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"Real World" example of a company turning into a SaaS company

Here's an interesting article I read. While it almost leaves you with more questions than answers I thought it was interesting as it's very hard to find real world examples like this.

Is a recession bad for SaaS?

With the current/looming recession I've been reading a lot of articles about how this is a fundamentally good thing for SaaS. The assumptions include:

• Dramatic change in the macro economic environment will cause dramatic change within organizations purchasing tendencies
• Smaller up front payment requirements with SaaS will resonate well with organizations that are now watching every penny

I'm going to leave the first bullet point for now as I'm not convinced one way or the other. For those interested here is a good reference.

Let's say you're selling a SaaS based offering that helps medium to large businesses. Therefore, you are selling to medium and large businesses. In the name of simplification, we could break this group into two subgroups:

• A group that is being so negatively affected by the current economic recession that they really are facing significant long term survival challenges (the auto industry is the current poster child but there are others)
• Companies that have more than adequate cash reserves but are "hunkering down" for a "nuclear winter" type of scenario

As a SaaS provider you offer a "pay as you go" recurring revenue model. Your competition is an OnPrem traditional licensed type model.

Let's look at that in the context of our two groups:

• If Group A does ANY purchasing the "good news" is you'd likely win the business. But now you're "strong recurring" revenue stream is based upon a pretty questionable foundation
• Group B now faces a dilemma. Do they use more money than they'd like today or do they sign up for more ongoing costs for tomorrow?

You go to your CEO/CFO and say "Can we offer a model whereby a customer pays the majority up front and a smaller revenue stream as we go along?" Your executives are horrified. This is SaaS heresy and attacks the very foundation of why they built the company. Also, the risk is that because you're a SaaS company you're probably "new" and as a group have never managed your business through a down turn but that's another story.

However, let's say you have both in your backpocket. Your CFO might require that you use this new model for Group A and let you offer both options to Group B.

Now the CFO at the Group B companies isn't forced into a tough dilemma. Those that are worried about revenues tomorrow less than right now will be able to choose the pricing scheme that works for them. Those that want the financial burden spread out over time have that option.

To me it comes down to:

• Simply replacing one rigid type of pricing model (OnPrem licensed models) with another rigid type of pricing model (annual recuring fees) is not a significant advancement in choice from a purchasing perspective.

Try both models. Before you object here is another blog I wrote about this very topic.

Justin

SaaS offerings should be priced the same as On-Prem offerings

Why should SaaS offerings from traditional ISV's be priced differently to traditional perpetual licenses? At the very least, I think SaaS offerings should be priced via subscription and traditional "licensed" models. Let the customer decide what they'd rather do. To support my theory let me try and get in front of the objections I'd expect to hear.

• Subscription models are superior revenue models due to their recurring revenues

How many times have we heard this? Yet as Larry Ellison pointed out, “If you look at the leader, Salesforce.com, they don’t make very much money and they’ve been at it for almost 10 years” While many will want to object to anything Larry says he has got a point. NetSuite and others are just passing $100 million. Impressive, but hardly earth shattering.

• SaaS revenue models are more "recession proof"

Well I guess we're about to see now how true this is. The common thought process is "Licensed software is a big up front cost while SaaS is a smaller recurring cost" Let me ask you one question on that. If you think the economy is not great today but you're sure it's going to be worse tomorrow how excited are you to sign up for a recurring cost? A CFO is going to think (in this order) i) Don't spend any money right now, ii) Spend it now if it makes sense for us today, iii) create an ongoing recurring cost that might be 3% or revenues today but could balloon to 5% etc if revenues fall in a recession. You can go for a year without maintenance and support on licensed software in a pinch if you have to. Short of cutting back seats, and thus value, you can't do too much with SaaS revenue (and that's assuming the pricing model is something easy like seats vs say "site traffic")

Thus I'm not anywhere near as confident as most are on the recession proof element to the pricing model.

• With their steady predictable revenue streams SaaS companies are better positioned in the long run to grow and prosper

There's a general rule of thumb when procuring CFO's look at SaaS vs licensed offerings. It's called 3 years. Generally, Licensed fees + Support over 36 months will equal 3 years of the SaaS equivalent offering. Ie $1 million licensing fee + 2 years of 20% maintenance vs $500K per year for the SaaS equivalent. That's great, but that software company with the license fee has $1 million in the next 45 days while the SaaS vendor has (quarterly advance) $125K. It's hard to underestimate the power of having that much more (8x) money in your hands today vs 3 years to catch up and surpass. If we both did 10 deals at the end of the quarter I'd have $10 million in cash and you'd have $1 million. I can show up on your doorstep and offer you 6x revenues for your SaaS company and still have $250 000. You on the other hand are going to have a very difficult time acquiring me. 

To those that argue against my 3 year model along the lines of "Well, you're wrong. SaaS allows a customer to start at a much lower price point and scale over a greater period of time" I say "See Larry's point above"

• SaaS companies need to have subscription fees due to the ongoing costs associated with providing an OnDemand offering

Companies like Amazon and Google are driving cloud computing costs towards zero and thus undermining whatever truth there once was to this argument.The 20% maintenance fees that traditional licensed sales charge are probably fine to cover SaaS support and upgrade costs. (perhaps you could extract as much as 30% to reflect the increased business value of not managing these apps internally and thus earn solid margins on these revenues)

Lastly, what's one of the most commonly documented rationale's for "Old World ISV's reticence to adopt the SaaS model more aggressively? Concern with managing Wall Street's revenue expectations as well as managing sales compensation conflicts. Price them both the same way and *poof* no more problem.

My conclusion? For certain products it's more effective from a technology perspective to offer a SaaS model. However, if there is dogma in the financial model discussions it's not the traditional ISV's. It's the SaaS companies. Offer companies both and if you only offer one offer the traditional perpetual licensing model until you're well established.