The Advantages of SaaS for Software Vendors
Software vendors see their greatest opportunity in SaaS. New software companies are most often in the SaaS, mobile, or Big Data spaces — not on-premise software. The SaaS companies such as Salesforce, NetSuite, and Workday are the darlings of the software business by virtue of their technology, high growth, and rapid innovation – plus their market value is stratospheric.
Customers are moving to SaaS. The trend will accelerate in the coming years as more SaaS offerings become available and the perceived risk of SaaS continues to diminish as predicted in the blog post, “The SaaS Explosion of 2013”.
Customers see greater business value through SaaS:
- Greater Agility – Customers can innovate much more rapidly, enabled by SaaS’ enabling experimentation of new SaaS products with minimal commitments.
- Reduced Vendor Lock-in – While some vendors appreciate the difficulty of moving to another software vendor, customers want to acquire SaaS since it reduces the “Vendor Lock-in”.
- Reduced time and cost to go “live” – The implementation times for SaaS projects are a fraction of the time it takes for large on-premise software to go live. SaaS reduces “Time to Value” significantly.
- Reduced IT dependence/Reduced IT costs –There is much less of a requirement for massive IT personnel and hardware expenses before SaaS projects are live.
- Fewer Operational Headaches – Companies want to spend their resources on areas where they can uniquely add value to avoid what Amazon calls “Undifferentiated Heavy Lifting”. SaaS removes the headache of running software on-premise.
- Users run current software – Since there are no lengthy software upgrades, companies running SaaS enjoy the benefits of the latest features rather than being locked into dated software to avoid the cost and complexity of on-premise software upgrades. Customers are happier because they always have access to the latest software without “new release envy” of nifty features that are not available since the cost and complexity to upgrade is just too great.
- SaaS minimizes “Shelfware” — With the ability to buy software “just in time”, companies no longer need to make large up-front license commitment before there is a need for the software.
- Customer like trading CapEx for OpEx – Agile companies want to avoid long term financial commitments and the cash requirements of large upfront license and implementation costs required by on-premise software. SaaS allows customers to scale their costs to the needs of the business quickly as business conditions change.
SaaS Companies Grow Faster
Driven by Customer Demand, the SaaS market is growing several times faster than the on-premise market. This is reflected by the much higher growth, approximately 27% CAGR, of SaaS in the marketplace. The reoccurring subscription model of SaaS together with ever growing new SaaS sales “wins” will further accelerate SaaS revenue growth.
SaaS companies grow faster because:
- SaaS reduces the barriers to sales – With less of a financial commitment, less IT dependency, and a shorter time to value, SaaS reduces barriers to sales.
- SaaS sales cycles are shorter – With fewer barriers to sales, the typical SaaS sales cycle is much shorter.
- SaaS companies have a higher win ratio — the win ratio for SaaS companies in competitive deals is greater than on-premise companies as purported by SaaS companies including NetSuite and Salesforce.
- SaaS provides more upgrade revenue – SaaS enables a “land and expand” strategy where an initial sale can be more readily expanded by adding additional seats, companies divisions, and new modules than with on-premise software.
- SaaS companies are “closer to the company” driving additional sales opportunities – since the SaaS companies is providing services on a day-to-day basis, there is much greater involvement with their clients providing more opportunities to promote new offerings for incremental sales.
- SaaS cannibalizes on-premise sales – Every year the percentage of new software projects that are being implemented with SaaS rather than on-premise solutions are increasing.
- SaaS companies have “buzz” – SaaS companies are “cooler” than on-premise companies giving them a halo effect and providing a competitive edge.
- SaaS products are “made for” mobile applications – Well designed SaaS inherently supports APIs for mobile applications and have a “run anywhere” architecture accelerating the deployment of mobile applications driving additional sales offerings.
SaaS Companies are More Agile
Just as customers’ business are more agile utilizing SaaS, SaaS companies can move more quickly than on-premise companies. SaaS products are more complex to build because of the additional requirements of multi-tenancy, operational aspects of SaaS, security, performance, and reliability considerations. However there are third party products that assist in building the core SaaS platform and once that platform is implemented, once the core SaaS architecture is in place, innovation can happen more rapidly:
- All Customers are on the same release – Without a legacy of old software to support, all resources are directed at providing the best software to all customers without being slowed down by supporting and being certain not to break compatibility with the prior releases.
- Resources allocated to legacy release sustaining can be allocated to innovation – it is hard to fathom just how much supporting legacy releases slows down the progress of new software; it is huge. The elimination of this support burden saves development costs and dramatically increases the ability of the SaaS company to respond to new market opportunities.
- Product release cycles are faster – SaaS release cycles typically are from 6 weeks to 3 months versus dramatically longer release cycles for on-premise software. This allows the SaaS companies to get ground-breaking new capabilities in the hands of their customers much faster.
SaaS Companies have more Predictable Revenue
The SaaS annuity stream drives revenue continuity that isn’t possible for on-premise software companies. As long as SaaS companies provide a great service and remain competitive, attrition can be kept low. Then each new sale builds the revenue on top of an ever increasing revenue stream.
SaaS Companies have Higher Valuations
The financial markets like the SaaS model and large software companies want to acquire SaaS companies to help SaaSify themselves. Both Salesforce and NetSuite have market valuations over ten times their revenue even with a loss in the last fiscal year.
These higher valuations benefit SaaS companies by:
- Venture Funding and Investing in Software is shifting to SaaS – Much of the new venture capital funding in the enterprise and SMB applications is shifting away from traditional on-premise software to SaaS, mobile, and Big Data. This means SaaS companies have more access to capital, and those SaaS investments are receiving a higher valuation than on-premise companies.
- M&A valuations for SaaS companies is much higher than on-premise companies – The valuation of SaaS companies measure by the price revenue ration between SaaS and on-premise companies is 2.25x in Q3 2011 according to the Software Equity Group. This understates the greater value of SaaS companies since many on-premise companies were unable to be acquired since the acquiring companies weren’t looking to buy on-premise software. Large software companies such as Oracle (with RightNow), SAP (with SuccessFactors) want to SaaSify themselves by buying SaaS companies at high valuations.