Selling Through SaaS: Should Your Company Take the Plunge?


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Selling Through SaaS: Should Your Company Take the Plunge?

Software publishers have had to evolve their value proposition to meet changing expectations in the market. Clients are pushing for lower IT costs; yet, they demand more functionality and greater ease of use from their business applications. One solution has been to reduce hardware and networking costs by migrating to the Web and implementing strategies such as outsourced cloud computing and virtualized servers. Those technologies have also enabled publishers to create new shared licensing models, including concurrent and open source licensing.

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Selling Through SaaS: Should Your Company Take the Plunge?

  1. 1. Selling Through SaaS: Should Your Company Take the Plunge? Author: Rene Meister Software publishers have had to evolve their value proposition to meet changing expectations in the market. Clients are pushing for lower IT costs; yet, they demand more functionality and greater ease of use from their business applications. One solution has been to reduce hardware and networking costs by migrating to the Web and implementing strategies such as outsourced cloud computing and virtualized servers. Those technologies have also enabled publishers to create new shared licensing models, including concurrent and open source licensing. Another increasingly popular approach to lowering software costs for customers is to offer software as a service (SaaS). Rather than purchasing and installing software on their machines, users access software over the web under a pay-as-you-go model. The publisher is responsible for hosting and maintaining the application. This paper examines the viability of the SaaS business model for new and existing software publishers and discusses the hurdles those companies should expect to cross to be successful. Issue 19 Selling Through SaaS: Should Your Company Take the Plunge? SaaS Defintion Wikipedia has a good definition: „Software as a Service is a model of software deployment whereby a provider licenses an application to customers for use as a service on demand. SaaS software vendors may host the application on their own web servers or upload the application to the consumer device, disabling it after use or after the on-demand contract expires.” SaaS Advantage • No Installation required • Low cost of entry and lower total cost of ownership (TCO) - elimination of capital expenditures • Faster implementations • Powerful and secure IT infrastructure • Access Data from anywhere • Automatic upgrades
  2. 2. The SaaS Culture – a Sea of Change for Established Companies For established companies selling licensed software, converting to or adding on a SaaS business model represents a formidable culture change to their organizations. Licensed software sales focus more on identifying new customers – existing customers already own a license. While there is some recurring revenue from maintenance agreements and version upgrades, without new customers, the company could not survive. The SaaS business model, instead, focuses on servicing existing customers. Because users pay only for services received, the easiest and lowest cost source of new revenue is to encourage existing customers to renew their subscriptions. The result is a more intense and ever vigilant focus on immediate customer satisfaction by SaaS companies. Clients will only renew a subscription if they enjoy the entire software “experience,” including aspects to which licensed software vendors may only pay lip service, such as training and personalization. For SaaS companies, technical support must be offered in real time because pay-as-you-go customers can easily go elsewhere before they pay. Obviously, marketing a SaaS business model will require a different strategy, but the culture conflict will be especially evident in the payment of sales commissions. Sales of licensed software produces a high one-time fee that can easily fund commission payments; whereas, the SaaS business model delivers revenue in small increments. The SaaS company will have to be creative in its sales compensation to properly motivate a sales team. It is, therefore, easier for a new, start-up organization to create the customer-first culture required for SaaS success, but many established companies have successfully transformed themselves to provide a SaaS solution. However, there are other hurdles to success that must be considered. Resources Can Be an Issue For most SaaS software, engineering costs are higher whether the company is a start-up or an established software publisher. Most enterprise applications are customized to some extent for the customer’s unique requirements. That customization is typically performed by the purchasers of licensed software, or they pay the vendor or a third party consulting company to deliver the solution. That’s not the case for SaaS software providers that must design the capability for users to customize the application into their software, and it requires development of a robust user interface to deliver that functionality. In addition, development costs are incurred to create the specialized architecture to support application customizations for multiple clients, whether those clients access a single instance of the hosted application or the SaaS vendor hosts separate applications for each client. Established companies have a resource advantage over start-ups in this regard as current revenue from licensed software sales can fund the SaaS product development, and the skilled resources required may already be on staff. Higher Development Costs, More Resources, Culture Issues – Why Bother with SaaS? While companies considering a SaaS solution should analyze their decision carefully, there are strong reasons for choosing that business model – most driven by customer demands. Business software users have become more discerning of value in their software purchases. They want lower total cost of ownership and the flexibility to adjust their licensing commitment as business circumstances change. They want to roll out new software quicker and have users become productive faster. Importantly, they want to lock down their IT budgets and know exactly what costs to expect. SaaS solutions appeal to those buyers. Hosted solutions eliminate capital investment in hardware, costs for data-center floor space, and expensive IT resources. Pay-as-you-go or usage-based pricing means no large upfront cost for software licenses, inherent flexibility to address business needs on-the- fly, and predictable long term costs. Because users access the SaaS solution online, there are no software downloads or time-consuming rollouts, and upgrades are easily implemented by the vendor at the host server to be instantly available to all users. And the buyers get it. A recent survey found that 12 percent of U.S.-based companies are subscribing to at least one major SaaS application today; another 13 percent are currently designing, prototyping, or implementing their first SaaS application; and 14 percent are planning to do so within the next year. While Tier 1 organizations were the early adopters, small-to-medium-sized businesses are now embracing SaaS twice as fast as those larger enterprises.
