Why SaaS Popularity Means New Business Opportunities for Technology Firms

InfluenceOfSaas

The last few years have seen the success of Software-as-a-Service, or SaaS, spread beyond poster child Salesforce.com to many other well-known companies: Taleo, NetSuite, SuccessFactors, Concur, and more.  But there is always a contingent that asks: is SaaS just hype? Or rather, is this a permanent change in the technology landscape?


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It does seem that an overwhelming number of software companies are opting to release their products from the cloud as opposed to CD form. The world now accepts Saleforce.com’s initial premise of software living on the Internet as a core tenet, and this methodology is quickly spreading beyond software. All around us we see everything from consumer product companies to medical services adopting the subscription model.

In fact, if you look beyond SaaS, you'll see the subscription model taking hold everywhere. Take for instance: Zipcar, instead of buying one car, subscribe to an entire fleet; Netflix, don’t buy DVDs, subscribe to a service and get as many movies as you want for as long as you want; Bag Borrow or Steal, as noted in the “Sex & The City Movie,” why spend all your savings on one designer bag when you can have access to every design for every occasion? There are also medical practices moving to a membership model, accountants moving to a retainer model, even farms allowing buyers to subscribe monthly for fresh produce. On Wall Street, the one bright light is the wealth management industry, with a fees-based approach, based on assets under management, which translates to steady, predictable revenues.

And it’s no wonder all of these industries are moving towards the subscription model. With more selection, greater control, and fewer upfront costs, subscription services make it easy for everyone to buy less and subscribe to more.

So why is this model so attractive? The reasons that made SaaS the dominant model for creating and delivering applications are the same reasons why subscriptions are taking hold in all other industries:

  • Vendors love it – The recurring revenue system that is key to a subscription business allows companies to focus on delivering high customer value to a larger customer base, while enjoying a consistent and predictable revenue flow.

  • Customers love it – Customers are able to choose from many pricing and packaging options. And the on-demand element of allows them to switch options, or cancel service, easily and at any time.

  • Investors love it – Look at some of the largest Silicon Valley VC firms, the majority of their current portfolios are subscription companies. Investors reward higher multiples for subscription-based businesses.

These reasons have made subscriptions an attractive economic model across industries. However, what many on the everything-as-a-service bandwagon don’t yet know, is that running a subscription business is hard. In the product world, sales, pricing, and fulfillment are simple – a stark contrast to the complexities of the subscription world. Consider:

  • Pricing and packaging options – Competitive pricing and packaging are how subscription businesses create the right offering for various customer segments, and how to drive competitive differentiation. Continuously offering new pricing and packaging options is extremely difficult if there is not a system in place to support this kind of billing.

  • Complex quote-to-cash processes – In the subscription world, the purchase doesn’t stop with the original order – frequent changes from customers and sales are a constant. Orders can come from the Web, face-to-face, or through the call center.  And invoices are generated on a recurring basis, for as long as the customer is a customer. This makes the entire process extremely complex and not supported by traditional systems.

  • Different metrics – The metrics for running a subscription business are significantly different from a single transaction model. New metrics such as MRR, ACV, Churn, and others are needed. Traditional systems do not supply these metrics and subscription businesses simply cannot grow without them.

What can be done to address these needs? How are subscription businesses to grow if the systems they’re using are not designed for how they work? Companies like Salesforce.com spend millions of dollars to build systems to support the infrastructure. New companies that want to adopt this model, or have and are trying to scale, usually don’t have the money or manpower to do this. So how can this movement to everything-as-a-service thrive if companies don’t have the picks and shovels to help build, manage and grow?  For subscription businesses to scale, they need new technologies that are developed just for this unique model.

SaaS has proven the subscription model is here to stay. Subscriptions are the future, for every company size, in every industry. Technology companies have a tremendous opportunity now to build solid, lasting solutions for not just SaaS but all subscription companies. This is the next great monetization of the Internet, how are we going to support it?

About the Author

Tien Tzuo joined Zuora after nine years at salesforce.com. Tzuo was one of the ďoriginal forcesĒ at salesforce.com, which he joined in 1999 as the 11th employee, when the company was still operating out of a house on Telegraph Hill in San Francisco. In his nine years at salesforce.com, Tzuo built salesforce.comís original billing system and held a variety of executive roles in salesforce.comís technology, marketing, and strategy organizations, including building out the product management & marketing organization, serving as chief marketing officer for two years, and most recently as chief strategy officer.

Tzuo personally oversaw the vision, direction, and design of the first 17 releases of Salesforce.comís award winning product line, including overseeing the launch of Salesforce and the AppExchange. In 2004, Tzuo was named CMO of the Year Finalist by the CMO Council and BusinessWeek Magazine. Tzuo is also widely recognized as one of the thought leaders in the software-as-a-service industry. His podcast on the Secrets of Salesforce is widely cited and has been downloaded over 250,000 times since it was first published.

Prior to salesforce.com, Tzuo was at CrossWorlds Software, where he launched CrossWorlds' Telecommunications business unit focused on integration with billing systems such as Portal, Kenan, Amdocs, and MetaSolv, and at Oracle Corporation where he managed several of Oracle's largest Telecommunications accounts, including MCI, NYNEX, Bell Atlantic (now Verizon), and AT&T. Tzuo holds a bachelorís degree in electrical engineering from Cornell University and a masterís in business administration from the Stanford Graduate School of Business.

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