Comeback KidComeback Kid

SaaS Climbs off the CanvasSaaS Climbs off the Canvas

Comeback KidComeback KidThe Re-Rise of the ASP as The Re-Rise of the ASP as

SaaSSaaS

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Comeback KidComeback KidSaaS Climbs off the CanvasSaaS Climbs off the Canvas

Merrill R. (Rick) ChapmanMerrill R. (Rick) ChapmanEditor of SoftletterEditor of Softletter

www.insearchofstupidity.comwww.insearchofstupidity.comwww.aegis-resources.comwww.aegis-resources.com

Quick DefinitionQuick Definition Software as a Service is…Software as a Service is… A hosted applicationA hosted application You rent itYou rent it Method of delivery not importantMethod of delivery not important

• Web interfaceWeb interface• Terminal servicesTerminal services

If they buy and install, not SaaSIf they buy and install, not SaaS Subscription pricing is not SaaSSubscription pricing is not SaaS

The MeltdownThe Meltdown From the late 1990s to 2001From the late 1990s to 2001

• More than 500 companies…More than 500 companies…• Received more than $10 billion in VC…Received more than $10 billion in VC…• And…And…• Made nothingMade nothing

The Meltdown The Meltdown (cont)(cont)

Why?Why? The applications suckedThe applications sucked Multiple warmed over “office suites”Multiple warmed over “office suites” Foolish predictions of the end of the Foolish predictions of the end of the

desktopdesktop Failure to account for “the piracy” Failure to account for “the piracy”

discountdiscount Infrastructure unable to support Infrastructure unable to support

grand dreamsgrand dreams

There Were SuccessesThere Were Successes Salesforce.com ASP poster childSalesforce.com ASP poster child HRHR Project ManagementProject Management E-commerceE-commerce CRM/SFACRM/SFA Anything NOT mission or data criticalAnything NOT mission or data critical

What About TodayWhat About Today No longer “ASPs”No longer “ASPs” Software as a ServiceSoftware as a Service

• SaaSSaaS SaaS Market GrowingSaaS Market Growing But still not that bigBut still not that big

• Gartner thought $7.4B in 2004Gartner thought $7.4B in 2004• Ovum thought $132B!Ovum thought $132B!

SaaS vs. Desktop/Client ServerSaaS vs. Desktop/Client Server(in billions)(in billions)

$0

$20

$40

$60

$80

$100

$120

2004

SaaS

DT/CS

But Thing Will ImproveBut Thing Will Improve Probably 10% to 15% next yearProbably 10% to 15% next year Things should get even livelier…Things should get even livelier… Maybe 30% to 40% growth over the Maybe 30% to 40% growth over the

next several yearsnext several years Much of the growth will be Much of the growth will be

cannibalization of existing application cannibalization of existing application basesbases

Much in new verticalsMuch in new verticals

Why are Things Improving?Why are Things Improving? Hardware infrastructure improvingHardware infrastructure improving

• 60% of Americans have high-speed 60% of Americans have high-speed accessaccess

• 99% of businesses99% of businesses• Better interfacesBetter interfaces

AJAX, DHTML, etc.AJAX, DHTML, etc.

Why are Things Improving?Why are Things Improving? Software infrastructure is appearingSoftware infrastructure is appearing

• SOASOA• GoogleGoogle• AmazonAmazon• YahooYahoo

Several idiots have allowed their Several idiots have allowed their data to be compromiseddata to be compromised

Data-protection standards are in Data-protection standards are in developmentdevelopment

Companies are Looking at New Companies are Looking at New Vertical MarketsVertical Markets

Distance LearningDistance Learning• E-learningE-learning

Shop ConnectShop Connect• Marketing for auto repair shopsMarketing for auto repair shops

Mark MonitorMark Monitor• Real-time domain monitoringReal-time domain monitoring

LiveCapitalLiveCapital• Online credit scoringOnline credit scoring

And the list goes onAnd the list goes on

And the Smart Companies are And the Smart Companies are Avoiding HorizontalsAvoiding Horizontals

