Frankfurt Partners

Issue 19 Selling Through SaaS: Should Your Company Take the Plunge? SaaS Defintion Wikipedia has a good definition: „Software as a Service is a model of software deployment whereby a provider licenses an application to Selling Through SaaS: customers for use as a service on demand. SaaS software vendors may Should Your Company Take the Plunge? host the application on their own web servers or upload the application to the Author: Rene Meister consumer device, disabling it after use or after the on-demand contract Software publishers have had to evolve their value proposition to meet expires.” changing expectations in the market. Clients are pushing for lower IT costs; yet, they demand more functionality and greater ease of use from their business applications. One solution has been to reduce hardware and networking costs by migrating to the Web and implementing strategies SaaS Advantage such as outsourced cloud computing and virtualized servers. Those • No Installation required technologies have also enabled publishers to create new shared licensing • Low cost of entry and lower total models, including concurrent and open source licensing. cost of ownership (TCO) - elimination of capital expenditures Another increasingly popular approach to lowering software costs for • Faster implementations customers is to offer software as a service (SaaS). Rather than purchasing • Powerful and secure IT and installing software on their machines, users access software over the infrastructure web under a pay-as-you-go model. The publisher is responsible for • Access Data from anywhere hosting and maintaining the application. This paper examines the viability • Automatic upgrades of the SaaS business model for new and existing software publishers and discusses the hurdles those companies should expect to cross to be successful. The SaaS Culture – a Sea of Change for vendor or a third party consulting company to deliver Established Companies the solution. That’s not the case for SaaS software providers that must design the capability for users to For established companies selling licensed customize the application into their software, and it software, converting to or adding on a SaaS requires development of a robust user interface to business model represents a formidable culture deliver that functionality. change to their organizations. Licensed software sales focus more on identifying new customers – In addition, development costs are incurred to create existing customers already own a license. While the specialized architecture to support application there is some recurring revenue from customizations for multiple clients, whether those maintenance agreements and version upgrades, clients access a single instance of the hosted without new customers, the company could not application or the SaaS vendor hosts separate survive. The SaaS business model, instead, applications for each client. Established companies focuses on servicing existing customers. have a resource advantage over start-ups in this Because users pay only for services received, the regard as current revenue from licensed software easiest and lowest cost source of new revenue is sales can fund the SaaS product development, and to encourage existing customers to renew their the skilled resources required may already be on staff. subscriptions. Higher Development Costs, More Resources, The result is a more intense and ever vigilant Culture Issues – Why Bother with SaaS? focus on immediate customer satisfaction by SaaS companies. Clients will only renew a While companies considering a SaaS solution should subscription if they enjoy the entire software analyze their decision carefully, there are strong “experience,” including aspects to which licensed reasons for choosing that business model – most software vendors may only pay lip service, such driven by customer demands. Business software as training and personalization. For SaaS users have become more discerning of value in their companies, technical support must be offered in software purchases. They want lower total cost of real time because pay-as-you-go customers can ownership and the flexibility to adjust their licensing easily go elsewhere before they pay. Obviously, commitment as business circumstances change. marketing a SaaS business model will require a They want to roll out new software quicker and have different strategy, but the culture conflict will be users become productive faster. especially evident in the payment of sales commissions. Sales of licensed software Importantly, they want to lock down their IT budgets produces a high one-time fee that can easily fund and know exactly what costs to expect. commission payments; whereas, the SaaS business model delivers revenue in small SaaS solutions appeal to those buyers. Hosted increments. The SaaS company will have to be solutions eliminate capital investment in hardware, creative in its sales compensation to properly costs for data-center floor space, and expensive IT motivate a sales team. resources. Pay-as-you-go or usage-based pricing means no large upfront cost for software licenses, It is, therefore, easier for a new, start-up inherent flexibility to address business needs on-the- organization to create the customer-first culture fly, and predictable long term costs. Because users required for SaaS success, but many established access the SaaS solution online, there are no companies have successfully transformed software downloads or time-consuming rollouts, and themselves to provide a SaaS solution. However, upgrades are easily implemented by the vendor at the there are other hurdles to success that must be host server to be instantly available to all users. considered. And the buyers get it. A recent survey found that 12 Resources Can Be an Issue percent of U.S.-based companies are subscribing to at least one major SaaS application today; another 13 For most SaaS software, engineering costs are percent are currently designing, prototyping, or higher whether the company is a start-up or an implementing their first SaaS application; and 14 established software publisher. Most enterprise percent are planning to do so within the next year. applications are customized to some extent for While Tier 1 organizations were the early adopters, the customer’s unique requirements. That small-to-medium-sized businesses are now customization is typically performed by the embracing SaaS twice as fast as those larger purchasers of licensed software, or they pay the enterprises. savings in capital expenditure since extensive IT infrastructure is not necessary SaaS Wags supportTail administrative costs are reduced; in some cases, users can dispense with their IT on-going a Long and department altogether On the positive side, the market If yours is a niche solution, SaaS may values SaaS companies higher at that Long Tail Defintion the location of the company’s offices liquidity event due to the predictable allow you to take advantage of “Long and individual PCs is irrelevant; users can be anywhere Wikipedia has a good definition: Tail” marketing theory. Long Tail nature and consistent growth of their refers to a statistical truism that a recurring revenue models. And, as “The Long Tail or long tail refers to we’ve discussed, by better addressing the statistical property that a larger share of the population rests customer concerns and providing a larger share of population rests within the “tail” of a probability within the tail of a probability distribution.