Customers sign up, may or may not pay a customization or setup fee, and then pay for the software on a monthly, quarterly or yearly basis—much as they pay for any other business service.
Pricing is often variable based on how much service the customer consumes, allowing the commitment to expand or contract as business conditions dictate.
Another appealing aspect of software as a service (SaaS) is that its generally hosted, eliminating the need for an IT infrastructure and allowing the application to be accessed from anywhere over the Internet.
Also, there are no routine updates to purchase and security is someone elses problem—usually a someone more qualified and better equipped than the customer to deal with the threats.
These technical reasons may make SaaS superior to traditional software installed at the customers site, but its in the area of finance where this superiority takes on a moral dimension.
Why? Because as most enterprise software is sold, the customer makes a huge upfront payment and then loses leverage over the vendor. SaaS, however, places customers and vendors interest squarely together and gives back to the customer the power usually granted to those with the power to write checks and withhold payments.
If the service doesnt meet either partys needs or the customers requirements change, the relationship can be severed on short notice and generally without penalty.
It may not be easy switching from one vendors SaaS to another, but it generally is possible. This keeps SaaS vendors competitive with traditional software and with each other.
All of these things mean that customers win.
In the “pay upfront model, too many enterprise-software vendors are focused too much on closing sales and not enough on forming happy customer relationships. Yes, you need happy customers to make sales, but how many really happy Oracle or Computer Associates customers do you know?
Wall Street has become habituated—in the addictive-disorder sense—to the ever-increasing quarterly revenues generated by the large upfront payments many enterprise vendors extract from their customers, often months before the application actually becomes useful to them.
These vendors are strongly incentivized to sign contracts, sometimes with little regard for what happens next. That gives the vendor way too much power and creates companies that are “customer-focused” mostly to the extent that theyre focused on getting contracts signed before the end of the quarter,
In the SaaS model, most revenue trickles in but has the benefit of being predictable for the vendor, just as the expense is predictable for the customer.
This doesnt generate the exciting quarterly sales increases that Wall Street likes to see, but it does bring a consistency to the financials that warms the hearts of many investors.
Most importantly, the SaaS model makes satisfying customers—existing customers—the vendors most important priority. A customer is important every day, not just when they are about to cut the occasional, very large check.
Failing a customer means losing that customer either immediately or very soon, thanks to a much lower lock-in than traditional enterprise software companies enjoy.
All of this empowers customers and frightens many old-line enterprise vendors. But even though I dont expect SaaS to become the dominant delivery mechanism for enterprise apps, we are already seeing vendors responding to the challenges of customers demanding better value and more accountability from their vendors.
And while this is painful for vendors, over time they will adapt (or perish) and a better—more truly customer-focused—industry will result. And thats good for everyone.