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Viewpoint: Software as a Service – a Rocky Transition

by Randall Craig on April 22, 2016

Filed in: Blog, Make It Happen Tipsheet, Viewpoint

Tagged as: , , ,

There is no doubt that software as a service (SAAS) holds great promise, but are there downsides?  And for both software vendors and their customers, is it a disaster in the making?  (Maybe.)

If you are not sure what SAAS is all about, it is the movement to rent software on a monthly basis, rather than purchase it outright.

For software vendors, the benefits are huge:

  • Far more profitable: no sharing margin with pesky distributors and retailers.
  • No packaging, shipping logistics, or inventory costs.
  • Direct sales to customers means a more robust, and exclusive marketing relationship that can later be exploited.
  • A one-time sale is converted to a far more valuable ongoing annuity.
  • Incremental upgrades to the software are possible:  no “huge” development cycles are necessary.

And for software buyers, there are other benefits:

  • A capital expense is converted to a “low” operating expense.
  • Lower deployment and management/operational costs.
  • Everyone can be on the identical, most recent version.

Given all of the benefits, it isn’t surprising that SAAS has become such a gold rush, particularly for software vendors.  And with Microsoft’s decision to sell their Office software using this model, it can be said that the SAAS market has finally “matured”, and that the tipping point has finally been reached. But is all well in SAAS-land from a buyer’s perspective?  Or are there rocky shores ahead?

Unfortunately, between vendor greed, many buyers’ unwillingness to commit to an ongoing cost model, and for those that do commit, a growing alarm at the sheer number of hits to their credit card each month, not all is well.

Vendor greed:   As the functionality of the software is the very same for everyone, it seems only reasonable (from the vendor’s perspective) to price it the same for everyone.  Yet, there are really two very different market segments for any SAAS product: new customers, and existing ones.  The existing customers are the ones who have established the vendor’s brand equity, not just through their past purchases and their usage, but through their referrals, recommendations, and word of mouth.  They have loyalty, and often feel a personal connection to the brand.  When this is not acknowledged in any way – and pricing is very front-and-center in SAAS –  there is a disconnection: brand equity (and loyalty) are instantly lost.  Pricing needs to be perceived as fair, and it must acknowledge loyalty.

Unwillingness to commit:  In the olden days, organizations would do a lease vs buy calculation before any major purchase: it is no different today with SAAS, although not everyone recognizes the need to analyze it in those terms.  Recently, a professional colleague was told that there would no longer be any upgrades for his purchased system (audience response “clickers” and the controlling software), but he could “upgrade” to a cloud version and get the needed upgrade that way.  From the vendor’s perspective, moving to SAAS was a way to switch the business model from selling hardware (a one-time purchase) to selling software as well (an annuity).

The original cost was approximately $10,000, mostly for the hardware; the SAAS “offer” was about $4900, per year.  Says the buyer: “for the number of times that we use the clickers, this isn’t feasible. Instead, we will sell the clickers, and use that money to rent a competitor’s system when needed, at a fraction of the cost.”  In this case, perhaps vendor greed was also a factor, but the core of the decision was a desire not to move into a SAAS model with this vendor.  Or said another way, they had done the lease-vs-buy calculation years ago, made the decision to buy, and still felt that way.

Growing alarm: Have you looked at your credit card statement recently, and highlighted all of the SAAS charges? Were these charges there, even a few short years ago?  (Likely not.)  Here is a selection from my card:

  • Evernote (Note-taking software)
  • RingCentral (Virtual telephone switch)
  • Dropbox (Filesharing)
  • eSpeakers (pro speaker management software)
  • Adobe Creative Cloud (Graphics software)
  • Apple (Apple music, iCloud back-up storage)
  • Google Apps
  • Microsoft Office 365
  • Infusionsoft (CRM and Marketing Automation)
  • Done Done (Support Tracking)
  • Moqups (wireframe tool)
  • Invision (prototyping tool)
  • TeamWork PM (Time tracking)
  • Quickbooks Online (Bookkeeping)
  • Many small “plug-ins” for the web

In my case, I can absolutely say that there is value in every single one of these SAAS expenditures.  But that doesn’t take away from my growing personal discomfort with how many are there, nor the growing aggregate monthly cost.  Or that many of these are just simply not available in a “purchase” option, without significant downside.

Notwithstanding these issues, there is no question that SAAS is here to stay – but we are clearly in a market of transition.  What might the future of SAAS look like?  Some predictions:

  1. Switching costs have been reduced, so there will be significantly less loyalty. Vendors will need to continuously demonstrate improved value for their fees; purchasers should be scanning for “better fit” SAAS offerings that deliver greater value.
  2. SAAS adoption is following a “creeping” strategy. In the next few years, many purchasers will wake up to their reliance on SAAS, and begin a wider lease/buy/build analysis.
  3. While SAAS vendors will always say how easy it is to deploy, so has every vendor since the beginning of time.  And like in the past, any new system – howsoever delivered – will require significant change management, internal process change and training.
  4. Pricing will become significantly more complicated as SAAS matures.  Much like the cell phone industry with monthly plans, multi-year contracts, pay-as-you go alternatives, and a myriad of “add-ons”, vendors will realize that different market segments may prefer different pricing models.  Overlaid onto this will be pricing that recognizes loyalty.
  5. Increased integration with other SAAS offerings as well as internal legacy systems.  The more integration, the higher the switching costs.
  6. Hybrid revenue streams.  We are already seeing advertising creeping into SAAS in some cases.  In the future, expect more cross-selling of other services, up-selling to premium versions/extra functionality (want this translated? Pay $1), paid-placement for third party functionality, and behavioral data sales to third parties.  Expect outside-of-the-app marketing and sales partnerships between different SAAS vendors as well.
  7. SAAS fee structures may change – and they may not grandfather existing customers. For example, instead of charging per user/month, they may charge per transaction.
  8. Data sovereignty is becoming an increasingly bigger issue.   Already most governments are requiring that cloud-based data be housed within their own borders; many larger corporations have similar requirements.  Beyond data, with more and more functionality also being delivered via the cloud, SAAS providers will need to find a way to deliver their services “locally.”  If they don’t, they will find themselves locked out of key markets. And those organizations within those markets who cannot access key SAAS functionality because of sovereignty issues, will find themselves at a competitive disadvantage.

This week’s action plan:  Not all SAAS “businesses” are the same.  Like the dot com crash of 2000, and the death of many social media sites 15+ years later, not every SAAS business will survive. SAAS customers must do their due diligence on the financial stability for any strategic SAAS relationship, and have a “plan B” in case of unexpected shut-down. (Yikes!)

More to do:  SAAS has changed how organizations (and individuals) purchase technology forever.  This week, inventory your current SAAS commitments: sometimes the reason for initial sign-up no longer exists, but the charges continue to pile on.  And then look at your legacy software, and consider whether moving them to the cloud has merit.

 

Note: The Make It Happen Tipsheet is also available by email. Go to www.RandallCraig.com to register.

Randall Craig

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About 

Randall has been advising on Web and Social Strategy since 1994 when he put the Toronto Star online, the Globe and Mail's GlobeInvestor/Globefund, several financial institutions, and about 100+ other major organizations. He is the author of seven books, including the recently released "Everything Guide to Starting an Online Business", and speaks across North America on Social Media and Web Strategy. More at randallcraig.com and 108ideaspace.com.

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