Is SaaS About Maximum Profit for the Provider?

Jul 16, 2007 by Sinclair Schuller

I recently read and commented on a good post over at Unreasonablemen.net titled “How Do SaaS companies make money“. In summary, the article highlights the fact that SaaS companies have an alarmingly low EBIT, high marketing spend rate, and no mechanism for getting “upgrade fees.” While this is all true, I wouldn’t use the word alarming. In the comments I state that the low EBIT is a result of immaturity within the space, and that it will change.

 To further the conversation, however, I also want to point out that SaaS is inherently not an early, maximized profit model. Instead, the tradeoff is reduced profit for increased stability. The software industry has done excellent with the traditional model, but as business consumers look for more and more choice as well as a way to reduce IT budgets, SaaS becomes a natural outcropping. SaaS providers need to recognize that while huge margins are gone, as are “upgrade fees”, they will see revenue stability and predictability. The SaaS business model is about reaping the benefits of this predictability. As for funding R&D via EBIT, one needs to recognize that SaaS (from the technical perspective) is about incremental and rapid improvement rather than “fell swoop” R&D and releases. Can a SaaS company pursue large scale R&D? Sure they can, but they have to hit scale first, and as we’ve seen via the Netsuite example in the referenced post, this could take some time.

 

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Google Buys Postini Solutions

Jul 10, 2007 by Matt Ammerman

The SaaS world is abuzz around Google yet again with yesterday’s news that Google will acquire on-demand communications security firm Postini Solutions for $625 million.  The acquisition is aimed at bolstering enterprise security and management confidence in the Google Apps online suite, and seems to be a direct mirror of Microsoft’s Exchange Hosted Services strategy which was born from their own 2005 acquisition of Frontbridge Technologies. 

With advanced security, archiving, and message filtering in place, Google’s hopes are that this move will shine a new light on the Google Apps suite as a viable hosted business suite to enterprise users who often must conform to compliancy requirements in security and data archiving.  It’s a good move, and one that Google pretty much had to make in some form or another.  They’ve established over 100,000 Google Apps users who will speak for the suite’s usability and aid in productivity.  Now they’ve set their sights on converting the hordes of users who haven’t been convinced that usability benefits and frills outweigh security and compliancy concerns.

As always, Phil has an interesting piece that takes the news and goes another step… “What next for MessageLabs?”

 

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Can the Fortune 500 Achieve Efficiency through Intra-enterprise SaaS?

Jul 4, 2007 by Sinclair Schuller

SaaS is generally approached from the standpoint that a SaaS provider will write an application and sell it as a service to other businesses. This provides the many well known business driver benefits to those who use SaaS. Additionally, it is also well understood that the provider generates certain efficiencies via the centralization of the technical burden associated with the application. Is there another realm of SaaS applicability, however? In my opinion, absolutely!

Whenever I gauge the ‘size’ of a SaaS provider, I look to see how many subscribers they support – not customers, but actual individual users. Many SaaS providers are in the 5,000 user to 20,000 user range across hundreds of customers. While these numbers are not small, some Fortune 500 companies have more employees than this, spread across numerous subsidiaries. Furthermore, the Fortune 500 write a considerable amount of software for use by their employees, with some software (such as HR/Expense Reporting/Time Management apps) used by virtually every employee. Can SaaS help organize this scenario? From the technical/architectural standpoint – yes it can. If an enterprise were to write software for their employees & subsidiaries with a single instance, multi-tenant model in mind, they would undoubtedly be able to centralize and organize administration while being able to distribute functionality. That’s powerful and efficient.

Have you worked on any intra-enterprise SaaS applications? Who were your tenants – subsidiaries or departments? Did IT realize efficiencies through the model?

 PS: If you are in the U.S., have a happy and safe 4th!

 

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