SaaS Blogs

[…] Schuller over at SaaS Blogs poses an interesting question: Is it the right time for ISVs to enter the SaaS market in this […]

I think in any economy (good or bad) a software vendor has to get their business model and pricing right before moving forward to software marketing, selling, etc. Changing mid-stream is likely going to either confuse or upset your customers (unless the net cost to them goes down…).

So regardless of the current economic climate, a vendor that has a usage model that is amenable to a SaaS type of model (or subscription) is going to have a lower hurdle to initial customer adoption, and that’s probably a good way to go. And it can especially help in the current financial situation…. but that may not be a good enough reason to change by itself.

Joanna

Joanna,
You are definitely right that an ISV has to tread carefully when making the ‘leap’ to SaaS because they must remember that they are taking their entire customer base with them. Any changes they make to their model ripple heavily through their customers. This is why there are technologies such as SaaSGrid (self promotion, sorry)… whose essential benefit is that it eases the transition for the ISV first technologically (yes, EC2 and Azure tackle parts of these technological hurdles), but then - uniquely, SaaSGrid is a business platform that facilitates the transition to a SaaS business model for an ISV and its customers. I think you hit the nail on the head, though, regarding the customer reaction to transitioning - everyone touts technological achievements in SaaS, yet we at Apprenda think they still leave too much of the burden of actually leveraging SaaS to the ISV.

Joanna,

Spot on. You should move to the model only if it makes sense for you and your customers. My biggest point in this post, however, is that even when both want the business model change, issues like cannibalization make it very difficult to move to SaaS. A bad economy might dampen the effect of revenue cannibilization since it can be absorbed by your naturally declining on-premise revenue streams.

A couple more things to consider - cost of license versus SaaS recurring costs are not the only factors in a customer decision - Internal IT has a significant cost and many organizations are looking for ways to save - so resources are cut back. That means less money for staff, server refresh, licenses on necessary infrastructure to support local IT. In the increasingly spread environment companies are in - that can be expensive. If a SaaS app is offering core productivity for a line of business - the case is strong.

On the ISV side, SaaS represents more than an opportunity for their existing customer base. In most cases, ISVs have limited marketing budgets and need to capture an addressable portion of their market - usually the top end - to be successful. With SaaS, they have a significant opportunity to widen their reach. Why? The support overhead for installations and local maintenance is much less for SaaS. The cash flow is different, but a well thought out SaaS offering is bringing in a constant cash flow.

The biggest obstacle is knowledge and understanding the issues and how to work with them. ISV’s can do it - but it is a significant change no question.

An ISV business model should be driven by customer demand and the most relevant technologies at the time the decision is made. From that standpoint, the SaaS model makes sense in a good or bad economy. Perhaps the recession makes SaaS pricing even more compelling, given there is little upfront cost and the solution can be tried within minutes without the need extensive consulting or upfront costs. But I see this as reinforcement for the decision an ISV has to make, not the primary driver.

Some software lends itself very well to SaaS, such as end user applications for business users. Some other apps will likely remain a “download and install”, such as infrastructure software, client-side SOHO applications and other software that is sold as embedded.

The potential problem I see is that recessions occur over an extended period of time. Recurring costs like SaaS models may be MORE vulnerable in that situation. Take the $200 per month for 4 seats example above. If they drop just 1 seat that’s a 25% drop in revenues. In the aggregate that’s the difference between life and death for many SaaS companies or fledgling divisions.

Justin, not a bad point. I would argue that the impact of a 1 seat drop on savings for a SaaS customer, however, is minimal. For example, if I have 4 sales people using Salesforce.com and the tool enables them to work efficiently, is the extra $50 in savings by dropping one seat going to matter? Probably not. Now, granted if there is wide unemployment and there is no need for the seat, you’ll lose that $50.00.

Also, I agree the 25% drop would be drastic, but I’d be willing to bet that on premisis software companies could experience a greater than 25% revenue loss given the relative price point of their software packages.

Thanks Sinclair. I dive into it a bit deeper at http://distincthoughts.typepad.com/my_weblog/

I think what we’re guilty of is switching between news sales and renewals in this dialogue. The dropped seat example is really a “renewal” event. The ISV equivalent might be 25% in aggregate of people not renewing maintenance due to a down year vs the “they won’t get their big up front license fee” idea. That would be new sales and would be a different apples to apples comparison.

Justin, great post, I enjoyed reading it. Renewals are clearly the basis for a SaaS revenue model while license sales are more prone to feast or famine type cycles. Give your example, if 25% dropped off of renewals, I’m betting an ISV would be better off than a long famine brought on by deep recession in an on-premise license model.

