Selling Through SaaS: Should Your Company Take the Plunge? Software publishers have had to evolve their value proposition to meet changing expectations in the market. Clients are pushing for lower IT costs; yet, they demand more functionality and greater ease of use from their business applications. One solution has been to reduce hardware and networking costs by migrating to the Web and implementing strategies such as outsourced cloud computing and virtualized servers. Those technologies have also enabled publishers to create new shared licensing models, including concurrent and open source licensing.

1. Selling Through SaaS:
Should Your Company Take the Plunge?
Author: Rene Meister
Software publishers have had to evolve their value proposition to meet
changing expectations in the market. Clients are pushing for lower IT
costs; yet, they demand more functionality and greater ease of use from
their business applications. One solution has been to reduce hardware and
networking costs by migrating to the Web and implementing strategies
such as outsourced cloud computing and virtualized servers. Those
technologies have also enabled publishers to create new shared licensing
models, including concurrent and open source licensing.
Another increasingly popular approach to lowering software costs for
customers is to offer software as a service (SaaS). Rather than purchasing
and installing software on their machines, users access software over the
web under a pay-as-you-go model. The publisher is responsible for
hosting and maintaining the application. This paper examines the viability
of the SaaS business model for new and existing software publishers and
discusses the hurdles those companies should expect to cross to be
successful.
Issue 19
Selling Through SaaS:
Should Your Company Take the Plunge?
SaaS Defintion
Wikipedia has a good definition:
„Software as a Service is a model of
software deployment whereby a
provider licenses an application to
customers for use as a service on
demand. SaaS software vendors may
host the application on their own web
servers or upload the application to the
consumer device, disabling it after use
or after the on-demand contract
expires.”
SaaS Advantage
• No Installation required
• Low cost of entry and lower total
cost of ownership (TCO) -
elimination of capital
expenditures
• Faster implementations
• Powerful and secure IT
infrastructure
• Access Data from anywhere
• Automatic upgrades

2. The SaaS Culture – a Sea of Change for
Established Companies
For established companies selling licensed
software, converting to or adding on a SaaS
business model represents a formidable culture
change to their organizations. Licensed software
sales focus more on identifying new customers –
existing customers already own a license. While
there is some recurring revenue from
maintenance agreements and version upgrades,
without new customers, the company could not
survive. The SaaS business model, instead,
focuses on servicing existing customers.
Because users pay only for services received, the
easiest and lowest cost source of new revenue is
to encourage existing customers to renew their
subscriptions.
The result is a more intense and ever vigilant
focus on immediate customer satisfaction by
SaaS companies. Clients will only renew a
subscription if they enjoy the entire software
“experience,” including aspects to which licensed
software vendors may only pay lip service, such
as training and personalization. For SaaS
companies, technical support must be offered in
real time because pay-as-you-go customers can
easily go elsewhere before they pay. Obviously,
marketing a SaaS business model will require a
different strategy, but the culture conflict will be
especially evident in the payment of sales
commissions. Sales of licensed software
produces a high one-time fee that can easily fund
commission payments; whereas, the SaaS
business model delivers revenue in small
increments. The SaaS company will have to be
creative in its sales compensation to properly
motivate a sales team.
It is, therefore, easier for a new, start-up
organization to create the customer-first culture
required for SaaS success, but many established
companies have successfully transformed
themselves to provide a SaaS solution. However,
there are other hurdles to success that must be
considered.
Resources Can Be an Issue
For most SaaS software, engineering costs are
higher whether the company is a start-up or an
established software publisher. Most enterprise
applications are customized to some extent for
the customer’s unique requirements. That
customization is typically performed by the
purchasers of licensed software, or they pay the
vendor or a third party consulting company to deliver
the solution. That’s not the case for SaaS software
providers that must design the capability for users to
customize the application into their software, and it
requires development of a robust user interface to
deliver that functionality.
