Transcript Comeback Kid

Comeback Kid
SaaS Climbs off the Canvas
Comeback Kid
The Re-Rise of the ASP as
SaaS
www.softletter.com
Comeback Kid
SaaS Climbs off the Canvas
Merrill R. (Rick) Chapman
Editor of Softletter
www.insearchofstupidity.com
www.aegis-resources.com
Quick Definition
Software as a Service is…
 A hosted application
 You rent it
 Method of delivery not important

• Web interface
• Terminal services
If they buy and install, not SaaS
 Subscription pricing is not SaaS

The Meltdown

From the late 1990s to 2001
• More than 500 companies…
• Received more than $10 billion in VC…
• And…
• Made nothing
The Meltdown (cont)
Why?
The applications sucked
 Multiple warmed over “office suites”
 Foolish predictions of the end of the
desktop
 Failure to account for “the piracy”
discount
 Infrastructure unable to support
grand dreams

There Were Successes
Salesforce.com ASP poster child
 HR
 Project Management
 E-commerce
 CRM/SFA
 Anything NOT mission or data critical

What About Today
No longer “ASPs”
 Software as a Service

• SaaS
SaaS Market Growing
 But still not that big

• Gartner thought $7.4B in 2004
• Ovum thought $132B!
SaaS vs. Desktop/Client Server
(in billions)
$120
$100
$80
SaaS
DT/CS
$60
$40
$20
$0
2004
But Thing Will Improve
Probably 10% to 15% next year
 Things should get even livelier…
 Maybe 30% to 40% growth over the
next several years
 Much of the growth will be
cannibalization of existing application
bases
 Much in new verticals

Why are Things Improving?

Hardware infrastructure improving
• 60% of Americans have high-speed
access
• 99% of businesses
• Better interfaces

AJAX, DHTML, etc.
Why are Things Improving?

Software infrastructure is appearing
• SOA
• Google
• Amazon
• Yahoo
Several idiots have allowed their data
to be compromised
 Data-protection standards are in
development

Companies are Looking at New
Vertical Markets

Distance Learning
• E-learning

Shop Connect
• Marketing for auto repair shops

Mark Monitor
• Real-time domain monitoring

LiveCapital
• Online credit scoring

And the list goes on
And the Smart Companies are
Avoiding Horizontals
Avoid “office” wars
 Stay away from entrenched
application markets dominated by
Microsoft, Adobe, Oracle, etc
 There is an ongoing struggle
between “fat” vs. “thin” computing
and you will be squeezed no matter
where you stand

And the Smart Companies are
Avoiding Horizontals (cont)
Commodity products are not
candidates for SaaS because they do
not offer otherwise unaffordable
technology to customers
 A SMB can buy Salesforce; it’s hard
for them to by Siebel

SMBs are the Sweet Spot

SMBs are where the action is:
• Firms from $1M to $50M are where
most SMBS are making sales


Source: Softletter
Vertical markets are also a good
place to be; targets can be defined
• There are 70K auto service shops in the
US; avg. yearly revenue $250K
• Focus on the M in “SMB”
SMBs are the Sweet Spot
When pricing is transaction- or
bandwidth-base, the larger the
company the more attractive “own”
looks
 Smaller companies have CFOs who
decide on capital cost (own) vs.
current expenses (rent)

The Economics are Very Attractive

Rapid growth is possible
• Salesforce.com opened its doors in
1999; by 2003 had reached revenues of
$66M
• SaaS model tends to under-report
revenue due to multi-year service deals
• Deferred revenue not reported on
current books
The Economics are Very Attractive
(cont)
Most SaaS firms are collecting
revenue in advance or in conjunction
with the delivery of services
 This is contrary to conventional
wisdom
 Subscription-based companies often
wait months to see invoices fulfilled

The Economics are Very Attractive
(cont)

Predictable growth
• Less “blank slate” projections

Development costs are significantly
lower
• SaaS range between 7% to 12%
• Enterprise software between 20% to
22%
Source: Softletter
And There are Some other Nice
Benefits

Freedom from license compliance
issues
• Purchases
• Receipts
• Certificates

Best-business practices compliance
• Sarbanes-Oxley, section 404
SaaS as a Platform
SaaS companies are increasingly
opening up their products to vertical
markets, i.e. Distance Learning
 An alternative to DVD/CD-based
content programs
 The company has a developing OEM
market

• Application for the retail car market
Some Reality Checks

Sales and marketing costs are no
lower than those faced by traditional
software companies
• 20% to 24% privately-held firms
• 40% + for public companies (with the
exception of Microsoft)

SaaS 45%+ sales and marketing
costs (source: Softletter)
Some Reality Checks (cont)

Traditional licensing empowers
vendor lock-in
• They pay a big amount of money up
front (eventually)
• They pay even if the product has a few
“issues”

SaaS removes much of this leverage
• Switching is still painful, but they can
fund it out of that big lump of dollars
they didn’t give you upfront
More Reality Checks
As mentioned, cannibalization is
inevitable for companies selling
licenses
 Your SaaS product will appeal to
SMBs/verticals in its first iteration
 A focused subset of features
 A steady bulking up of the product
 Parity achieved in about two to three
release cycles

Pricing Issues

For SaaS, it’s a volume game
• New customer costs are very low:


$.10 to $.50, on average (Source:
Softletter)
Pricing models are becoming
increasingly granular
• Heavy volume users of your product are
your least profitable customer
Pricing Issues (cont)
Most pricing models have three to
five tiers
 You WILL be tied to a license model
if you have an installed base
 You can also charge for:

• Bandwidth
• Storage

But customer acquisition needs will
squelch many of these attempts
Service Issues
An era of “white glove” customer
service is coming
 Companies we have interviewed
estimate that customer service is
going to become a significant cost
center: 15% to 20%
 The SaaS model requires you to be
nice to people; no one is the phone
company (yet)

SLA Issues
In a sense, the issue of SLAs is
almost not relevant to the SaaS
market
 Yes, there will be SLAs
 But…
 If your product doesn’t do what it
says, there’s nowhere to hide

Salesforce Management
A tremendous change in mindset
 The traditional $50K, 5%, $1M a
year paradigm does not fit well with
the SaaS model
 Significant SaaS sales require
cultivation over time

Salesforce Management (cont)

Significantly higher commissions
upfront
• As high as 40%

Then a steady ramp down as the
account grows
• Decrement in stages to between 5% to
10%
Salesforce Management (cont)
The trick is to balance the need to
develop new account vs. the
necessity of nurturing existing
business
 Attempts to cut off the account from
the salesforce have not been very
successful; relationships and
professionalism are lost

Comeback Kid
The Re-Rise of the ASP as SaaS
www.softletter.com