SaaS economics

Don Dodge has a great post on his blog about the economics of SaaS based on a Mass Technology Leadership Council session this past spring. He points out that the startup costs for a SaaS company are nearly double those of a traditional enterprise software vendor, but the payoffs are higher, too. Equity markets assign a great value to companies with predictable revenue streams, and SaaS companies can move more quickly to enter new markets than packaged software vendors. In other words, it costs more to start a SaaS company, but you get back more in the long run.

There's a particularly interesting passage on the cultural shift that packaged software vendors need to make to succeed in the SaaS market. "If you are a sales person with a $1M quota and you have the choice of selling a $100K perpetual license, or a $2K a month SaaS subscription, which would you do? Some companies are changing their sales compensation models and metrics to level the playing field. They might give quota credit for 24 to 36 months of the subscription and pay commissions as the revenue comes in. Or they might just pay commissions based on 18 to 24 months of subscriptions."

They're going to have to do something. In my podcast interviews with SaaScon keynoters Bill McNee and Tim Chou (Tim's interview launches Aug. 3) both used the same language to described packaged vendors' attitude toward perpetual licenses: "addicted." It is very hard to turn a business based on sales into one based on rentals, yet that's precisely what big software makers have to do to get SaaS religion. Imagine how many management cycles are going to be burned making that change at an Oracle or a CA.

Dodge also talks about the importance of infrastructure. It's not simple to build a 24x7 data center, but that's what each SaaS vendor has to do. You'd think they'd be looking to outsource that as quickly as possible.

There's also a good checklist of things to look for in a SaaS vendor. The article is oriented toward investors but has plenty of value for users, too.

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