions. Thus, the recommendation is to think of the development system as essential for offering the productive SaaS solution and thus include the costs of the development system into the price of the solution.  For example, if the partner expects to sell their SaaS solution to 10 customers, they could add one tenth of the cost of the development system to the price of their SaaS solution offering.

Determine the Commercial Sales Price of the Solution

The main message here is that the partner determines the price of their solution.  SAP is not involved!

Further, most of the tasks of determine a sales price is related to a SaaS solution in general, and not SAP partner program.

However, for completeness of this blog post, I will mention some of the topics I have noticed that channel partners so far are considering.

Some channel partners see their IP more as an accelerator than its own stand-alone business.  When setting a price in these cases the partners focus on coming up with a price covering the variable / run costs like SAP BTP services, DevOps and development system.  They are not too worried about the time it has taken their staff to develop and maintain the solution.   At least not in the beginning.

Some partners are concerned that their price might be too high for a majority of their (smaller) customers.  In those cases, it could be an option to split the capabilities of their solution into a basic capabilities and advanced options (for example, advanced options could be machine Learning capability, heavy HANA analysis etc.).  These advanced services typically have higher run costs.

Further, some partners are worried about not having a pricing dynamic which align with the SAP BTP pricing and their costs to SAP.  In these cases, it could be an idea to try to copy the pricing metric of the most important SAP BTP service to the customer price.  For example, if SAP HANA memory the main SAP BTP service for the partner solution, then consider having a base fee (to cover the partner IP, dev ops cost etc.) and then offer capacity packages of SAP HANA GBs.

Of course, it could be tempting to come up with very comprehensive and complex pricing to ensure there is a 1:1 relationship between revenue from the customer and the resources/cost the partner consume on SAP BTP.  However, it is also important for success to keep the pricing simple for the customers.  Too complex pricing will hurt the sales cycle.

Finally, customers don’t know (or care) about a partner’s cost level.  They care about the value they get from the solution.  Thus, a best practice for SaaS vendors is to start their pricing evaluation with comprehensive value understanding.   This might include in-depth interviews with existing customers / prospects, and laser focus on customer value in marketing materials and sales cycles.

At the end, all aspects of determining a price need to be balanced.  It is said that determining a price is more an art than a science, especially for cloud solutions.

Conclusion

Channel partners need to understand the cost elements themselves and decide themselves on their sales price strategy.  Offering a real SaaS solution to the market is more complex than “just” reselling other companies services.  But it can also be very rewarding as a business opportunity

In my opinion, the PE build program and the SAP’s Industry Cloud program are excellent programs for channel partners who want to evolve from being sales and service orientation, to also leverage their industry expertise to build (new) sustainable cloud revenue for themselves.  To read more about this, check out my blog post “Three Ways to Improve your Channel Partner Business with SAP’s Industry Cloud”