I have to admit that I love SaaS (Software as a Service), both from a user perspective and from a supplier perspective., and those are the main reasons why:
SaaS is a new way (granted it’s well over 10 years old but new in most people’s mind) to deliver application over the web. Instead of downloading or buying an application and installing it on your own machine or server, you simply connect to a web site and use the application online. What’s the benefit as a user:
– Instant access, no install cost. Using a SaaS solution is basically a matter of creating an account. When you use your gmail or Yahoo mail, it’s email using the SaaS model.. You don’t need to buy a machine.
– Pay as you go.. Pricing is usually based on a subscription model: If you use the application (assuming it’s not free), you pay a monthly fee, but if you want to stop using it, just stop paying. The investment required is definitely lower than paying an upfront fee for “On-premise” software.
– No Maintenance. when you have a software installed in your enterprise, you have to handle it’s maintenance. Upgrade, problems, extension is needed, etc.. With the SaaS model, your supplier takes care of all of it, including Backups. Upgrade are done seamlessly, on a very frequent basis, bugs are solved faster (no need for a big release), storage is usually expandable at will. All this for your monthly subscription.
– One version to deal with. If any problem occurs on the application and you have to deal with your suppliers hotline, you won’t hear the usual: “Upgrade to the latest version and call us back”. You are always using the latest version and support is therefore simplified.
From a Supplier stand point the benefits are also great:
– Easy to do trials with customers. As the start up cost is close to zero, it’s easy to push your potential customers to try out your software and hopefully convince them that it works for them and that they should subscribe.
– The Subscription model allows for recurring incomes that are more predictable and that add up over time. Every new customer will bring an additional revenue to your business which, over time can become very significant and less dependent on sales effort.
– Only one version to support. If you think that companies like SAP can maintain something like 10 versions of the same software, imagine the hassle (and cost) of development, upgrade, testing (Quality Assurance – QA), and training. Dealing with only one version is fundamentally less costly for a supplier.
– Easy to up-sale customers with add-ons. Want extra storage, want a Gold Access to certain features? the user can be one click away from those up-sales by making it very convenient for them to buy. SaaS makes it very easy to come up with version pricing, bundle pricing, and get a little closer to the economist dream of one price per user..
I could go on and on about those benefits and the growth of the SaaS market as a whole has been impressive as a consequence. Gartner projected that “by 2011, 25 percent of new business software will be delivered as SaaS” and IDC projected that “by 2011, this opportunity will reach $14.8 billion, representing a compound annual growth rate (CAGR) of 32%”. Fast growing market (one of the key point for a successful business) so why isn’t everyone taking that route then? What is hidden behind the scene?
People talk about Salesforce.com as one of the biggest company to have achieved a sustainable revenue/profit with SaaS. Salesforce.com makes almost $1B a year but if we take a closer look at another company with similar size (at least in terms of market cap): BMC, what do we see?
Some rough numbers first:
If you look at all the benefits from SaaS, a SaaS company should have way larger margins than any other non SaaS company, but the numbers say otherwise:
SalesForce has a profit margin of 5.96% where BMC shoots at 18.29%, the operaintg margin of Salesforce is 8.53% where BMC flies at 27.62%.. (all data come from Yahoo Finance). BMC has been on the market for a lot longer, so the learning curve for Salesforce might not have allowed them to reach an optimum position yet.
Of course I’m not a financial analyst (call to all my friends who are in the finance sector for a quick analysis that I can add here!!) but there is something wrong in this picture.
Here are a few guesses that would surface in their 10K:
Spending on the sales force itself and on marketing effort must be huge at Salesforce. Despite all the benefits of SaaS large company who can bring large revenue with smaller sales force, are still convinced that (for security/control reasons) they are better off having everything internally. There is a huge need to convince decision maker that SaaS IS safe and that you can trust a third party to host your data, secure it and maintain it, better than you can do yourself and for cheaper.
The SaaS market is still very attractive to Small and Medium businesses too, and reaching those companies requires large sales force (or going through resellers), which is costly..
Another explanation is that Saleforce might not follow the SaaS model as much as it wants. What if trying to gain new customers (especially big ones) they break their own rules and start building custom solutions (different versions that need to be maintained separately..). I wouldn’t be surprised to see that happening.. but doing so on a true SaaS architecture makes it a nightmare (and expensive) to maintain and grow.
The SGA of both company could backup those guesses:
Sales Force SGA: 693M (growing steadily with revenue)
BMC SGA: 739M (stable for the last 3 years with a $400M increase in revenue)
When I look at this more closely I realize that SaaS might not be the major success people think int he coming year. It is a good business model that’s for sure, and startups should definitely consider it, but let’s not take things for granted and think that building a SaaS model over an On-Premise model is the recipe for success. I would go even farther than that and say that a company structured to build on-premise solutions can more seasily build a SaaS offer and maitain it as an extra version that the other way around.
Finance people, I am turning to you for comments.. what’s hidden behind those numbers? is SaaS such a great business model?