Comeback Kid

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Comeback Kid

• SaaS Climbs off the Canvas

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Comeback Kid

• The Re-Rise of the ASP as SaaS
• www.softletter.com

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Comeback Kid

• SaaS Climbs off the Canvas
• Merrill R. (Rick) Chapman
• Editor of Softletter
• www.insearchofstupidity.com
• www.aegis-resources.com

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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

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The Meltdown

• From the late 1990s to 2001
• More than 500 companies
• Received more than 10 billion in VC
• And
• Made nothing

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The Meltdown (cont)
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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

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There Were Successes

• Salesforce.com ASP poster child
• HR
• Project Management
• E-commerce
• CRM/SFA
• Anything NOT mission or data critical

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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!

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SaaS vs. Desktop/Client Server(in billions)
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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

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Why are Things Improving?

• Hardware infrastructure improving
• 60 of Americans have high-speed access
• 99 of businesses
• Better interfaces
• AJAX, DHTML, etc.

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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

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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

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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

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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 its hard for them to
  by Siebel

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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

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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)

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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

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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

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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
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And There are Some other Nice Benefits

• Freedom from license compliance issues
• Purchases
• Receipts
• Certificates
• Best-business practices compliance
• Sarbanes-Oxley, section 404

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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

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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)

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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 didnt give
  you upfront

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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

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Pricing Issues

• For SaaS, its 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

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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

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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)

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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 doesnt do what it says, theres
  nowhere to hide

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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

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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

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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

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Comeback Kid

• The Re-Rise of the ASP as SaaS
• www.softletter.com