Software-as-a-Service (SaaS) or Subscription Software is a means of licensing software designed to keep the vendor and clients objectives aligned. In the traditional license and support model the vendor is not incentivized to upgrade or fix problems as routinely because most clients are affectively locked in and have provided most of the their revenue upfront. In the subscription model, the vendor takes many of the client’s initial costs and bears that burden upon themselves. This includes hardware, support, application consultants, support staff, and other infrastructural burdens. It is because of this that many subscription vendors have to provide outstanding customer service.

Vendors love/hate relationship with SaaS Software

Most subscription software providers lose money for the first 6-18 months on a signup. Shifting the cost to the vendor allows clients to have a significantly lower upfront cost and also makes it easier to break away. This forces the vendor to focus on keeping the customer happy.

Having monthly/yearly payments keeps the vendor constantly in the eye of the client making constant communication about feature requests and desired enhancements. Although many enhancements can be added as new modules, typically in SaaS licensing arrangements many bug fixes and minor updates are pushed out routinely. In fact one of the largest benefits of SaaS is that the vendor can manage a single code base across all of its customers. It was the customization of software by consultants that made it difficult for large enterprise software companies to adequately support traditional license/support software models.

What are the SaaS Software Cost Savings

Although many perceive SaaS as cheaper in the 3-5 year time period and more expensive long-term, that is not a realistic perception. In the past many clients choose to stay on Version 2.3 of a product for years (even when Version 5.7 was available) because of the pain and cost of upgrading. The SaaS model has alleviated that problem and includes those version releases.

Here is a more adequate portrayal of the costs of SaaS licensing from the Client perspective*:

Sample EAM & CMMS product

Subscription License Support
2 5 1

Yearly Expenses

saas-cmms

What is that big bump on year 6… remember you need an upgrade. Even if the upgrade is free you would have to include the consultant time, internal analysis, downtime… We decided not to go into all of the other areas saves you money, but decided to show you that on just software. SaaS is a considerable savings.

What does that look like cumulatively?

saas-eam

That really shows a smoothing out of the cash flow. Ultimately that is one of SaaS’ greatest advantages it evens out the cash flow on a yearly basis and makes the pricing predictable on a monthly/yearly basis.

Recap, SaaS’ major pluses:

  • Lower upfront costs
  • Lower infrastructural costs
  • Lower IT costs
  • Smoothing out yearly expenses
  • Easier to leave
  • Vendors typically provide better customer service/support

*Reminder – additional IT savings on server, software licensing (DB) and support are not included. Numbers are meant for illustrative purposes only.

A plug for the world’s best SaaS EAM and SaaS CMMS.

Here are some places to read more about SaaS Software:

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  • Linda Day Harrison

    You cannot impress upon this subject enough in our industry. The future is definitely not software installed on machines. That is just a thing of the past and is unfortunately cost prohibitive. In order to reduce skyrocketing overhead, PM and FM firms must look at outsourcing their technology and adopting new ideas about improving efficiencies and providing 24/7/365 access to systems.

    Thanks,

    Linda@Managerlabs.com

    P.S. See my blog article that introduces the term to the industry too! Great minds think alike!

  • Mark N

    The SaaS example above does not account for implementation costs in Y1 nor does it include increases upong contract renewal, so Y1 would be much higher and the slope of the line is NOT FLAT but upward.
    When you really dig into the math you quickly find that SaaS is the biggest rip-off since the Ponzi scam. For very small cusotmers who dont have an IT Dept. fine, go SaaS and over pay as you dont have many other options. But for enterprise software, SaaS is a complete joke.

  • http://www.mintek.com stuart smith

    Implementation costs exist in both scenarios and with the cost of upgrades & increase in support the graph may be off slightly but it is representational of reality