Three reasons for software vendors to sell more SaaS
SaaS vs On-premises from the perspective of software vendors for the financial and healthcare industries
If recurrent revenues aren’t a significant part of your bottom line, then you’re probably part of the last wave of software providers converting to SaaS.
And this is probably because your target market has been reluctant to buy SaaS or because a particular feature of your market makes it less attractive for SaaS players.
In particular the financial and healthcare industries are among the latest industries to buy software as a service. Companies in these industries are subject to strict regulations on data protection. They also tend to be more risk averse than others, so the idea of losing control on infrastructure and data have scared them off since the early days of SaaS. But change is happening, after years of hesitation, they’re now moving fast towards SaaS.
For some corporate customers , roadmaps and needs are extremely unstable and change occurs too often. Politics and organizational changes make them shift focus very often. In these markets, SaaS present much higher risk levels for software providers then on-prem business models. That’s particularly for tier 2 and tier 3 banks, insurance companies and other corporations. Bad customers affect SaaS companies more than on-prem software vendors. ISVs wary of risk has been avoiding this model.
But in most cases, benefits of SaaS as a business model for software vendors outweigh risks. In some cases, software providers are compelled to transition to SaaS because of shifting market dynamics. So here are three reasons to launch a SaaS product or to put more emphasis on your SaaS business if you’re still new to SaaS.
Investors expectations: revenue stability, growth, resilience and performance transparency
Investors love SaaS. PE, VCs and capital markets all do for a number of reasons, this is both a reason and a consequence to the performance of SaaS companies. Investor tend to inject more money into software as a services companies so they grow faster in average. It’s also true that SaaS companies inherently outperform non SaaS software providers. That’s a why investors love them and inject more money in them.
First, from the perspective of an investor, a SaaS company is more stable and less risky than an on-premise software one.
Indeed, if a company relies on a large installed base for recurrent revenue, it’s less vulnerable for market conditions and for internal changes. If you’re selling software licences, losing a key partner or a super star sales director will translate into much lower revenue than if you have an installed base of customers paying regularly. If you have strong lock-in and low churn rates, even competitors can hardly affect your revenue in the short term. Companies who rely on sales for revenue are more vulnerable for competitive pressure.
Investors love all of this. They also love the fact that as a business model SaaS fosters growth which translates into better IRR for them. For all these reasons, if you want to raise money, you better be a SaaS.
Until recently, investors were not willing to invest in software vendors in emerging markets, the cashflow disadvantage and the shortage of funding made SaaS as a business model un-practical for emerging market software vendors. This has changed over the last 5 years. Investment are widely available for any vendor willing to reap the benefits of SaaS
Growth and market leadership
The SaaS business model helps software providers grow in two different ways besides helping them with fund raising — which is by itself a significant contributor to growth.
First , SaaS speeds up sales substantially by making it easier for customers to budget their software purchases. It’s easier for a manager to find budget for a SaaS than for an on-premises solution. One particular exemple I’ve experienced is a team leader who identified a solution for his $200K a year productivity problem. He fought for 3 years to get $1M budget to buy a solution and couldn’t get himself heard. It’s only in his fourth time trying that he proposed a SaaS solution costing $250K upfront and $150K a year. That was when management listened.
SaaS also makes more sense to the finance function as companies shift IT expenditures from CAPEX to OPEX. Mobilizing capital for non-essential business activities make less sense when the company is subjected to pressure to use capital wisely. Investors demand that companies only invest in core activities to optimize capital utilization.
Second, SaaS opens up new market segments as it provides software companies more flexibility with pricing and on-boarding. With SaaS, it’s easier to get customers to try before committing, it’s easier to offer usage based pricing, it’s also easier to acquire customers in new geographies.
SaaS helps companies access new markets and establish market leadership
New customer expectations and new technology stacks
Customers who plan to shift substantial part of their infrastructure to cloud providers are increasingly requiring to buy software as a service. It is simply starting to be a market standard and customers are starting demand SaaS solutions.
Technical considerations are often behind these new expectations. Integration using IaaS is definitely one of the main reasons. It makes it easier for integrations with existing system to connect via IaaS solutions such as MuleSoft. The increasing adoption of infrastructure as a code approach also favours SaaS offering.
So if you’re not offering a pay as you go solution, you’re probably excluded from a number of deals. This is only the tip of the iceberg but this has been already noticed by vendors. Thus the increasing interest in SaaS.
BUT… don’t take it lightly
Although it looks easy transition to SaaS of an established player is by no mean trivial. It actually poses some real challenges from the technology, financial and product perspective.
Ressources
from microsoft https://www.cloudmarket.com/media/vutkbccs/grow-your-isv-business-with-saas.pdf
from cognizant https://www.cognizant.com/InsightsWhitepapers/Cloud-Brokers-Can-Help-ISVs-Move-to-SaaS.pdf
