SaaS Delivers Better Economics -- But Who Will Reap the Rewards?
Network World has a great article today on the pricing of Software-as-a-Service. One of the key points it makes is that SaaS is getting expensive, because vendors are convincing customers to buy more capacity than they need.
Shame on those who sign these agreements. Because nowhere are the cloud economic benefits more compelling than with SaaS.
SaaS can be priced so low because it costs much less to develop and maintain than traditional software. SaaS eliminates the largest cost old-school software vendors incur. And in doing so, it fundamentally changes the software business model. This isn’t a temporary flash-in-the-pan. It is a major market disruption.
Old-school ISVs typically spend between 70-80% of their R&D budgets maintaining old versions of software. That’s a staggeringly high portion of their development investment. It is so high because customers don’t want to upgrade from one version to another very frequently. Those upgrades are very expensive and disruptive for customers. So customers require their vendors to support old versions of software, for a very long time – sometimes a decade or more. Maintaining each version is costly, and the combinatorial effect of maintaining multiple versions consumes most of the R&D budget.
SaaS vendors, however, typically don’t need to maintain old versions. The version that’s up and running is the only one they maintain, and they invest the vast majority of their resources developing new features for new versions. Which, by the way, customers can typically use without expensive and disruptive upgrade cycles. The SaaS vendor hides much of the complexity. The result is a dramatically lower cost structure, over the long term, compared to traditional ISVs. And, in a competitive market, that can mean much lower prices for customers, for the long term.
So SaaS can be much cheaper than traditional software. But where that savings lands – in the customers’ pockets or the vendors’ – comes down to good old-fashioned negotiation.
Disclosure: Lots of SaaS vendors use my employer’s software.