In addition, development costs are incurred to create
the specialized architecture to support application
customizations for multiple clients, whether those
clients access a single instance of the hosted
application or the SaaS vendor hosts separate
applications for each client. Established companies
have a resource advantage over start-ups in this
regard as current revenue from licensed software
sales can fund the SaaS product development, and
the skilled resources required may already be on staff.
Higher Development Costs, More Resources,
Culture Issues – Why Bother with SaaS?
While companies considering a SaaS solution should
analyze their decision carefully, there are strong
reasons for choosing that business model – most
driven by customer demands. Business software
users have become more discerning of value in their
software purchases. They want lower total cost of
ownership and the flexibility to adjust their licensing
commitment as business circumstances change.
They want to roll out new software quicker and have
users become productive faster.
Importantly, they want to lock down their IT budgets
and know exactly what costs to expect.
SaaS solutions appeal to those buyers. Hosted
solutions eliminate capital investment in hardware,
costs for data-center floor space, and expensive IT
resources. Pay-as-you-go or usage-based pricing
means no large upfront cost for software licenses,
inherent flexibility to address business needs on-the-
fly, and predictable long term costs. Because users
access the SaaS solution online, there are no
software downloads or time-consuming rollouts, and
upgrades are easily implemented by the vendor at the
host server to be instantly available to all users.
And the buyers get it. A recent survey found that 12
percent of U.S.-based companies are subscribing to
at least one major SaaS application today; another 13
percent are currently designing, prototyping, or
implementing their first SaaS application; and 14
percent are planning to do so within the next year.
While Tier 1 organizations were the early adopters,
small-to-medium-sized businesses are now
embracing SaaS twice as fast as those larger
enterprises.

3. savings in capital expenditure since extensive IT infrastructure is not necessary
on-going support and administrative costs are reduced; in some cases, users can dispense with their IT
department altogether
the location of the company’s offices and individual PCs is irrelevant; users can be anywhere
SaaS Wags a Long Tail
If yours is a niche solution, SaaS may
allow you to take advantage of “Long
Tail” marketing theory. Long Tail
refers to a statistical truism that a
larger share of the population rests
within the “tail” of a probability
distribution. As a retailing concept, it
describes the niche strategy of selling
a large number of unique items in
relatively small quantities – unlike
most brick-and-mortar operations that
focus on popular items because of
high storage and inventory costs.
Because online merchants using
centralized warehouses have greatly
reduced storage, distribution, and
inventory costs, they can profitably sell
small volumes of hard-to-find items by
leveraging the Internet to find many
customers. For example, a traditional
brick-and-mortar movie rental store
has limited shelf space and high
overhead. To maximize revenue per
shelf space foot, it must stock only the
most popular movies. On the other
hand, an online vendor can stock a
wider assortment of movies in
centralized warehouses because its
storage and distribution costs are the
same whether the movie is popular or
not. The results prove that those
unpopular movies – the Long Tail –
represent a greater percentage of the
online vendor’s sales.
Software is no different than movies,
and a SaaS business model produces
the low storage and distribution costs
that can enable a niche solution to find
profitability.
Recognize Impediments
As every entrepreneur knows, cash is
king. Unfortunately, a SaaS business
model does not generate the early
cash flow of a successful licensed
software business selling high-priced
software. Venture capitalists have
estimated that a SaaS start-up
requires 70 to 100 percent more
capital investment and a longer time (6
to 7 years) before it can reach a
liquidity event (sale, or IPO).
On the positive side, the market
values SaaS companies higher at that
liquidity event due to the predictable
nature and consistent growth of their
recurring revenue models. And, as
we’ve discussed, by better addressing
customer concerns and providing a
low entry cost, SaaS start-ups can
have a greater probability of success.
Plan for SaaS Success
While marketing a SaaS solution
entails similar objectives, and even
similar tactics, to those used for
licensed software, SaaS solutions
require a different marketing strategy.
SaaS solutions target a different
audience with a different value
proposition.
