Software as a Service (SaaS) is exploding. With the advent of cloud computing, small developers can deploy SaaS applications at scale without the massive capital expenditures that used to be required for hardware and IT personnel.
Best of all, rather than a “boom and bust” revenue cycle of traditional product development, SaaS products tend to enjoy consistent and predictable product revenue. Consider the following diagram of the revenue stream for a successful software product in a traditional release cycle:
Figure 1: Revenue model. Traditional Software Release
The revenue peaks come with new releases. Then, revenue declines until the next release. Rinse, lather, repeat. In contrast, look at revenue associated with a successful SaaS product:
Figure 2: Revenue model. Software as a Service
Notice that the peaks and valleys are smoothed out. The revenue stream has consistency from month to month without the “boom and bust” cycles that come with traditional software. In addition to this predictable revenue stream, developers don’t worry about amassing the funds for their next release. Neither do they have to add superfluous functionality to justify a new release to consumers. With the traditional model, developers constantly are on the hunt for features to add – because without new features, consumers have no reason to purchase new versions.
Consumers benefit from SaaS
While those benefits are enjoyed by developers, SaaS also provides benefits for consumers. Consumers can allocate a fixed monthly or yearly budget for their software. IT departments don’t need to requisition large sums of money for a new revision of software. Traditionally, software expenditures are hard to prioritize and plan for. Employees are often frustrated by rejected requests for new versions of software due to software budgets being too inflexible to deal with unanticipated new versions. With SaaS, these frustrations are eliminated.
Also, if software does not meet the needs of an organization, it can be terminated after a short period of time without a significant investment. Finding out that expensive software does not work for your organization can be a very costly mistake when purchasing software under the traditional model.
With all of these benefits, there are still pitfalls to be aware of. Under SaaS, customers do not own licenses for their software. When they stop paying for a SaaS product, they have no further access to the software. This makes some customers leery of a perpetual software license.
But truly, what is the value of old software? After all, very few still use their license of Office ’98! Once, cars were the ultimate depreciating asset. No longer. Software is. The value of most software licenses over time is zero.
With that said, a customer must feel like a SaaS product is worth putting their long-term investment into it. Recently, Newton, a SaaS email client, shut down. For most, their $100/yr. subscription was not worth it. Do your homework! See what the market will bear.
The successful SaaS developer will also make sure that their product does not stagnate. This means continual improvement has to be their modus operandi. Users expect that their experience will improve over time and that they will become more productive as time goes on. Continual refinement and improvement (SaaS developers should consider an Agile approach) is the way to retain satisfied customers and gain new ones.
Finally, developers must commit themselves to the preservation and protection of their customers’ data. Imagine the disaster it would be if your customers’ sensitive data were to be leaked. In many cases, you not only are responsible for your own customers’ data, but also their customers’ data as well! When making the leap to SaaS, speak to your cloud provider about data loss mitigation and your developers about security and privacy.
It cannot be stressed enough: if you become a SaaS vendor, this has to be your number one priority. Your customers’ data needs to be treated as if it were more valuable than your own. This is not an option.
The cloud makes SaaS possible for all developers
While it is true that Microsoft, Adobe, and others have benefited from the SaaS model by moving their products to the Cloud, smaller software developers have disproportionately benefited from the SaaS model.
Why? Because they can now compete with companies with budgets much larger than theirs. Not too long ago, it would have been daunting to manage a data room and servers and IT personnel. Today, a single developer can flip on an instance of a server with a few keystrokes and launch a platform that can reach millions.
Consider offering your internal application as SaaS
An interesting thing has been happening more and more: the most unlikely of companies have become successful SaaS providers when they discover that their in-house software can be turned into a SaaS product. Ever use Slack? It was originally an internal messaging system used to help develop a game. But the game was abandoned when they found out that their messaging client had more value than the game they were developing.
What about Basecamp? It too started off life as an internal tool to manage web design projects for the company. Eventually, the tool was leveraged as a SaaS product and became the sole focus of the company Both companies seized the opportunity to turn their in-house software into something useful for the world.
As an independent software developer, I work with companies that are following that same path. One of my clients is My Shop Assist. The founders of My Shop Assist own their own automotive shops. What they found is that no tool on the market was optimized for their line of work, so they commissioned the creation of My Shop Assist and made it available to outside companies as a SaaS. They did it all without a full-time development staff or IT department! The SaaS model for My Shop Assist enabled them to solve not only their own needs but also to profit from it as well.
Cloud providers such as Flint Technologies, AWS, or Azure make this exciting new world possible, allowing you to focus on development and scaling the business, and not the hardware, as your customer base grows.
If you have software that you would like to roll out as SaaS, find a developer and a cloud computing provider. Who knows, you may find, as Slack and BaseCamp did, that a move to SaaS will transcend the current revenue stream of your current business!