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The Saas business model: not busted, but still to be proven
August 30, 2008
The email has been flowing fast and lurid since I wrote a column earlier this week suggesting that the the software-as-a-service (Saas) business was unlikely ever to be as profitable as traditional software (in fact, one venture capitalist with a lot of experience in the field offered to send me to “reeducation camp.” Can’t wait.)
To recap briefly: I argued that subscription businesses where customers can switch suppliers easily tend to suffer from heavy churn and falling prices. It may be called “software”, but the economics of Saas have nothing to do with the old enterprise software business.
The main argument from readers who have been lighting up my inbox is that I failed to make allowances for all the switching costs companies face when they change Saas suppliers (such as training workers to use a new service,) so there is a degree of customer lock-in. A second argument is that Saas companies can add value to their otherwise commodity-like services by customising them to fit specific industries.
These are fair qualifications, but I don’t think they change the central issue. Maintenance fees are the gravy train of enterprise software: SAP recently said it would raise maintenance fees by nearly 30 per cent between now and 2012. No Saas company is going to be able to do that.
Let’s be clear: I’m not saying the Saas market will collapse in two years (which is what the CEO of Lawson Software told ZDNet Asia.) But I am saying that when Saas becomes a more mature market, the power of customer choice will be a significant factor. Some suppliers will still thrive under these conditions, but they will have lower margins than their predecessors.
Whilst I think that Harry Debes, the CEO of Lawson, made some sensible points, the current controversy seems to be ignoring any rational criteria for choosing software.
It is possible to provide ‘enterprise’ functionality through a SaaS model, but it really only makes sense as a fairly generic solution. Those organisations that have been through the pain of a large scale ERP implementation will find it difficult to believe that equivalent functionality will be available with minimal configuration over the web. These claims dent the credibility of those making them
On the other hand, Google Apps, Salesforce.com, etc. - do make sense for a significant proportion of the market. I suspect that it is a large proportion and that the reduced margins compared to traditional models can be balanced by increased volume and reduced costs if the SaaS providers keep focused.
Posted by: Peter Dunkley | September 1st, 2008 at 11:19 am | Report this commentTraditionally some vendors have looked to lock companies into using their software, but the fact is that there is now more choice than ever before, with more vendors offering increasingly flexible, lower cost options for businesses.
SaaS offerings can change and evolve quickly based on business needs – traditional software deployments cannot. Yes, companies have to pay ongoing licensing costs, but many prefer this to making an upfront investment, as it’s a more manageable cost and the number of licenses can easily be modified based on immediate needs.
Of course there’s a risk that customers will simply abandon a generic SaaS offering once they no longer require it. However, smart vendors will look to tailor their offerings to meet each company’s individual requirements, thus making them an integral part of day-to-day business processes and helping foster a successful long-term relationship.
Posted by: Rikke Helms | September 4th, 2008 at 10:22 am | Report this comment