Avoid “office” warsAvoid “office” wars Stay away from entrenched Stay away from entrenched

application markets dominated by application markets dominated by Microsoft, Adobe, Oracle, etcMicrosoft, Adobe, Oracle, etc

There is an ongoing struggle There is an ongoing struggle between “fat” vs. “thin” computing between “fat” vs. “thin” computing and you will be squeezed no matter and you will be squeezed no matter where you standwhere you stand

And the Smart Companies are And the Smart Companies are Avoiding Horizontals Avoiding Horizontals (cont)(cont)

Commodity products are not Commodity products are not candidates for SaaS because they do candidates for SaaS because they do not offer otherwise unaffordable not offer otherwise unaffordable technology to customerstechnology to customers

A SMB can buy Salesforce; it’s hard A SMB can buy Salesforce; it’s hard for them to by Siebelfor them to by Siebel

SMBs SMBs areare the Sweet Spot the Sweet Spot SMBs are where the action is:SMBs are where the action is:

• Firms from $1M to $50M are where most Firms from $1M to $50M are where most SMBS are making salesSMBS are making sales

Source: SoftletterSource: Softletter

Vertical markets are also a good Vertical markets are also a good place to be; targets can be definedplace to be; targets can be defined• There are 70K auto service shops in the There are 70K auto service shops in the

US; avg. yearly revenue $250KUS; avg. yearly revenue $250K• Focus on the M in “SMB”Focus on the M in “SMB”

SMBs SMBs areare the Sweet Spot the Sweet Spot When pricing is transaction- or When pricing is transaction- or

bandwidth-base, the larger the bandwidth-base, the larger the company the more attractive “own” company the more attractive “own” lookslooks

Smaller companies have CFOs who Smaller companies have CFOs who decide on capital cost (own) vs. decide on capital cost (own) vs. current expenses (rent)current expenses (rent)

The Economics are Very AttractiveThe Economics are Very Attractive Rapid growth is possibleRapid growth is possible

• Salesforce.com opened its doors in Salesforce.com opened its doors in 1999; by 2003 had reached revenues of 1999; by 2003 had reached revenues of $66M$66M

• SaaS model tends to under-report SaaS model tends to under-report revenue due to multi-year service dealsrevenue due to multi-year service deals

• Deferred revenue not reported on Deferred revenue not reported on current bookscurrent books

The Economics are Very Attractive The Economics are Very Attractive (cont)(cont)

Most SaaS firms are collecting Most SaaS firms are collecting revenue in advance or in conjunction revenue in advance or in conjunction with the delivery of serviceswith the delivery of services

This is contrary to conventional This is contrary to conventional wisdomwisdom

Subscription-based companies often Subscription-based companies often wait months to see invoices fulfilledwait months to see invoices fulfilled

The Economics are Very Attractive The Economics are Very Attractive (cont)(cont)

Predictable growthPredictable growth• Less “blank slate” projectionsLess “blank slate” projections

Development costs are significantly Development costs are significantly lowerlower• SaaS range between 7% to 12%SaaS range between 7% to 12%• Enterprise software between 20% to Enterprise software between 20% to

22%22%

Source: SoftletterSource: Softletter

And There are Some other Nice And There are Some other Nice BenefitsBenefits

Freedom from license compliance Freedom from license compliance issuesissues• PurchasesPurchases• ReceiptsReceipts• CertificatesCertificates

Best-business practices complianceBest-business practices compliance• Sarbanes-Oxley, section 404Sarbanes-Oxley, section 404

SaaS as a PlatformSaaS as a Platform SaaS companies are increasingly SaaS companies are increasingly

opening up their products to vertical opening up their products to vertical markets, i.e. Distance Learningmarkets, i.e. Distance Learning

An alternative to DVD/CD-based An alternative to DVD/CD-based content programscontent programs

The company has a developing OEM The company has a developing OEM marketmarket• Application for the retail car marketApplication for the retail car market

