Can ISVs Benefit by Moving to SaaS in a Bad Economy?
It’s difficult to argue that current economic conditions have a silver lining or that somehow SaaS is immune to it. In fact, Trip Chowdhry recently remarked that 1st generation SaaS companies are hurting and have dim future prospects, with SaaS startups facing a bleak fate as well. That said, ISVs facing declining or stagnant revenue streams may be able to leverage the climate and start down the SaaS business model path with the intent of reversing the negative trends they were experiencing. Not possible? Not all of today’s big companies were started during boom times.
What we’re starting to see in a variety of sectors in today’s climate is a significant downturn in spending. Clearly, this affects everyone. Operationally, businesses are and will continue to look at spending patterns to determine where to cut expenses and reduce aggregate financial obligations. In the software space, it might mean significant decreases in support and license renewals, as well as decreases in spending toward new licenses for on-premise products. Generally speaking, if you’re an ISV and your customers revenue streams start to significantly shrink, your bound to get hit. Most companies look to cut out non-essentials, which may include license renewals. The interesting thing is that the yardstick customer’s use isn’t really based on cost benefit; trivially, they’ve already assumed the benefit of your software outweighs its cost because if they didn’t, they wouldn’t have bought it. Instead, they look for big ticket items that may not be core or critical, or for which a workaround or alternative exists. Many types of software fall in this category. From a SaaS perspective, if your customer is spending $200 a month paying for 4 seats of your service, odds are they won’t cut you out since the savings are negligible. This shows a certain price sensitivity property to this decision. If the price of your software goes up or the ability for one of your customers to meet a financial obligation for a license goes down, they’ll probably stop buying.
Being that economic issues at hand are widespread, it wouldn’t be terribly surprising to see revenue contraction. The reason I bring up SaaS is that one of the conversion problems with SaaS is revenue cannibalization. If your revenue streams are drying up, it might be wise to look at a SaaS model. There is an equilibrium point where the significantly less expensive SaaS model will slow or even stop customer attrition. Yes, your revenue stream might be smaller, but it won’t be disappearing and you still have active accounts. Leveraging this scenario to move to SaaS is very appealing to me because it helps solve an immediate problem within a couple of quarters (and significantly less if you’re leveraging a good PaaS) and positions you to look toward growth again by placing yourself in a price bracket that should be a little less prone to being cutout as an egregious expense. If I’m looking to save money at Apprenda, I wouldn’t normally look toward cancelling inexpensive recurring services like a few software packages I subscribe to, I’d try to identify big ticket items.
Do you feel that this might be an opportunity for some ISVs? Are there other product development strategies not involving SaaS that might be relevant and helpful? Share your thoughts!