Around $9 Billion of the $284 Billion software market is currently sold using an online method, Software as a Service or SaaS. The online market is growing at 40%, the traditional market at 3%. So what’s all the fuss about? Well I am convinced that buyers of software get a great deal with SaaS but it could lead to seriously reduced margins for the vast majority of software vendors.

The good news for buyers: Great concept for tight budget, pay and play

  1. Reduce admin costs and hassle of rolling out new software across all the users
  2. Reduced hardware costs
  3. Great for cash flow, no more large enterprise license payments
  4. Software always up to date with all the new features
  5. Difficult to customize however CIOs are now recognizing the huge wasted effort and expense of underutilized features in tailored software
  6. Switching costs relatively low
  7. Concerns over security and data leaving the business, outside the firewall. Watch Sox exposure. However you have to ask, is your internal security really any better than an outside supplier.
  8. Clearly certain defense, intelligence, Pharma type companies may resist the SaaS model because of security worries but even this is changing
  9. Difficult to integrate SaaS software with existing in-house software eg to achieve smooth workflow processes. (however this is also the case with existing disparate client/server systems
  10. Ultimately after SaaS software gains enough users it is usual for the buyer to sit down with the vendor to talk about volume pricing deals (as they would in traditional software deals)
  11. However cost savings may be less over longer periods (per Gartner analysts report)

The issues for software vendors:

  1. Building/renting sever capacity for hosting the service is becoming easier using Cloud Computing
  2. Metrics management is key, eg Monthly Recurring Revenue or Committed Monthly Recurring Revenue (CMRR), CMRR growth, Churn (attrition rates) and cash generation.
  3. Customer acquisition costs (CAC) are vital. Customer Lifetime Value ratios are vital. The web architecture allows deep and detailed analysis of customer behavior which allows dashboard type metrics worth measuring.
  4. Watch scaling sales force too quickly
  5. Sales lead times can be shorter than traditional sales model
  6. Commission structures tricky but manageable – watch rewarding the correct behavior (no maintenance renewals in SaaS models)
  7. US seems to be a few years ahead of Europe
  8. No shelf ware concept ie if the customer isn’t using your product you are in trouble. It’s on demand computing like switching on the lights – need to over-service clients
  9. Watch bandwidth of service regarding outages and servicing the customer
  10. Avoids customizations of software (most of the time)
  11. Staffing needs: Inside sales teams and how to motivate them.Outside sales teams needed eventually to close the enterprise type deals. Customer service professionals and technical support vital, VP Marketing probably more important than VP of sales
  12. Ability to use aggregated data to share trends with your customer


Large software groups have a massive cultural issue on their hands (see WSJ article here) and many may need to hit the acquisition trail to garner that knowledge and culture quickly enough. Smaller software companies need to wake up to the fact that their overpriced client/server/maintenance model is over or at least build SaaS product offerings into their Product Road Map.