  3. 3. savings in capital expenditure since extensive IT infrastructure is not necessary on-going support and administrative costs are reduced; in some cases, users can dispense with their IT department altogether the location of the company’s offices and individual PCs is irrelevant; users can be anywhere SaaS Wags a Long Tail If yours is a niche solution, SaaS may allow you to take advantage of “Long Tail” marketing theory. Long Tail refers to a statistical truism that a larger share of the population rests within the “tail” of a probability distribution. As a retailing concept, it describes the niche strategy of selling a large number of unique items in relatively small quantities – unlike most brick-and-mortar operations that focus on popular items because of high storage and inventory costs. Because online merchants using centralized warehouses have greatly reduced storage, distribution, and inventory costs, they can profitably sell small volumes of hard-to-find items by leveraging the Internet to find many customers. For example, a traditional brick-and-mortar movie rental store has limited shelf space and high overhead. To maximize revenue per shelf space foot, it must stock only the most popular movies. On the other hand, an online vendor can stock a wider assortment of movies in centralized warehouses because its storage and distribution costs are the same whether the movie is popular or not. The results prove that those unpopular movies – the Long Tail – represent a greater percentage of the online vendor’s sales. Software is no different than movies, and a SaaS business model produces the low storage and distribution costs that can enable a niche solution to find profitability. Recognize Impediments As every entrepreneur knows, cash is king. Unfortunately, a SaaS business model does not generate the early cash flow of a successful licensed software business selling high-priced software. Venture capitalists have estimated that a SaaS start-up requires 70 to 100 percent more capital investment and a longer time (6 to 7 years) before it can reach a liquidity event (sale, or IPO). On the positive side, the market values SaaS companies higher at that liquidity event due to the predictable nature and consistent growth of their recurring revenue models. And, as we’ve discussed, by better addressing customer concerns and providing a low entry cost, SaaS start-ups can have a greater probability of success. Plan for SaaS Success While marketing a SaaS solution entails similar objectives, and even similar tactics, to those used for licensed software, SaaS solutions require a different marketing strategy. SaaS solutions target a different audience with a different value proposition. The SaaS solution’s initial low cost will create early interest from a prospective customer, but its other value offerings, including rapid deployment, easy updates, reliability, and flexibility, are often cited as their deciding factors by subscribers. It must also be evident to the prospect that the solution is easy to use and configure, and that it is easy to administer (i.e., registration and subscription renewals). In addition to marketing the solution’s functional capabilities, these additional value elements need to be emphasized as well. Importantly, it is also critical to earn the prospective customer's trust. For many users, SaaS applications execute and store critical business transactions. Users need to be assured that the application will be accessible and their data stored securely for the duration of their subscription periods. Long Tail Defintion Wikipedia has a good definition: “The Long Tail or long tail refers to the statistical property that a larger share of population rests within the tail of a probability distribution than observed under a 'normal' or Gaussian distribution. The concept was popularised by Chris Anderson in an October 2004 Wired magazine article. The total sales of large number of "non-hit items" is called the Long Tail.” To the right is the long tail; to the left are the few that dominate. Notice that the areas of both regions match.
  4. 4. Your SaaS marketing plan should include these essential steps: Create a unique marketing strategy designed specifically for the SaaS solution Success will require more than simply tweaking the marketing strategy used for licensed software. While many of the tactics are identical, the strategic elements – those relating to your audience and value proposition – are different. Market the user experience, not only the product’s functionality Users subscribe to the promise that the SaaS solution will not only deliver software functionality today, it will provide fast, reliable application access, secure proprietary information, and deliver valuable enhancements through the subscription period. To earn the customer’s trust, announce the product roadmap and document your record of delivering on its past milestones. Demonstrate your reliability and the system’s security. Build a strong brand Incorporate the element of trust in your corporate brand. Customers invest in your company as much as in the product. Allocate resources to the task of building your corporate brand to clearly impart a positive and compelling message. Market to the IT professional Although SaaS solutions are not implemented in the customer’s data center, its IT staff has legitimate concerns about security, reliability, performance, and integration with enterprise applications. Address their concerns early and provide all the documentation required to answer any question. Don’t lose existing customers In the SaaS business model, current customers are your best prospects for new business as their subscriptions expire. Understand that your customers are also prospective customers and treat them that way. Make registration easy, provide an intuitive experience and online training, make sure they gain value from the software, inform them of upcoming product enhancements, and build a community around them. Manage customer acquisition costs Customer acquisition is typically the largest expense a SaaS company faces after initial development costs, and you won’t have the luxury of large upfront licensing fees to fund any mistakes. Make sure that you execute an efficient customer acquisition strategy. Create a marketing machine that can match the speed of your product roadmap A fundamental advantage of SaaS over licensed software is the inherent capability to generate frequent product updates – perhaps, as frequently as once a quarter. Your marketing department should also be capable of sustaining that same rapid pace. Educate the prospective customers’ purchasing department on SaaS Purchasing SaaS solutions on-the-fly and as-you- go are still relatively new concepts to technology buyers and their legal staffs. From your side, acknowledge that contract terms and conditions have not been standardized across the industry regarding service level agreements, credits, and subscription terms or pricing. Educate your prospective customers’ purchasing and legal staff early in the sales process, and ensure that your own sales team understands which terms are negotiable. Conclusion – Take the Plunge SaaS is a viable business model that has been accepted by customers and the investment community. Solid software applications that address real customer concerns with competitive solutions can benefit from SaaS’s inherent cost advantages over licensed software to attract market share and build a business. Management must understand the higher investment required and build the culture needed to satisfy the requirements of high-demand users, but if successful, their work will result in a higher market capitalization than alternative business models. For companies considering SaaS, specific expertise, such as that offered by Frankfurt Partners, can be the difference between success and failure. Frankfurt Partners Bockenheimer Landstrasse 17 60325 Frankfurt Tel: (069) 710 455 382 Web: