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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Fitting SaaS under the Budget (and CIO) Radar

Mar 22, 2007 by Sinclair Schuller

I just stumbled across this little article on Rod Drury’s blog. The article describes the fact that when compared to traditional software, SaaS apps are much cheaper, therefore allowing individuals in an organization the ability to make purchase decisions without the consent of IT or expense approval. While this is one of those things that are apparent in the SaaS model, I’m intrigued by the prospect of SaaS vendor specifically targeting this “segment” (I’m using the term loosely). The number of applications that satisfy *most* of a business user needs but are inexpensive enough to be purchased “under the radar” must be massive. Each organization has intra-enterprise niches that most likely map horizontally across their industry or business in general. Assuming that a software developer or SaaS vendor can target this group with applications that can be built quickly, flexibly and to scale, the group could prove lucrative. The rub is that this group still requires the utmost in reliability, security, and anything else you would expect from an “enterprise app” while maintaining the simplicity/value ratio to keep costs low.

The goal of our platform is to make things like this possible. Yes, that’s some shameless self-promotion, but nonetheless honest. Due to the micro-market nature of the intra-enterprise niche or “under the radar” group, a software provider needs to look closely at the cost/benefit of writing any given application targeting these folks. If a platform can reduce cost, making the ratio more appealing, a larger number of these types of applications can be produced and more software provider profit or customer savings (are you a giver or a taker?) can be realized.

Do you find this group to be an appealing target? Just curious, but does anyone have any examples of applications that might already fit this space?

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