SaaS businesses have to usually figure out how to deliver enough value to customers so as to continually earn their business month after month, year after year. The risk shifts to the vendor — which increases adoption.

One thing that’s different (that hasn’t been talked about much yet) is the capital requirements for SaaS businesses. The quality of revenue is high and it has a lot of benefits, but it takes more cash because to some degree, a SaaS company is financing it’s customers.

At its best, SaaS is about simplifying the vendor/customer relationship: Easy trial, easy purchase, easy adoption, easy operations, easy management.

Making the customer’s life easier increases willingness-to-pay. It is then up to the vendor to make sure that it architects its business appropriately to be able to serve the customer in a profitable manner.

Let me play devil’s advocate for a bit. In consulting, SaaS has begun to have the stigma of being a buzz word. It’s today’s “Web 2.0″ phrase. That aside, I’ve run up against some real-life problems getting client buy-in for these type of projects.

First, SaaS is rarely commercially viable if it stands on its own. Most of the time, you’re not able to attack a market where you’re effectively selling “the same old thing” that we all know is better (think replacing something like an ERP application with a service-based one). You run into a lot of resistance to service models because a client is no longer owning something, and the difference is not immediately perceived as valuable. Quite often, you’re looking at integrating your new software service into existing applications, and that’s where the real costs start to add up in terms of professional expertise and development. To get a big enough chunk of the market, you may have to go through this process several times.

Second, the value proposition, and the idea of recurring or transactional costs, make it tough to stomach for many small and medium businesses (SME’s). I’ve heard many owners complain “you’re charging me $X per month for Y software, when I’m not even going to own it?” Fundamentally, a lot of market education still needs to take place about how SaaS is beneficial, and MRR is something that many businesses just can’t handle paying right now. The other side of this is that a customer often recognizes that the ongoing costs of SaaS to a software vendor are substantially less than than the monthly sticker price (especially if it’s a per transaction charge - there is almost no per transaction cost to base that charge on). These crafty folks will do some crazy total cost of ownership math to determine if over the lifetime of the software they would be better of to build it in-house or buy a more tangible resource from another vendor. In short, they’d rather take a lease for tangible software than feel like they’re paying too much for intangible software, even if the TCO is the same.

I would argue that ubiquitous SaaS, especially within the SME space, is going to be years away. That’s no surprise, since SME’s typically lag behind the curve anyways. It is going to take more proven revenue models (read ROI for the customer), and more customer education for it to really penetrate the skepticism of today’s business owner.

Also McKinsey Quarterly on Delivering SaaS:
http://harshjshah.googlepages.com/McKinsey_Delivering_SaaS.pdf

cheers
h