Some Reality ChecksSome Reality Checks Sales and marketing costs are no Sales and marketing costs are no

lower than those faced by traditional lower than those faced by traditional software companiessoftware companies• 20% to 24% privately-held firms20% to 24% privately-held firms• 40% + for public companies (with the 40% + for public companies (with the

exception of Microsoft)exception of Microsoft) SaaS 45%+ sales and marketing SaaS 45%+ sales and marketing

costs (source: Softletter)costs (source: Softletter)

Some Reality Checks Some Reality Checks (cont)(cont)

Traditional licensing empowers Traditional licensing empowers vendor lock-invendor lock-in• They pay a big amount of money up They pay a big amount of money up

front (eventually)front (eventually)• They pay even if the product has a few They pay even if the product has a few

“issues”“issues” SaaS removes much of this leverageSaaS removes much of this leverage

• Switching is still painful, but they can Switching is still painful, but they can fund it out of that big lump of dollars fund it out of that big lump of dollars they didn’t give you upfrontthey didn’t give you upfront

More Reality ChecksMore Reality Checks As mentioned, cannibalization is As mentioned, cannibalization is

inevitable for companies selling inevitable for companies selling licenseslicenses

Your SaaS product will appeal to Your SaaS product will appeal to SMBs/verticals in its first iterationSMBs/verticals in its first iteration

A focused subset of featuresA focused subset of features A steady bulking up of the productA steady bulking up of the product Parity achieved in about two to three Parity achieved in about two to three

release cyclesrelease cycles

Pricing IssuesPricing Issues For SaaS, it’s a volume gameFor SaaS, it’s a volume game

• New customer costs are very low:New customer costs are very low: $.10 to $.50, on average (Source: Softletter)$.10 to $.50, on average (Source: Softletter)

Pricing models are becoming Pricing models are becoming increasingly granularincreasingly granular• Heavy volume users of your product are Heavy volume users of your product are

your least profitable customeryour least profitable customer

Pricing Issues Pricing Issues (cont)(cont)

Most pricing models have three to Most pricing models have three to five tiersfive tiers

You WILL be tied to a license model if You WILL be tied to a license model if you have an installed baseyou have an installed base

You can also charge for:You can also charge for:• BandwidthBandwidth• StorageStorage

But customer acquisition needs will But customer acquisition needs will squelch many of these attemptssquelch many of these attempts

Service IssuesService Issues An era of “white glove” customer An era of “white glove” customer

service is comingservice is coming Companies we have interviewed Companies we have interviewed

estimate that customer service is estimate that customer service is going to become a significant cost going to become a significant cost center: 15% to 20%center: 15% to 20%

The SaaS model requires you to be The SaaS model requires you to be nicenice to people; no one is the phone to people; no one is the phone company (yet)company (yet)

SLA IssuesSLA Issues In a sense, the issue of SLAs is In a sense, the issue of SLAs is

almost not relevant to the SaaS almost not relevant to the SaaS marketmarket

Yes, there will be SLAsYes, there will be SLAs But…But… If your product doesn’t do what it If your product doesn’t do what it

says, there’s nowhere to hidesays, there’s nowhere to hide

Salesforce ManagementSalesforce Management A tremendous change in mindsetA tremendous change in mindset The traditional $50K, 5%, $1M a year The traditional $50K, 5%, $1M a year

paradigm does not fit well with the paradigm does not fit well with the SaaS modelSaaS model

Significant SaaS sales require Significant SaaS sales require cultivation over timecultivation over time

Salesforce Management Salesforce Management (cont)(cont)

Significantly higher commissions Significantly higher commissions upfrontupfront• As high as 40%As high as 40%

Then a steady ramp down as the Then a steady ramp down as the account growsaccount grows• Decrement in stages to between 5% to Decrement in stages to between 5% to

10%10%

Salesforce Management Salesforce Management (cont)(cont)

The trick is to balance the need to The trick is to balance the need to develop new account vs. the develop new account vs. the necessity of nurturing existing necessity of nurturing existing businessbusiness

Attempts to cut off the account from Attempts to cut off the account from the salesforce have not been very the salesforce have not been very successful; relationships and successful; relationships and professionalism are lostprofessionalism are lost

Comeback KidComeback KidThe Re-Rise of the ASP as SaaSThe Re-Rise of the ASP as SaaS

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