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
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?
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.
Here are some places to read more about SaaS Software:
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