SaaS Economics

The proliferation of SaaS has changed the way companies pay for and maintain software. The following are some of the most important things to think about when you consider budgeting and SaaS:

Entry costs are lower with SaaS. When implementing a SaaS application, customers are often able to get a free trial period to assess the software. Additionally, companies can slowly ramp up the number of seats (users) who have access to the application. With traditional on-premises implementations, a company must make a large capital expenditure upfront to acquire the application. It then must install the software and possibly purchase additional hardware to support the implementation.

Maintenance and support fees are a thing of the past with SaaS. With on-premises applications, there’s a perpetual license software model. Companies need to enter into a contract with a software vendor or services provider to keep software up to date and free from glitches and security vulnerabilities. These contracts are expensive — typically, ranging from 10 to 25 percent of the original purchase price. SaaS sheds these contracts, and instead includes such support in the access fees.

Upgrades are no longer costly, prolonged procedures with SaaS. Upgrading a traditional, on-premises application often requires months of testing, the allocation of large budgets, and teams of consultants to ensure that the implementation runs smoothly. Companies often skip upgrades in order to reduce the headaches involved. In a SaaS model, upgrades are performed behind the scenes by the SaaS vendor. All the customers receive the new, updated software at the same time without having to manage a frustrating upgrade process. This ensures that SaaS users are always running the most up-to-date version of the software.

Occasionally, SaaS updates cause problems. For example, if you’re running a third-party application that gathers data from the SaaS, the application may fail because the SaaS is no longer working as expected. These problems are typically kept to a minimum because they have to architect their solutions to support a wide variety of partners and their platforms.