Friday, October 26, 2007

Is SaaS a profitable business model?

Read a blog post today by Charles Fitzgerald.

I'm simplifying a little here but Charles basically discusses the challenge of profitability when there are high costs of acquisition and of retention which then extends the time required to recoup the costs from the subscription revenue. and NetSuite are used as case studies, along with examples of the cost of sales cycles and their balance sheet numbers.

The temptation in this scenario is therefore to focus on enterprise sales, the higher user counts would then offset the cost of sales. Now this makes sound business sense looking at pure financials.

The problem I have with a purely Enterprise strategy is that it leaves the SMB market underserved. This got me thinking.

Back when I was involved in selling and implementing on premise or ASP hosted Life Science CRM we had the sample problem, the cost of selling and in fact the cost of implementation were the same whether it was a 30 user site or a 2000 user site so we much preferred working on the larger sales opportunities, so its something that isn't new and unique to SaaS. In fact in those days we didn't get full payment until implementation was complete, accepted and rolled out, so it could take months to recoup the cost anyway.

However lets take a look at the breakeven equation, as per above you could go for the larger user counts (Enterprise) to offset the acquisition costs OR you could look at making the cost of sales so low that its inconsequential.
(you could also try upping your subscription prices but that would make you vulnerable to Competitor pricing)

The question then becomes ...
Why would you attempt to sell to SMB's the same way you would as Enterprise? .

Firstly, what is the cost of sale comprised of:
1. Sales Rep Time and Remuneration
3. Salaries of Operations people involved in the sale
4. Travel?
5. Opportunity Costs

The greater the time a sales rep spends on one sale means less time available for other deals, which means you are forced to increase the size of your sales force to handle leads. If your product is overly complicated then you need a larger team of presales engineers for demo purposes.

It seems to me then its really the people involved which incurs the cost.
Rep face time in the Enterprise world is about relationship building,
A successful SaaS selling model is different. Remember, SaaS is a state of mind.
You're evangelizing a way of purchasing and using software as much as a product.
Which means a successful SaaS sales cycle needs:

1. No Sales Rep involved during early and middle stages of sales cycle.
2. No technical people required to demo and setup until the close stage, which is possible if your product is self demoable and user can sign up for evaluation use online.
3. An application which can be provisioned and configured by the customer themselves, this being a basic tenet of what a SaaS system needs to provide anyway.

For item 1, what do you in lieu of rep to prospect face time? Viral marketing is one way - effective use of online networks with vocal customers evangelizing your product. It's all about building up trust. And if we've seen one consistent thing on the web, consumers trust other consumer's referrals more than anything.

To close the deal, you are going to obviously need some interaction, but that doesn't need to be time intensive, could be a couple of phone calls and a WebEx/Gotomeeting presentation.

Is SaaS a profitable business model? If you have built your product well, its easy to use, is self provisioning and self configurable and solves business problems, then the answer is Yes.

Thursday, October 25, 2007

'Webifying' the Desktop

I have been reading some interesting blogs lately.

Treb Ryan
Bob Warfield

Treb makes the prediction that "All applications will be web applications".
Somebody like myself who is exclusively involved in SaaS will obviously agree with that point, although I would amend it to be "All applications will have a web component to them, will be deployed over the web and will have a shared information repository on the web"

Bob makes some interesting and valid observations about the future of the desktop and how it can survive in the web X.0 world.

What this got me thinking about was "what is good about the desktop which cannot be currently emulated in the browser".

Despite all the fantastic innovation that Web Developers have achieved, they still fall short of the user experience which the desktop can provide be it Vista, Mac OS or Linux. This could be due to the boundaries of the browser.

A lot of talk is about Mashups right now, a good thing.

However wouldn't it also be cool if on your desktop you had your dashboard from your SaaS BI tool displayed in one corner, your list of Tasks from your SaaS Scheduling app in another, a list of contacts from your SaaS CRM tool and then your Question and Answers from Linkedin at the bottom. You could then drag and drop items from one SaaS app to another. All the processing of data would be handled on the hosted app side and you are simply rendering UI results on your desktop.

There is still huge potential in browser apps but the desktop could still provide some interesting opportunities.

Tuesday, October 23, 2007

Web 2.0 again!! and Social Networking.

I actually read a lot of the questions coming through on via igoogle.
As we discussed in some of my earlier posts the term Web 2.0 appears to have different definitions depending on who you talk to.

On linkedin, everyone is talking about Social Networking and Collaboration and defining this as web 2.0. (Everything is X 2.0 nowadays as if by putting the number 2 in front of a term we have suddenly and miraculously discovered a new technology)

So now Web 2.0 is social networking which also includes collaborative tools in the business environment.I am an avid user and supporter of these types of tools being it a wiki, blog or networking sites like

Less focus is placed on line of business applications being transformed by Web 2.0 in particular SaaS. My interest is obviously biased towards this, but I think the success of Web 2.0 collaboration tools within a business organization actually hinges on the adoption of a SaaS mindset first.

By having these SaaS business tools in place first, it gives context and sensible subject areas to Social Networking and colloboration.

A good example I think is Life Science CRM. I read an excellent post today
Scott Monty

Pfizer is partnering with a social networking site and will get access to the thousands of doctors who network there. Now this is something that the Sales reps would love to analyze and review for the zipcodes in their territories and the best place for this would be in their CRM system. Not an easy task if you aren't using a SaaS application. By having it in CRM, it structures what is essentially unstructured information. I can picture one day a Life Science SaaS CRM solution which has a social networking and blog portal for doctors as part of its feature set.
(Although you have to be in compliance with all FDA regulatory requirements.)

Tuesday, October 16, 2007

SaaS Product Pricing

Found an interesting question in LinkedIn a couple of days ago. Someone in my network asked about how they should price their SaaS offering to customers.
All sorts of complex scenarios were discussed and extra charges for infrastructure was suggested.

Frankly, IMHO that type of talk misses the whole point of why SaaS is attractive to many organizations. SaaS is not about technology or the platform, its all about a service that you pay for in a regular cycle. As a potential customer, If you get charged for infrastructure or server hosting, thats not SaaS, its an an additional unnecessary cost which you were trying to avoid in the first place with SaaS.

You look at SaaS because you don't want the higher cost of ownership of buying servers, software licenses and the additional cost of setup.

A secure and stable hosted environment is a given and a customer should not be expected to pay for that as an extra cost.

With a SaaS solution, initial provisioning should be transparent to you and pricing should be simple, a single per user monthly cost possibly on an annual renewal.