The Economics of SaaS for technology companies

February 20, 2023

We always see SaaS as a great benefit of companies that use software. But what about companies that BUILD software? Why so much excitement in Start-up investors about B2B SaaS companies?

As a 15-year old company- WebXpress started very much as an on-premise software company. We deployed ASP based software on Netmagic Internet data centers- thus technically we were on "Cloud". But we "installed" a version for every new customer - exclusively for them and typically customized as per their needs.

But then SaaS technology matured and we completely "pivoted" to SaaS as a Game Changer. What has changed??

Game changer # 1: No more customization, only enhancements

  • "Customization" has been the mainstay of Tech Industry for decades. every customer wants his own little tweak and his own "secret sauce". Tech companies are happy to charge a ransom and deploy an army to meet every whim of customer.
  • With SaaS- there are only Enhancements. A SaaS company will get feedback from hundreds of users every day. These are collated by importance, innovation value and urgency. Such enhancements are taken up as a part of road-map and made available to ALL customers.
  • Each customer has a choice to switch on or switch off a particular enhancement. For example, a SaaS company deploys a new alert based on Speed of vehicle. You as customer can set the speed limit, enable or disable the alert, limit it to selected vehicles etc. Choice is yours.

Game Changer # 2: Talent is limited, get most out of them

  • In the customization world- software companies recruit the brightest engineers and then put them on to Fortune 500 clients - to carry out maintenance !! The emphasis is on "billable hours" and "Yield per hour". IITians command more per hour than NITians and so on. Very soon- the talent gets frustrated and moves out. Thus, you need a large bench.
  • IN the world of SaaS- the talent gets to work on real world business problems and can expect to see what they build in "production" in few weeks time. The thrill of getting customer feedback for a feature well done is unparalleled.
  • Thus, SaaS companies are able to attract better talent and use the talent better. They can make small but smart teams work on specific problems and deliver results faster. The talent is not just "tech" talent- it is a combination of domain experts, technology team and user experience team.

Game Changer # 3: Leverage best that Cloud can offer

  • Cloud computing companies such as Microsoft, Amazon and Google have progressed light years since 2015. Early on they offered replacement of data centers and physical machines to offer virtual machines and compute loads. Now- almost everything is offered as Platform as a Service or PaaS. Cloud companies acquire or partner with latest technology and make it available as a service to SaaS companies.
  • For example, Google offers some fantastic tools to use GPS data and calculate distance, estimate time of arrival, optimize route and so on. SaaS companies use these as BUILDING BLOCKS to build a solutions and offer to customers. Be it analytics or IoT or Data Warehouse or AI/ML- there is a range of solution components available today and more are released each week.
  • Today, software development is more like manufacturing a car. You take a platform, select a set of components supplied by few top tier suppliers. The top tier suppliers work with hundreds of smaller suppliers and build a sub-system- guaranteed for performance. The job of Car company is to ensure best design, quality, user experience and service.

Game Changer # 4: Economies of Scale

  • For many decades, software was built and delivered like fashion clothing or even boutiques. You have new designs every season, you build from scratch and build a limited version. Only a few designers get the top billing and are unable to fulfill demand, while rest are striving to make ends meet.
  • With SaaS, the software building process is more like mass manufacturing. You build a utility and get hundreds or thousands of customers. The pricing for each customer is small as costs of SaaS are spread over a large base.
  • In fact a SaaS company will fail unless it scales- as fixed costs of building a product are very high deploying best talent and best technology. But scaling is also much smoother thanks to robustness and scalability of underlying Cloud infrastructure.

In conclusion, SaaS is a much more sensible, economical and profitable way of building software. As more and more start-ups focus on SaaS as a model- the erstwhile on-premise companies will find it extremely difficult to complete.