Whether software vendors like it or not, today they don’t have a choice other than providing atleast one version of their software in a subscription based SaaS model. One single major concern from Independent Software Vendors (ISV) is the “profitability”. There are quite a few myths about profitability in SaaS that are assumed by ISVs. In this blog I am going to take some of the common myths associated with/contribute towards profitability. Let’s take one by one and break it down.
High Volume of Customers: Yes, this is definitely true. ISVs should plan towards having more number of customers as they will need to meet a threshold value to maintain running cost. But doesn’t Salesforce have loads of customers? Salesforce.com has reported full year losses of $232 million in 2014, and has $2.5 billion of debt on its balance sheet. You may be interested to read this article Salesforce CFO to Resign
Pricing: Yes, ISVs need to set a right pricing that can attract their target customer base. But how do ISVs know if they are charging less or more? In a competitive SaaS market ISV’s pricing is always going to be influenced by what their competitors are offering. While ISVs may be puzzled as to how one can quote such low subscription fee, they don’t try to solve the puzzle rather simply copy the cost.
Technically sound product: Of course, you need to have a stable and solid product to service ISV’s customer. But it’s not enough to have a strong technical solution from a development perspective but they also need to have a scalable solution from a deployment perspective. Ironically, the end customer is not going to realize neither of it and they don’t have to in a SaaS model. But, from an execution point of view it’s important for the ISVs to have a solution that is economical and scalable.
No Customization: World has understood that subscription based softwares cannot be tailor made to one’s specific requirement. But the ground reality is you are always going to get request from your customers to do those slight customizations. If your product is not designed to accommodate these customizations in a configurable manner then you end up spending a lot of time and effort.
Payback period: Given the nature of subscription model, SaaS companies have a long payback period. But the question is how “long” are we talking about? After 15 years in the game Salesforce is yet to post a profit. What does this mean for smaller SaaS companies?
SaaS companies cannot just sit and wait for things to happen. While driving sales and keeping customers happy take priority, it’s just not enough for sustaining the business. The inherent nature of SaaS business model requires the companies to continuously optimize their operational aspects so that they stay as economical as possible. This fine tuning of the business and operations model is extremely important for profitability, as even a small change in your way of operating can lead to great savings.
The other trick that SaaS companies tend to miss is by thinking operational optimization is required only when they become large or get more customers. The truth of the fact is once you have more customers you are going to have more problems to solve and all our optimization initiatives will take a back seat.
Smart SaaS companies approach their product not just from functional aspect but also from a business aspect, which is the key to break the profitability myth in SaaS.
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I personally feel that this Utility approach (Power, Water, Gas) to Software Subscription may only kill the industry on the long run. Utilities approach is acceptable in a steady flow of same product or services being offered to all customers in a more or less similar form. But Software is highly intelligent one (supposed to be) and highly customised for a specific business situation. For this reason, Framework driven approach have over taken with lots of bootstrap frameworks in an OPEN SOURCED MODEL with service/support alone chargeable without taking any risks on the Data or Security or Business Continuity etc….
It is next to impossible for customers embracing this subscription model of business while they pay for Electricity, WiFi, Telephone/Mobile, Server/Workstation/Device, Cable/Dish, all the Software installed in their devices, Banking and Financial Services…..EMI, Gas Bill, Home Loan, Insurance, OTHERS and TAX….I mean, it is ridiculous notion to think people are ready to park part of their Monthly pay slip with all Software Vendors! For Small / Medium enterprise customer base, the charges offered by these SaaS model is ridiculously high and I often see most of them buy single license and share it with many! For big enterprise,Cloud and SaaS are not going to be any big use except for puerperal areas.
I won’t be surprised if SaaS model business is not going anywhere unless there is an underlying Product that directly serves customers. Even Apple could charge Developers but not Mobile Users. Most of the people use only free versions and never make big purchases of subscription based apps.