Last week we looked at the history and reasons for why downloadable software was purchased and licensed on a perpetual basis. This week, we’ll look at Software as a Service (SaaS).
SaaS is licensed and delivered as a service, similar to how you use and pay for gasoline or electricity. You pay for what you use, and are typically billed once a month for that usage. Other payment models exist, such as pay per number of calls your applications make, the number of gigabytes of data are moved or stored, or the number of contacts you add to a database.
So why did the SaaS pricing model take off? In the technology world, the analogy is that a new technology or solution has to be 10x faster, 10x cheaper or 10x easier to use to be successful. SaaS pioneers like Salesforce and NetSuite offered a new computing and use model that presented new licensing opportunities and challenges. Their 10x came from several areas but also included some new challenges.
- Intellectual Property: By hosting their applications in their own data centers, SaaS companies could easily protect their intellectual property – nothing to ship means it’s a lot more difficult for someone to potentially reverse engineer their code, or to make illegal copies and harm their revenue streams
- Less revenue lost to theft: No software to ship means no one can make illegal copies for sale
- Development cost savings: the cost savings associated with internet development could be applied to reduced license costs
- Lowered cost of sales: No-charge trials dramatically lowered the cost of sales – especially for selling into the small and mid-market segments
- Less customer IT: The hosted solutions didn’t require the customer to hire IT staff to support databases, run servers, or manage upgrades
- Pricing on a per-user basis: SaaS companies could offer more granular pricing
- Solution “de-risking”: Prospects could validate functionality without risking significant resource time or living for multiple years with an inappropriate solution
- No perpetual licensing: The customer doesn’t “own” a service.
- Internet connectivity: SaaS companies required an active internet connection to deliver their service
- New contracts: Large enterprise procurement departments didn’t know how to handle service agreements for technology – what happens if the service goes down?
- Remote sales: Customers had to learn to be comfortable with sales and technical teams who didn’t come to their offices
Despite the technology and business hurdles the SaaS firms faced, they solved the biggest business frustrations with perpetually licensed software – upfront costs, application risk, and speed (or lack of it). Perpetually licensed software has to be delivered. Administrative changes require IT. In contrast, SaaS doesn’t need to be installed – it’s already available. To get access, you just need to send someone a log-in and temporary password. Administrative changes can be managed by a business analyst in the department using the application.
Organizations continue to reduce their IT organizations, whether by outsourcing development, hosting or function management, or by replacing downloadable software with SaaS applications. We believe the stronger market force is to continue to reduce up-front or capital expenditures. This pressure will continue to drive adoption of a SaaS style “pay per X” license model over perpetual. That doesn’t mean, however, the perpetual model is dead by a long shot. Some niches with graphically rich or locally computationally intense usage don’t lend themselves to being run in the cloud and thus aren’t as likely to see new vendors pushing customer or usage centric licensing models.
Come back next week when we’ll discuss tracking desktop vs browser based applications.
In the meantime, check out one of our case studies: