While the SaaS model offers tremendous opportunities for growth - and who doesn’t dream of hockey stick growth? - it is not trivial to transform a traditional, on-premise software business into a scalable online SaaS business. Here are three reasons why such a transition is hard:
- On-boarding new customers requires a significant effort for the software vendor
- SaaS is not a good thing for your cash flow
- Reaping the benefits of using Cloud vendors requires a software architecture that takes advantage of cloud services
1. On-boarding new customers requires significant effort for the software vendor
Most software companies, especially those active in B2B, don’t sell a product that works out of the box. Often, a significant amount of installation, configuration, sometimes customization is needed before a customer can actually start using the software. Usually the software vendor takes care of this and is paid for it as part of the deal with the customer. This approach is labour intensive and requires significant investments in time and money from both vendor and customer. Simply offering your software product as a SaaS doesn’t change much in this picture: you’ll still be doing installations, configuration and customizations, except that now you’re also responsible for the operation of all these different releases, with their customer specific settings and tweaks. So, unless you make it dramatically easier to have new customers on board, neither your customer nor you really benefit from this SaaS thingy. For the software vendor, things just got more complicated.
2. SaaS is not a good thing for your cash flow
SaaS is a "pay later” model: the software vendor does the investment through a sales cycle, incurring an acquisition cost (CAC – cost of acquisition). In a traditional license model, once the sale is closed, the vendor will invoice the customer and the case is closed. In a SaaS model, the customer will pay a (monthly/yearly) fee. It will take time before the software vendor has earned back this potential investment. Worst case scenario, the customer stops using your software before that point and in this case, the software vendor will lose money. For a full explanation of SaaS cash flow, checkhttp://www.nebucom.be/blog/inconvenient-truth-about-saas-hockey-stick-growth
3. Reaping the benefits of using cloud vendors requires a software architecture that takes advantage of cloud services
Cloud providers, like AWS or Microsoft Azure, offer software companies scalable and relatively cheap pay-as-you-go options for deploying their software. Unfortunately, software that wasn’t originally built for the Cloud, often does not have a software architecture that takes advantage of these Cloud services. Take multi-tenancy for example: multi-tenant software means that the software is capable of serving multiple customers at once, with the same installation. The benefit for a SaaS provider for being fully multi-tenant, is that the load created by your customers can be spread over all the server infrastructure, and ideally scale up and down elastically, depending on the demand. If the SaaS application is only marginally used during weekends, the SaaS provider scales down, only paying a small fee to its cloud provider. If on the other hand the application is not multi-tenant, the SaaS provider needs to have an installation up and running per customer, even if that customer is not currently using its software right now. Most of the time, this is more expensive.
These are just three examples why it is hard for a “traditional” non-SaaS player to successfully transition into the world of SaaS.