Smart SaaS

The buying habits of software buyers over the past couple of years has really shifted. The way software was sold in the recent past was by promoting its revenue-producing benefits or the Return On Investment (ROI). This changed when the Great Recession hit the broader software market and buyers started thinking less about ROI and more about reducing or controlling their overall operational costs.

Between 2008-2009 this was a natural reaction by most businesses because their revenues began to dry up and they needed to reduce costs, payrolls and other investments in order to survive.   This was when SaaS all of sudden made a lot of sense to software buyers because:

• They could try the software before they bought it
• Pay for the software through a subscription, usually out of the company’s operating budget
• Only buy the software functionality they were going to use
• The SaaS provider paid for and managed all of the required infrastructure
• It was possible to get the software up and running very quickly

During this period of time most SaaS companies sold their products based solely on their Total Cost of Ownership or TCO benefits.  It was possible to make a strong case around shifting the software buyer’s costs from their capital budgets to their operating budgets, and this was attractive since most businesses were focused on conserving their cash.  This is why leading SaaS firms like Salesforce.com and SuccessFactors enjoyed very strong Compound Annual Growth Rates, usually in excess of 40%, even during the depths of the Great Recession.

A subtle benefit that buyers started realizing was that purchasing a software service was that all of the required software support and management costs like facilities, hardware, power and even staff, were no longer needed.  So companies could take fixed costs associated with facilities, infrastructure and staff and make them a variable expense by purchasing SaaS.  This is a powerful benefit because if the economy is bad then it is easy to dial down the costs and use less of the service and if things get better, then it is easy to add more capacity or functionality.  This shifting of fixed expenses to variable expenses continues to be popular among software buyers even now, given the instability in the economy.

As more businesses continue to look for ways to streamline their costs and improve overall agility, SaaS products are a nature enabler but buyers are starting to become more skeptical of blanket TCO savings claims.   Smart SaaS firms classify their product’s cost savings and business benefits in more of a tiered business justification framework that allow the software buyers to more easily build their own internal business cases.  By structuring costs and benefits in this way they have been able to retain their credibility during the sales cycle.

Here is an example of a simplified tiered cost/benefit structure for a SaaS product purchase that we have used with several of our software clients.  Costs are classified into hard costs, or as CFO’s refer to them as ‘real costs’ and then there are soft costs which are more productivity-based benefits.   Then there are strategic benefits that are not necessarily cost-based but provide additional benefits at a higher level.  Some of these may actually be revenue opportunities or ROI-based benefits.

Hard Cost Savings