The SaaS solution’s initial low cost will
create early interest from a
prospective customer, but its other
value offerings, including rapid
deployment, easy updates, reliability,
and flexibility, are often cited as their
deciding factors by subscribers. It
must also be evident to the prospect
that the solution is easy to use and
configure, and that it is easy to
administer (i.e., registration and
subscription renewals). In addition to
marketing the solution’s functional
capabilities, these additional value
elements need to be emphasized as
well.
Importantly, it is also critical to earn
the prospective customer's trust. For
many users, SaaS applications
execute and store critical business
transactions. Users need to be
assured that the application will be
accessible and their data stored
securely for the duration of their
subscription periods.
Long Tail Defintion
Wikipedia has a good definition:
“The Long Tail or long tail refers to
the statistical property that a
larger share of population rests
within the tail of a probability
distribution than observed under a
'normal' or Gaussian distribution.
The concept was popularised by
Chris Anderson in an October 2004
Wired magazine article.
The total sales of large number of
"non-hit items" is called the Long
Tail.”
To the right is the long tail; to the left
are the few that dominate. Notice that
the areas of both regions match.

4. Your SaaS marketing plan should include these
essential steps:
Create a unique marketing strategy designed
specifically for the SaaS solution
Success will require more than simply tweaking the
marketing strategy used for licensed software.
While many of the tactics are identical, the
strategic elements – those relating to your
audience and value proposition – are different.
Market the user experience, not only the
product’s functionality
Users subscribe to the promise that the SaaS
solution will not only deliver software functionality
today, it will provide fast, reliable application
access, secure proprietary information, and deliver
valuable enhancements through the subscription
period. To earn the customer’s trust, announce
the product roadmap and document your record of
delivering on its past milestones. Demonstrate
your reliability and the system’s security.
Build a strong brand
Incorporate the element of trust in your corporate
brand. Customers invest in your company as
much as in the product. Allocate resources to the
task of building your corporate brand to clearly
impart a positive and compelling message.
Market to the IT professional
Although SaaS solutions are not implemented in
the customer’s data center, its IT staff has
legitimate concerns about security, reliability,
performance, and integration with enterprise
applications. Address their concerns early and
provide all the documentation required to answer
any question.
Don’t lose existing customers
In the SaaS business model, current customers
are your best prospects for new business as their
subscriptions expire. Understand that your
customers are also prospective customers and
treat them that way. Make registration easy,
provide an intuitive experience and online training,
make sure they gain value from the software,
inform them of upcoming product enhancements,
and build a community around them.
Manage customer acquisition costs
Customer acquisition is typically the largest
expense a SaaS company faces after initial
development costs, and you won’t have the luxury
of large upfront licensing fees to fund any
mistakes. Make sure that you execute an efficient
customer acquisition strategy.
Create a marketing machine that can match the
speed of your product roadmap
A fundamental advantage of SaaS over licensed
software is the inherent capability to generate
frequent product updates – perhaps, as frequently
as once a quarter. Your marketing department
should also be capable of sustaining that same
rapid pace.
Educate the prospective customers’
purchasing department on SaaS
Purchasing SaaS solutions on-the-fly and as-you-
go are still relatively new concepts to technology
buyers and their legal staffs. From your side,
acknowledge that contract terms and conditions
have not been standardized across the industry
regarding service level agreements, credits, and
subscription terms or pricing. Educate your
prospective customers’ purchasing and legal staff
early in the sales process, and ensure that your
own sales team understands which terms are
negotiable.
Conclusion – Take the Plunge
SaaS is a viable business model that has been
accepted by customers and the investment
community. Solid software applications that
address real customer concerns with competitive
solutions can benefit from SaaS’s inherent cost
advantages over licensed software to attract
market share and build a business.
Management must understand the higher
investment required and build the culture needed
to satisfy the requirements of high-demand users,
but if successful, their work will result in a higher
market capitalization than alternative business
models. For companies considering SaaS,
specific expertise, such as that offered by Frankfurt
Partners, can be the difference between success
and failure.
Frankfurt Partners
Bockenheimer Landstrasse 17
60325 Frankfurt
Tel: (069) 710 455 382
Web: www.frankfurtpartners.com