The recent success of the NetSuite IPO on the U.S. stock markets has heightened interest in software product companies with the business model of ‘Software as a Service’ or ‘SaaS’ as it is popularly known. SaaS has become an important component of the industry, and even large software companies such as SAP and Microsoft have announced, or already have, SaaS offerings.

The basic premise of SaaS is that the software is not sold as license plus maintenance fee that gives the customer ownership of the software, but rather as a ‘subscription’ where the software is ‘rented’ and the customer pays a monthly fee based on the usage. Most SaaS companies charge per user per month (PUPM) fee for the software usage. Typically, the PUPM fee is a fraction of the traditional software costs and this significantly reduces the upfront cost a customer has to pay for software. As an example, a typical enterprise grade CRM software may cost hundreds of thousands of dollars in license fees alone while PUPM cost for companies selling CRM as SaaS would be around fifty to hundred dollars. In the traditional way of buying software, in addition to the one time license fee the customer ends up paying for professional services and annual maintenance. The annual maintenance fee itself could be a significant cost in the years following the purchase. Examples of some popular SaaS software are CRM applications from companies like Salesforce.com and NetSuite (at Xora we use NetSuite to manage our customer support operations). Other popular SaaS applications that are starting to get used by enterprises are Gmail and Google docs.

Besides lowering the upfront investment, SaaS takes away the customer’s pain point of installing, deploying, and maintaining the software, thus reducing hardware and people costs. In today’s dynamic environment where business needs change constantly, SaaS provides the ‘on demand’ flexibility in which user licenses can be added or
removed easily, thus customers are not stuck with what they do not need.

Internet is the main enabler of SaaS; obviously, without the Internet such a business model would not have been possible. Currently, fast Internet connection is getting widely deployed in traditional non-IT businesses, security over the Internet has drastically improved over the years, and businesses feel much more comfortable transacting business over the Internet and having their data reside on vendors’ servers. Use of Web2.0 technology has substantially reduced the usability gap between desktop and web applications. All this has led to wider adoption of SaaS.

From the SaaS vendors’ point of view, it takes a lot of effort to build sustainable SaaS business. Since the PUPM fees are very small, the revenues have to be made in volumes, and volumes take time to build. Plus SaaS applications take large infrastructure to deploy (‘fat’ Internet pipes, clusters of application servers, large database servers, IT staff to manage and maintain them, etc.) and calls for a big capital investment. Quality, robustness, performance, and scalability become paramount issues that must be managed properly – the more successful the SaaS vendor the bigger these issues become. Customer data security, safety, and integrity become crucial components and need to be addressed comprehensively. Basically, the SaaS business needs to be built the old fashioned way – with a lot of hard work and effort!

Not all the software are suitable for delivering via SaaS and there will always be a need for packaged software that is installed on desktops or within a company premise. In the beginning it was predicted that a lot of software will be available as SaaS, but in reality making traditional software ‘work’ as SaaS has been found a hard task, and thus even today the choice of software available as SaaS is limited. But the ease of use and the inherent cost advantages will see more and more software being delivered as SaaS. Consequently it may not be long before SaaS is classified as a mainstream way of selling software as opposed to a
separate category.