Transactional Pricing Models
A message for HR tech Founders…
Avoid the lure of transactional pricing models with their unintended consequences
When I’m working with HR tech founders, one of the areas they are most interested to explore and understand is the way they should price their product.
Normally they have two methods in mind…
- Transactional fees – i.e. charge every time a transaction is performed, eg., someone is hired, an advert is placed etc.
- Monthly/annual fee – normally subscription/licence based on say number of users
Superficially they see the transactional model as attractive as it allows them to easily sign up customers with no requirement for the commitment of a subscription or licence. But let’s examine four common issues associated with transactional pricing models.
1. Transactional pricing models encourage high client signups but have low spend per client
With a transactional model, clients have made no financial commitment until they use the service. The initial price per transaction is often very small so for a client it’s easy to switch on. For them it’s of no risk – “why not sign up and see how it goes” they think.
This maybe is a great strategy for “logo hunting” HR Tech founders. However if you want to keep clients long term remember that for them switching off, or just not using the platform, is equally of no effort. They can jump off the bus as quickly as they can jump on.
This lack of client commitment, both financially and psychologically, means you may have to sign up a lot of customers before you get one that actually uses the platform properly and to its full effect over a long period of time.
Summary: Under the transactional pricing model customer acquisition costs maybe low – but the lifetime value of clients will also be low.
2. With transactional pricing, setup is free to clients but to the HR Tech company there are initial costs to consider
Transactional pricing models, by definition, do not include initial setup fees.
However there are setup activities that you will need to perform to make sure the client’s users can proficiently operate the platform. This may involve setting up the software for that client, assigning an account manager and training users. These all cost money, and before you have any committed spend from the client.
Summary: Signing up a client under a transactional pricing model may be free for them – but its not free for you.
3.With transactional pricing, client’s scrutinise the value delivered by the end result of each transaction and don’t consider larger strategic and operational benefits of the platform
In a transactional model, the client will often judge the service based on the results of each and every transaction. Job boards typically have this issue as clients examine whether job adverts result in a successful hire. The value of your platform is therefore judged on the volume and success of the outcome of the transaction.
But, the true value of your platform maybe the way it improves the efficiency of the process it supports, or the ability for the client to make better business decisions, or the way it enables employee collaboration, or some other benefit that is not directly related to the transactional output you are charging for.
This means you will be pricing the platform in a way that is misaligned to the benefit it brings.
Summary: Transactional pricing may focus your client on tactical transactional outcomes rather than the overall business benefit of the platform that it was designed to deliver.
4.Transactional pricing transfers major operational responsibility for the successful delivery of thetransaction to the software provider
To increase revenue, many HR tech companies using transactional pricing want to drive up the volume of transactions as high as possible. Their strategy for doing this is to make it as easy as possible for clients to execute and fulfil the transaction.
The trap I have seen many HR tech companies fall into is to actually start managing the transaction themselves, normally meaning they have to employ a layer of staff to do operational tasks that would normally be done by the client.
These HR Tech companies are effectively providing a service wrapper around the software, turning themselves into service companies rather than focusing on being a SaaS platform. This costs money and often reduces scalability, and cash availability.
Summary: Transactional pricing can encourage HR tech companies to become service providers and move them away from being true SaaS
As an HR tech founder or senior commercial executive, if you are looking at your pricing model and considering going transactional rather than subscription/licence then think carefully. The appeal of the transactional model isclear – “we will be able to sign up more clients, more quickly”.
However this needs to be balanced against some really significant disadvantages such as:
- lower average client spend,
- no cash for client setup,
- a lack of appreciation by clients of the strategic benefits of your technology, and
- the danger of a human layer of service being setup