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.