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The Google model and B2B

Earlier this month my friends at Postini-Google announced they were dropping prices for their signature anti-spam service by up to 90% - down to $3 - $12 per user per year, from $35 per user per year. This would seem to be consistent with the Google consumer model to drive pricing down to the absolute minimum to drive revenue based on volume and sell everything over the web, and I expect it will be scary for the competition.

When one of the product marketing folks at Google called me in December and asked me what I thought of this idea, I my main reaction was - "can you convince yourself that sophisticated, B2B products like security and compliance services can be priced cheaply enough so they will just be bought over the web, or do they really need to be sold."

What immediately came to mind to me is that the implication of a 90% price decrease like this is that you would have to move to a web-based, direct selling model to make it work from an economic perspective outside of the very large enterprise market. If you are selling 10,000 seats for $30,000 to $120,000 per year you can clearly afford to have a salesperson involved, but for a 100 seats - now $300 to $1,200 per year - or even for 1,000 seats at $3,000 to $12,000 per year you really can't. So you have to convince yourself that companies of under 1,000 or so employees will buy the product off of the web, because it's cheap and because they trust the Google brand. I asked him to think about this, because my first instinct was to think about how a price drop like this would impact the gearing of the sales model in a SaaS business.

In retrospect, there are at least three other questions I should have asked him to think about - with a 90% price decrease what are you going to do about your current customers and MRR, what are you going to do about your channels, and how will this impact customer support.

Given SaaS companies are valued based on monthly recurring revenue, dropping subscription prices by 90% has some very interesting implications for your ongoing revenue stream. Google isn't supposed to be evil - so am I to presume that a 90% price drop for new customers means that Google are also going to proactively reduce the monthly billing for their 35,000 existing Postini customers by 90%? And in one swoop, cut the MRR of the whole Postini business by 90%? That's a lot of volume to make up, particularly at 10% of the former pricing.

Postini also had a really great channel, with something like 1,900 partners and resellers. Another question I should have asked is what is the implication for the channel of a 90% drop in list price? How will the partners make money - 35% of $3 or $12 is a lot less than 35% of $35 - can the partners continue to have viable businesses at these price points? And can Google still have good operating margins when they have to carve of 35% of revenue to partners who are are selling at these new much lower price points?

The last question I should have asked is about support - Postini had truly great customer support - it was one of our largest teams in the company and we invested in it to drive customer happiness which led to low churn and high recurring revenue. Google has very deep pockets so they could keep this level of high touch, personal support if they wanted to, but my suspicion is that the economics of a 90% price drop will force a move to more web-based, self service support. Again the question I should have asked the product marketing manager who called me is whether you can convince yourself this is ok for mission critical infrastructure like communications security and compliance - are the new low prices more important to a customer for these kinds of products, or is great personal support more important.

The folks at Google are far smarter than I am and they've built an amazing business. I'll be watching closely to see what the impact of these price decreases are. Postini is a great product - it really works and I believe that SaaS is by far a better way to solve communications security and compliance problems. I think the decision for a SaaS vendor to drop prices by 90% below the prevailing market rate when they really didn't need to is a fascinating one, and I look forward to seeing how it goes - it really comes down to whether Google can make their B2C approach work in their new enterprise B2B business.

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