Software as a Service: Path to Profitability

Software as a Service: Path to Profitability

The hype about Software as a Service (SaaS) today reminds us of the dot com era, not so long ago. The only difference is that this time around, other than the technology push, there is a demand pull created by the harsh economic downturn of 2008. So what is the business model that combines the ‘push–pull’ factors into a sustainable revenue model? There are not many examples of successful SaaS models for large manufacturing enterprises. The launch of On Demand CRM, Business Intelligence and some Enterprise Wide Solutions are yet to make a big splash in the large enterprise market.

Clearly the SaaS model is not a panacea for all business problems, and not all businesses are suited for this model. There is a distinct road map on the path to profitability through an effective SaaS model. The authors share their perspective through an innovative model.

The factoids presented in the paper constitute the original thoughts & research of the authors, acquired in the process of discovery of the best case road map for our own On Demand Solution.

Introduction

We strongly believe that for any technology-based business model to be successful there is a need to evaluate the feasibility of the application of that technology on three fronts. These are:

? Market Feasibility – Is there a market need / pull for the model?
? Technical Feasibility – Is the technology model established and stable?
? Commercial Feasibility – Is the commercial viability established? What is the risk – return trade off? Does the break even happen before the next technology wave?

Based on our research, we strongly believe there is adequate evidence to show feasibility of the first two points mentioned above. We have therefore consciously stayed away from topics that address market and technology feasibility.

Our attention was therefore focused more on the commercial feasibility aspect. Our preliminary discussions with subject matter experts, analysis of business models of various companies and review of published data sources helped us build the essential model for SaaS profitability. The build up to profitability is best captured in the following exhibit in terms of the essential cost components.

Guideline for reading this exhibit: This data model has been drawn from TCS research. The provider is the front end to the customer. The provider will need to source key requirements ‘In‘ or from external vendors. These include the database, base product, hosting (ASP), and sweat equity towards development and sales & general expense of the provider. The figures illustrated in the exhibit represent typical industry values for currently available SaaS solutions.

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