Challenges and Benefits of SaaS for an ISV

1 September 2013 | Articles

By Vinicius Pinheiro, VP of Business Development at e-Core

In the book “The Innovator’s Dilemma”, Clayton Christensen suggests that well-positioned companies fail to adapt in an industry which is facing disruptive innovation. Among the reasons for this, the book highlights the fact that the current technology and business model is generating money and that innovation generally challenges this source of revenue. Unfortunately for them, a competitor, who is usually a new player in this arena, makes the most of the opportunity created. I would guess this situation is not unfamiliar to Independent Software Vendors nowadays, considering the development of the Software as a Service model but along with the threats existing in this scenario, there are good opportunities to be exploited.

Software companies have been adapting to several changes since the beginning of their existence, but the most recent years have presented several significant transformations for the industry. Cloud computing, an explosion in the number of mobile devices and the expansion of connectivity are examples, but I believe one of the main challenges for software companies currently is to adapt to a Software as a Service offer because it means changing the business model and the way they relate to customers.

According to PWC, subscription revenue including SaaS is projected to reach one-quarter of new software revenue by 2016 and will jump from the current level of 5 percent to 15 percent of the total spending in software during the same year. This is a fast paced change that will keep on speeding up. Last year, an estimated 82 percent of new software companies started their operations using a SaaS model instead of a package approach. Enabled by cloud computing and offered either by subscription or in a pay-as-you-go model, SaaS changes the paradigms that the software industry has been used to.

In the process called “consumerization of IT”, final users are having more deciding power to buy and keep a product in companies, making sales and marketing activities more focused on the end user rather than on the CIOs. We will see more companies using a bottom-up approach to tap into organizations, instead of selling to C-level positions, starting in a department and growing from there to become a corporate solution.  Moreover, software companies will invest in order to provide the end user with the set of functionalities they want in a friendly interface, making sure they are well served. Additionally, they will need to invest to keep efficient and talented customer service centers in order to guaranty that the whole experience is good. In a nutshell, the customer is the star in this game.

Another significant change, enforced when analyzing a subscription service, is an expectation of the market that software has to be almost free, if not entirely free.  Customers are using Gmail, Google drive and Evernote for free, 100 GB in Dropbox at $ 9.99 per month and downloading apps to their smartphones paying $1.99. This scenario dramatically changes the perception of software value and presents software providers with a challenge when discussing the price strategy for an SaaS application.Customer loyalty is critical in the SaaS model. Taking into consideration the fact that companies don’t charge for setup, installation and other initial services, it is mandatory to keep the customers to get back initial costs of attracting and incorporating them.  Since long contracts are not the reality in an SaaS approach, the end-user has to be well served to keep using the service. As J. B. Wood, Todd Hewlin and Thomas Lah describe in their book, Consumption Economics, when an ISV close a deal in a package model there is something to celebrate as a revenue stream is guaranteed and the risk is on the customer’s side. In the SaaS model, when you subscribe a new customer the company gets a potential source where it has to work hard to make this particular client contribute positively to the financial results.

Adapting to the new trends as a way to survive should be enough to motivate companies to follow this path, but other than that, there are several advantages for ISVs to change their models, exploring good examples such as SalesForce and Intuit. This new scenario can increase the potential market available as long as all muscles are developed to an SaaS offer. This presents opportunities to easily adapt solutions and price strategies to serve customers who had not previously been a target. Besides the opportunity to tackle the small business market more effectively, B2B companies can target the B2C market as well.

Part of the costs and time involved in the solution presented by ISV companies were previously spent on infrastructure however, they are now using inexpensive cloud computing infrastructure services. Taking this fact into consideration, it is possible for an ISV to keep focus on the solution and value for the customer, becoming an easier firm to do business with from the customer’s perspective. At the end of the day, this should result in more business.

By reducing the costs involved in adding a new customer and reducing the time for a customer to have access to the benefits of this solution, companies will reduce the sales cycle, lowering the sales cost as a consequence and raising the potential to increase their customer base. If from one perspective, volume is needed in this new market, it can be achieved in a simpler manner.

Using an SaaS approach, ISVs will have access to more information about the end users’ behavior when using the product and understand better their needs.  This can be used to come up with some insights about new functionalities and applications, becoming an important asset for strategic decisions.

In the Software as a Service offer, as a consequence of the standardization of the platform, companies can reduce the complexity and costs involved in maintaining and supporting multiple versions simultaneously. Furthermore, with the benefits of mass-upgrade/deploy capabilities in addition to a rapid development and bug-fixing cycle, they can reduce the time-to-market when adding new functionalities and updates.

A lot of changes will be happening in the software industry in the coming years, Independent Software Vendors will have do adapt, reviewing their revenues stream for the future. There are challenges in this transformation and it is difficult to accept that a more convenient business model will no longer exist, but this is key to change and getting the most out of the opportunities which exist in this transitioning market.

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