It has been popular to discuss the impending doom of on premise software business models. You often hear the on premise vendor’s dependency on large capital purchases make it difficult to transition to the smoother SaaS subscription revenue stream. There is no dispute there is an issue with on premise vendors looking to make the transition to SaaS. The real question is: Are the current crop of enterprise SaaS vendors vulnerable themselves?
The short is answer is, yes. The reason is the vast majority of vendors who offer SaaS in the enterprise market do so with a fixed term subscription basis. This means there is no ability for a SaaS customer to pay for what they use, something we commonly see with infrastructure as a service or in many lower end consumer or SOHO applications. This was supposed to be one of the foundational tenants of SaaS but has rarely been offered because SaaS vendors want large contract lock in. SaaS vendors were also supposed to be agnostic to the end of quarter or end of year deals. Clearly, in my experience of reviewing 100s of contracts a year, SaaS vendor salespeople behave just like their on premise ancestors.
The bottomline is SaaS vendors will resist to the move to “pay as you go” because it will have a very big impact on their business model predictability. However, all it takes is one viable vendor to figure out the “pay as you go” formula for applications in a market. Once it happens, we will begin talking about those legacy SaaS vendors tied to a dinosaur business model and the whole replacement cycle will start over again.