As for your post, I’d definitely debate a couple of points. For example, Larry Ellison’s point of Salesforce.com not making a lot of money is silly. There is no SaaS market segment; SaaS is simply an attribute of how an ISV delivers their software. Larry should have compared Salesforce.com’s size to the relative size of other CRM vendors to accurately dissect “how big” Salesforce.com really is. Check out the “Market Structure” section: http://en.wikipedia.org/wiki/Customer_relationship_management
Salesforce.com has garned 8.3% market share and is the third biggest CRM vendor by Market Share as of 2007. That’s quite impressive, particularly against incumbents who have been at it for twice as long. Granted, net income is depressed compared to the “Big 3″ software companies, but capturing the market is arguably more important given that initiatives like focus on generating deeper economies to boost net income can be utilized once market position has been established. Once ramped up, the revenue model affords stability that is difficult to achieve via on-premise licenses.

With respect to the 3 year rule in your post, it’s a sticky problem. On premise requires you keep a well oiled pipeline that can match revenue targets so that budgeting can remain on track. Some CFOs will argue that on-premise models are much more difficult to plan around and the NPV problem might be a premium they are willing to pay for more predictable revenue. Second, for existing ISVs they may be backed in to a corner. If a newcomer who has no place to go but up starts off in a SaaS model, it puts competitive pressure on incumbents to follow suit (think of SAP and having to deal with SForce). Whether a CFO likes it or not, broader strategy may require they defensively transition in some cases so as to not suffocate under a model that generally will be more appealing from a cost perspective to the market.

You’re right in terms of recession proof. I wouldn’t use the word “recession proof”, but I think the trade-off tends to lean toward deeper stability and less churn when people don’t have a lot of money and still need/want the value of software.

Thanks again for the post reference!

Thanks very much Sinclair I appreciate your thoughts and feedback.

Just for clarity, I was referring to the CFO at the procuring company. That is, someone weighing up a SaaS purchase vs a On Prem or perpetual license purcahse. I *think* your references in the last comment to CFO’s was from the perspective of the ISV at the company who is weighing offering a SaaS or traditional licensed model or both?

I’m a big fan of SF.com having used it now for work for probably 5+ years. My issue with the Gartner table is that it takes each individuals revenues then adds it up to derive their % of marketshare. That’s fine but it’s not really very telling about what’s going on in each’s underlying business. It doesn’t really speak to profitability etc. I don’t think that SF.com is buying marketshare but if it were (or any of the others were) this table would have no way to reflect that.

To keep with the theory I was discussing earlier, how different would the world be for SF.com if they could take more of that revenue up front? Would they have won deals they lost due to not having a traditional licensed model?

Thanks anyway for the constructive feedback.

Justin

Justin,

I think you nailed the key question: how much can be credited to Salesforce’s SaaS model when it came to customer acquisition and what sort of impact would maintaining two license models have on profit (the maintenance hit on maintaining both from a support and engineering perspective is huge)? All very interesting food for thought. Sounds like this conversation could lead to a follow up post!

Well Sinclair I tried to expand on my rationale for why both revenue models might be better than just one here:

http://distincthoughts.typepad.com/my_weblog/saas/

I’m starting to wonder (maybe you’ve seen) a good post on whether the SaaS revenue model is a strategic advantage relative to perpetual license sales or just a by-product of an infrastructure legacy issue.

Many ISVs, like us, see SaaS not just as a change in technology, but a change in the software sales cycle.

Some of the smaller customers that could never afford buying BPM software can now rent it using the SaaS model.

Our customers are now able to run workflows using the BPM software on the SaaS platform.

http://www.pnmsoft.com/workflow-software-as-a-service.aspx

One of the sweet spots for PaaS vendors is in helping licensed software ISVs who have been serving big upfront fee markets in generally larger organizations to head ‘down’ into a small and medium size organization (SMB) market. Some initial ISV wins on Force validates this. For the ideal ISVx, it’s primarily a marketing strategy exercise at the beginning to identify this target SMB space and determine a proper price and functionality curve for the SaaS vs licensed product offerings. For the ISV with little or no revenue from the SMB space, this should be a winning proposition. But several obvious candidates to make this move in ERP are moving slowly or not at all. Change is hard for many.

I think in any economy a software vendor has to get their business model and pricing right before moving forward to software marketing, CRM is an important aspect of nearly every business, a business with out saas is like a kid without candy !