Is Profitability a Myth in SaaS Model?

Whether software vendors like it or not, today they don’t have a choice other than providing at least one version of their software in a subscription based SaaS model. One single major concern from Independent Software Vendors (ISV) is the “profitability”. There are quite a few myths about profitability in SaaS that are assumed by ISVs. In this blog I am going to take some of the common myths associated with/contribute towards profitability. Let’s take one by one and break it down.

High Volume of Customers: Yes, this is definitely true. ISVs should plan towards having more number of customers as they will need to meet a threshold value to maintain running cost. But doesn’t Salesforce have loads of customers? has reported full year losses of $232 million in 2014, and has $2.5 billion of debt on its balance sheet. You may be interested to read this article Salesforce CFO to Resign

Pricing: Yes, ISVs need to set a right SaaS pricing that can attract their target customer base. But how do ISVs know if they are charging less or more? In a competitive SaaS market ISV’s pricing is always going to be influenced by what their competitors are offering. While ISVs may be puzzled as to how one can quote such low subscription fee, they don’t try to solve the puzzle rather simply copy the cost.

Technically sound product: Of course, you need to have a stable and solid product to service ISV’s customer. But it’s not enough to have a strong technical solution from a development perspective but they also need to have a scalable solution from a deployment perspective. Ironically, the end customer is not going to realize neither of it and they don’t have to in a SaaS model. But, from an execution point of view it’s important for the ISVs to have a solution that is economical and scalable.

No Customization: World has understood that subscription based softwares cannot be tailor made to one’s specific requirement. But the ground reality is you are always going to get request from your customers to do those slight customizations. If your product is not designed to accommodate these customizations in a configurable manner then you end up spending a lot of time and effort.

Payback period: Given the nature of subscription model, SaaS companies have a long payback period. But the question is how “long” are we talking about? After 15 years in the game Salesforce is yet to post a profit. What does this mean for smaller SaaS companies?

SaaS companies cannot just sit and wait for things to happen. While driving sales and keeping customers happy take priority, it’s just not enough for sustaining the business. The inherent nature of SaaS business model requires the companies to continuously optimize their operational aspects so that they stay as economical as possible. This fine tuning of the business and operations model is extremely important for profitability, as even a small change in your way of operating can lead to great savings.

The other trick that SaaS companies tend to miss is by thinking operational optimization is required only when they become large or get more customers. The truth of the fact is once you have more customers you are going to have more problems to solve and all our optimization initiatives will take a back seat.

Smart SaaS companies approach their product not just from functional aspect but also from a business aspect, which is the key to break the profitability myth in SaaS.

Not sure about the maturity of your current SaaS solution? You use the below tool to measure your SaaS maturity – SaaS Maturity Calculator

Print Friendly

Janaki Jayachandran

Janaki serves as the Director of Technology at Techcello. Janaki has more than 15+ years of software development experience. He is responsible for product engineering, support and evangelization of Techcello. Prior to Techcello, Janaki worked with Aspire Systems as Delivery Manager and Practice Manager focused on Microsoft Technologies and SaaS/On-Demand product development. He has worked with several ISVs and enterprises in building multi-tenant, cloud enabled products. He has travelled widely across the US and UK for working with various customers. Janaki is an ardent cloud enthusiast and a prolific speaker at various cloud conferences including Interop, SaaS University, Cloud Connect and Euro Cloud.

More Posts - Website