Aug 28, 2007 by Sinclair Schuller
One of my favorite (and most important) topics within the software industry is how can an existing, traditional ISV move into the SaaS space. For competitive reasons or new market reasons, many ISVs want to release SaaS offerings but are unsure of the approach, implementation, and risks. Let’s face it: not all SaaS offerings come from new-fangled Web 2.0 companies whose names are portmanteaux or the result of a random dictionary search and as a result (not a result of naming, but of already having an established business;-)), they are faced with multiple dillemma’s including figuring out how to retune their sales team to a shift in license model and sales methodology. In my opinion, however, the most important aspect of go-to market for an existing ISV is cannibalization. After all, your Acme Software company has managed to reach $40 million in revenue via perpetual sales and although you recognize the need for a SaaS offering, how could you justify replacing your successful product if it’s going to slash revenue and profit, and reduce your competitiveness against newcomers who don’t have to deal with these issues? There are various strategies to deal with the go-to market issues related to cannibalization. I’ll outline a few in this post. Below is a summary chart, with slightly more detailed information later in the post.
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Full Product Replacement: Full product replacement is defined as creating a SaaS offering to replace a soon to be discontinued on-premise product. Full product replacement allows for the complete encroachment of your new SaaS offering into your existing on-premise product and market, thereby yielding the highest level of cannibalization and putting “all of your eggs in one basket.” Many of your existing customers will jump ship because they either feel abandoned or don’t believe in/need a SaaS offering. Anyone who moves from the on-premise product to the SaaS product will do so at the expense of the top line, since now it will take anywhere from 2-4 years to yield revenue that used to be acquired in a single shot. (We’ll call the time period of when an existing client will match its perpetual license top line input via SaaS licensing as the equivalent revenue yield period (ERYP)) A large ERYP and existing customer loss will mean that you’ll need a cash war chest to weather the storm. So why pursue this strategy? Well, if pulled off it can be strategically rewarding. First, it signals to the industry that you clearly support SaaS, enough so that you’ll bank everything on it. This could be good for positioning against newcomers in your space who are “SaaS only” and may be critical in convincing the SaaS choir that you’re worthy of their business. Second, most of the planning is up front. Whether things succeed or fail, once the strategy is executed and some time has passed, you’ve absorbed all of your change early allowing you to focus on your product.
Complementary Offerings: This strategy is defined as creating one or more SaaS offerings that compliment your on-premise product. For example, if you sell an on-premise logistics solution, you may opt to complement it with a SaaS offering that provides multi-installation visibility, management and data integration capabilities that boosts your customers supply chain management value. This strategy is appealing because it does not alienate your existing client base, but instead exploits cross elasticity of demand since odds are that a decrease in cost for your on-premise product should yield more physical installations, thereby increasing demand for your integration complement. Furthermore, it lets you test the waters when it comes to selling subscriptions, still leaving incentive for sales people via perpetual licenses. The downside? Well, you haven’t become a “SaaS player”: While this is a good short to mid term strategy, newcomers with pure SaaS offerings may offer cost and value advantages to your client-base forcing you into a corner with your high priced offering. Generally, if the exit costs on your on-premise offering are high, you should at least be able to “farm the base” while you figure out your next move. Just be careful because a poorly implemented complement could rub-off on your image and your existing product.
The “Lite” Version: The concept of a “lite” version of an existing product targeting a downsampled demographic is a tried and true concept that is used in various industries. We see it used in industries including the auto industry (Hummer releasing the H3, Porsche with the Boxster, Toyota with the Scion brand, etc.) and even clothing (Armani through its A|X brand) How does it play into SaaS? If you’re an existing ISV with an on-premise product, creating a “lite” offering with a subset of features that will be delivered as a service is a powerful mechanism for introducing yourself to the market. It allows you to play off of your established brand and keep your existing customers, and similar to the complementary offerings strategy, allows you to freely experiment with the SaaS model without encroaching on your base and experiencing massive cannibalization. In addition, new customers will most likely respect your existing product. What’s the danger? Strategically, you have two choices. If you still consider your on-premise model as your primary model, you’ll end up at a competitive disadvantage to pure SaaS competitors since you’re likely to use the Lite version as the start of an “upgrade path” to the more robust on-premise version of the software. This is a poor long-term strategy that reflects your company’s true intentions and position on SaaS: that its merely a new marketing tool for you rather than a new business model. If you truly want to shift your company to be a SaaS player, your focus should be parallel development that will allow the “lite” version to mature into a more accurate representation of your on-premise product, giving you revenue to work with, an avenue for your existing customers to switch to SaaS without feeling abandoned by your endeavors, and a long-term goal of migrating your company strictly to the SaaS model.
New Product Line: Relatively self-explanatory strategy. As an ISV, you may have always wanted to tackle a new (although aligned) market via a new product. One option is to create a SaaS offering to tackle this market. Personally, I feel this strategy is a tough strategy. It doesn’t attempt to blend SaaS into your existing company strategy and vision, but instead approaches it from an “offshoot” perspective. Failure of the product will most likely mean abandonment of a SaaS approach since you have little tie-in to your primary business. What’s more concerning is what does success mean for overall company strategy? If the product was successful, and your still happy with your primary on-premise product and business, do you have incentive to plan for the future and protect your primary business via a shift to SaaS? Probably not.
Has anyone executed any similar strategies, and if so, what did you experience in terms of results? Have you executed different strategies from those listed when it came to getting involved with SaaS?
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