David Feinleib at Mohr Davidow Ventures likes SaaS. He eloquently lists some great reasons:
– Recurring Revenue Model: As a Sales VP I once knew said, “Why do we have to start all over again every quarter?” SaaS, term licenses, subscriptions, and a very few other models help fix that problem.
– Low cost of sales: I’ve actually done the numbers on this one and can tell you without a doubt that SaaS provably costs less to sell. The hubub about SaaS profitability is because these companies do backload their revenue and frontload expenses, and also because most are throttling for maximum growth not maximum profitability.
– Ease of Delivery: Reducing friction in the transactions your business depends on is always a good idea. So far, SaaS is the lowest friction model yet seen and in some cases results in true click-to-buy self service.
– Stickiness: This is not a special advantage of SaaS, but rather of Enterprise Software in general. Once up and running, vendors have to do something really bad to get kicked out. Customers face the daunting task of moving data from one mission critical system to another one, fighting through any incompatibilities and outages that may bring. One could argue the ease of adopting SaaS may even make it the least sticky variant of Enteprise Software, but it’s still pretty darned sticky.
– Measurable growth: I personally think this is a restatement of the Recurring Revenue Model. Everything new, less churn which should be small, falls into the gift that keeps on giving category.
Feinleib misses out on another huge advantage of SaaS though: it creates new markets in plain sight.
What I mean by that is SaaS is such a corrosively disruptive business model that the incumbents generally can’t adopt it when an upstart comes along. For all intents and purposes a SaaS and Perpetual License Vendor may as well be in completely different markets. The Perpetual License company has to slit their own wrists to win by accepting monthly revenue instead of the big license payoff that is all recognized the month the software is sold. It’s all but impossible for these companies to do it it. The short term pain in order to achieve long term success is simply too great.
There’s a lot more on this point in my interview with Concur’s Steve Singh, but having decent barriers to entry, especially from big established companies, is hugely important for startups.