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Comeback Kid

Comeback Kid. SaaS Climbs off the Canvas. Comeback Kid. The Re-Rise of the ASP as SaaS www.softletter.com. Comeback Kid. SaaS Climbs off the Canvas Merrill R. (Rick) Chapman Editor of Softletter www.insearchofstupidity.com www.aegis-resources.com. Quick Definition.

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Comeback Kid

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  1. Comeback Kid SaaS Climbs off the Canvas

  2. Comeback Kid The Re-Rise of the ASP as SaaS www.softletter.com

  3. Comeback Kid SaaS Climbs off the Canvas Merrill R. (Rick) Chapman Editor of Softletter www.insearchofstupidity.com www.aegis-resources.com

  4. Quick Definition • Software as a Service is… • A hosted application • You rent it • Method of delivery not important • Web interface • Terminal services • If they buy and install, not SaaS • Subscription pricing is not SaaS

  5. The Meltdown • From the late 1990s to 2001 • More than 500 companies… • Received more than $10 billion in VC… • And… • Made nothing

  6. The Meltdown (cont)

  7. Why? • The applications sucked • Multiple warmed over “office suites” • Foolish predictions of the end of the desktop • Failure to account for “the piracy” discount • Infrastructure unable to support grand dreams

  8. There Were Successes • Salesforce.com ASP poster child • HR • Project Management • E-commerce • CRM/SFA • Anything NOT mission or data critical

  9. What About Today • No longer “ASPs” • Software as a Service • SaaS • SaaS Market Growing • But still not that big • Gartner thought $7.4B in 2004 • Ovum thought $132B!

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

  11. But Thing Will Improve • Probably 10% to 15% next year • Things should get even livelier… • Maybe 30% to 40% growth over the next several years • Much of the growth will be cannibalization of existing application bases • Much in new verticals

  12. Why are Things Improving? • Hardware infrastructure improving • 60% of Americans have high-speed access • 99% of businesses • Better interfaces • AJAX, DHTML, etc.

  13. Why are Things Improving? • Software infrastructure is appearing • SOA • Google • Amazon • Yahoo • Several idiots have allowed their data to be compromised • Data-protection standards are in development

  14. Companies are Looking at New Vertical Markets • Distance Learning • E-learning • Shop Connect • Marketing for auto repair shops • Mark Monitor • Real-time domain monitoring • LiveCapital • Online credit scoring • And the list goes on

  15. Avoid “office” wars Stay away from entrenched application markets dominated by Microsoft, Adobe, Oracle, etc There is an ongoing struggle between “fat” vs. “thin” computing and you will be squeezed no matter where you stand And the Smart Companies are Avoiding Horizontals

  16. Commodity products are not candidates for SaaS because they do not offer otherwise unaffordable technology to customers A SMB can buy Salesforce; it’s hard for them to by Siebel And the Smart Companies are Avoiding Horizontals (cont)

  17. SMBs are the Sweet Spot • SMBs are where the action is: • Firms from $1M to $50M are where most SMBS are making sales • Source: Softletter • Vertical markets are also a good place to be; targets can be defined • There are 70K auto service shops in the US; avg. yearly revenue $250K • Focus on the M in “SMB”

  18. SMBs are the Sweet Spot • When pricing is transaction- or bandwidth-base, the larger the company the more attractive “own” looks • Smaller companies have CFOs who decide on capital cost (own) vs. current expenses (rent)

  19. The Economics are Very Attractive • Rapid growth is possible • Salesforce.com opened its doors in 1999; by 2003 had reached revenues of $66M • SaaS model tends to under-report revenue due to multi-year service deals • Deferred revenue not reported on current books

  20. The Economics are Very Attractive (cont) • Most SaaS firms are collecting revenue in advance or in conjunction with the delivery of services • This is contrary to conventional wisdom • Subscription-based companies often wait months to see invoices fulfilled

  21. The Economics are Very Attractive (cont) • Predictable growth • Less “blank slate” projections • Development costs are significantly lower • SaaS range between 7% to 12% • Enterprise software between 20% to 22% • Source: Softletter

  22. And There are Some other Nice Benefits • Freedom from license compliance issues • Purchases • Receipts • Certificates • Best-business practices compliance • Sarbanes-Oxley, section 404

  23. SaaS as a Platform • SaaS companies are increasingly opening up their products to vertical markets, i.e. Distance Learning • An alternative to DVD/CD-based content programs • The company has a developing OEM market • Application for the retail car market

  24. Some Reality Checks • Sales and marketing costs are no lower than those faced by traditional software companies • 20% to 24% privately-held firms • 40% + for public companies (with the exception of Microsoft) • SaaS 45%+ sales and marketing costs (source: Softletter)

  25. Some Reality Checks (cont) • Traditional licensing empowers vendor lock-in • They pay a big amount of money up front (eventually) • They pay even if the product has a few “issues” • SaaS removes much of this leverage • Switching is still painful, but they can fund it out of that big lump of dollars they didn’t give you upfront

  26. More Reality Checks • As mentioned, cannibalization is inevitable for companies selling licenses • Your SaaS product will appeal to SMBs/verticals in its first iteration • A focused subset of features • A steady bulking up of the product • Parity achieved in about two to three release cycles

  27. Pricing Issues • For SaaS, it’s a volume game • New customer costs are very low: • $.10 to $.50, on average (Source: Softletter) • Pricing models are becoming increasingly granular • Heavy volume users of your product are your least profitable customer

  28. Pricing Issues (cont) • Most pricing models have three to five tiers • You WILL be tied to a license model if you have an installed base • You can also charge for: • Bandwidth • Storage • But customer acquisition needs will squelch many of these attempts

  29. Service Issues • An era of “white glove” customer service is coming • Companies we have interviewed estimate that customer service is going to become a significant cost center: 15% to 20% • The SaaS model requires you to be nice to people; no one is the phone company (yet)

  30. SLA Issues • In a sense, the issue of SLAs is almost not relevant to the SaaS market • Yes, there will be SLAs • But… • If your product doesn’t do what it says, there’s nowhere to hide

  31. Salesforce Management • A tremendous change in mindset • The traditional $50K, 5%, $1M a year paradigm does not fit well with the SaaS model • Significant SaaS sales require cultivation over time

  32. Salesforce Management (cont) • Significantly higher commissions upfront • As high as 40% • Then a steady ramp down as the account grows • Decrement in stages to between 5% to 10%

  33. Salesforce Management (cont) • The trick is to balance the need to develop new account vs. the necessity of nurturing existing business • Attempts to cut off the account from the salesforce have not been very successful; relationships and professionalism are lost

  34. Comeback Kid The Re-Rise of the ASP as SaaS www.softletter.com

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