Is the SaaS business model broken?

Recently Thomas Otter took time off from watching the Tour de France to post another interesting question on SaaS. Prompted by Jason Wood’s detailed look at the NetSuite IPO, Thomas focuses on the costs of running a SaaS operation.

The question: how viable is the SaaS model?

Some key figures:

  • In their SEC filing, NetSuite’s sales and marketing costs are around 50% . Salesforce.com’s typically runs between 50% and 70%.
  • NetSuite’s costs are around 30% of revenue in Q1 2007, rising in 2008.

For someone from a non-SaaS software background, like me, those figures could look high.

This theme is echoed by Bill Kutik’s recent column Is SuccessFactors Really Successful?, in which he quotes financial analysts speculating that

SuccessFactors was “break even” or less. Or maybe I misheard them

Kutik goes on to question whether a new entrant can build an entire suite of rich HR applications from scratch as SuccessFactors plans to.

I have questioned SaaS before, but on this one I have to say that the jury is still out. I don’t defer to Wall Street on this. Sure,  Salesforce.com’s stellar stock price performance paints a rosy picture, but so did many e-learning companies’ prior to March 10, 2000.

No, I think that the current financial standing of SaaS suppliers says more about their growth strategy than it does about their business model. They are going for growth in virgin territory. They want customers considering SaaS to come to them first, and to stay, and they will spend as much as they can bear – now – on capturing those clients. In the long run, they figure, the subscription revenues will make it worth while.

Advertisements

2 responses to “Is the SaaS business model broken?

  1. Donald,
    I think SaaS will become very significant in the near future, but I don’t think it is a magic dust that suspends financial reality. There will be quality SaaS companies, and also dross.

    Personally I’m very impressed with successfactors. I dont know Netsuite, but the numbers did not fill me with awe.

  2. Here is my prediction, having worked in the SaaS and related worlds: In the next 10 years, SaaS will be the delivery mechanism for 90% of the software needs. It’s only natural.

    What SalesForce.com has scratched is only the tip of the iceberg

    http://justfabulous.wordpress.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s