Gartner Blog Network

Another Interesting Implication for SaaS

by Debbie Wilson  |  March 23, 2009  |  11 Comments

I’m noticing a very interesting micro-trend in my inquiries this month.  I’ve taken several calls from clients who are nearing the end of a subscription to a software solution and are now taking the opportunity to look around.  Some are accessing their solutions via hosted delivery, others via SaaS.  Either way, the impetus for the market survey is the same:  when access to a solution is about to end, few organizations these days can justify simply “renewing” an arrangement.  Cost-cutting is driving a fresh look at pricing, even when the client is satisfied with the vendor.  Whether an organization is cost cutting or not, reviewing the options and testing the market is a best practice before rolling over ANY contract.

 The implication of this phenomenon is that SaaS/hosted vendors are likely to see greater levels of customer churn that traditional on-premises solutions providers.  In a perpetual license deal, there is no corresponding natural “point” at which a customer would pause and contemplate their options.  As a result, I believe that on prem users are much less likely to have a formal look around several years into their agreements.  

 The outcome of these subscription-expiration based sourcing projects will of course vary considerably from one product type to another.  But in procurement, where alternatives are plentiful . . this phenomenon may spell some long-term pain for SaaS vendors. 

Category: cost-cutting  e-procurement  software-as-a-service  spend-analysis  strategic-sourcing  

Deborah R Wilson
Research Vice President
8 years at Gartner
15 years IT industry

Deborah Wilson, a Gartner research vice president, covers procurement strategies and applications. Her areas of interest include procure-to-pay, e-marketplaces, e-sourcing, spend analysis, services procurement and supply risk assessment. Read Full Bio

Thoughts on Another Interesting Implication for SaaS

  1. Very interesting point. And to some degree the SaaS vendors are shooting themselves in their own feet by majoring on the financial savings SaaS is reputed to deliver.

    The minute people talk about cost savings, sourcing becomes a key question, and sourcing is about finding lower cost ways of doing things.

    The churn this will almost inevitably produce can be a good thing in other ways. It forces users to ask the questions about what it is they actually want, and that’s never a bad thing!

    Mike McCormac

  2. Debbie Wilson says:

    Thanks for the comment MIke, you do bring up a good point, that from the buyer’s perspective, it can be very productive to periodically assess how a solution is meeting needs. Clearly this is not something all software app stakeholders go through – if only because switching costs are so prohibitive. Why ask a question if you don’t want to know the answer. . . .

  3. Peter Cohen says:

    Your observation also makes it clear why SaaS providers must continue to market to their existing customers, not only to prospects.

    To reduce the risk of losing customers as they come up for renewal, SaaS vendors must ensure that their customers are actually using the solution, deriving benefits from it, and are aware of product enhancements as they are delivered over the life of the subscription.

    FYI, I’ve discussed this need to market to existing customers here:

  4. A Gupta says:

    What this article describes makes me wonder if this indeed would happen?

    For example, if I give you a new FREE cell phone, and you will have to invest significant time/energy to bring your address book from old phone to new phone. Would you consider doing so?

    So I feel that switching cost is also the energy/labor/time/consulting fee involved in bringing data from current Saas company to new Saas company? How do you explain that businesses will be okay migrate data across – and there is an inherent risk that some data may get lost etc.

  5. Scott Wilson says:

    I’m not all that sure that there isn’t a natural point for companies to look at options when using on-premises software; it’s when major upgrades come out. But you are correct in that they don’t actually often do so.

    I think this has less to do with subscription terms than the general effectiveness of on-premises lock-in versus SaaS lock-in. SaaS is cheaper and generally easier to transition from platform to platform; that’s one of the selling points, after all. As A Gupta points out, it’s not entirely free from difficulty, but in my experience it’s considerably less difficult than making the same transition between on-premises platforms.

    Given that, I think that the churn is inevitable, regardless of the billing model being used. Prices are lower (making experimentation less costly) and lock-in is intentionally less a factor, and I don’t see how you could avoid greater churn in such an environment. But as others point out, that’s a good thing for customers, and it will force SaaS providers (not a business I would want to be in!) to work harder and for less to keep their business and stay competetive.

  6. Debbie Wilson says:

    Thanks for all the interesting comments; great food for thought. One thing I am seeing – particularly in sourcing and spend analysis, is that cusotmers dont’ move their data to the new system. They simply start afresh with a new system.

  7. […] company is to minimize or eliminate the customer churn rate. Indeed, SaaS vendors are certainly not immune to customer attrition, especially in the time of contract renewals. Aleks said: “The cost of renewing a customer is significantly lower than the cost of signing up […]

  8. “In a perpetual license deal, there is no corresponding natural “point” at which a customer would pause and contemplate their options.”

    May I courteously disagree with this statement?

    Each time an old version is no longer supported by the software provider, discovering the migration cost to a newer release IS the natural point.

    Reason why SaaS market share is growing quarter after quarter I think….-:)

  9. It should be easy to technically switch from SaaS solutions but there is always cost incurred irrespective of SaaS or licensed solutions.
    Certainly with 100% SaaS there is no infrastructure so plugging back-end systems into a new SaaS provider is relatively straight forward (compared to licensed solutions) but the change management related to business process and organizational impact of any change needs to be evaluated as it is often overlooked or unanticipated.
    Unimarket (, like other SaaS companies tout that it is technically easy to “plug-in” and easy to “plug-out” and then internally emphasize to staff the crucial need to ensure consistant customer satisfaction for this very reason. E.g. Unimarket has a “raving fans” strategy which encourages our employees to ensure our customers are ‘always’ raving fans! By achieving this our customers have less reason to switch at the close of their subscription term.

  10. Debbie Wilson says:

    Thanks for your comment Scott but “there is no infrastructure so plugging back end systems into a new SaaS provider is relatively straightforward” doesn’t resonate with me . . . i.e. what about heterogeneous data models? Perhaps you find mapping trivial . . but I don’t think it necesarily is . . . . ..

  11. Debbie, fair point. My intent with the word ‘relatively’ was specifically in comparison between SaaS vs on-premises solutions that often require additional infrastructure for integration… certainly didn’t intend to downplay the complexity of various integrations as a whole. We tend to utilize standards where possible but depending on the legacy system the mapping is far from trivial as you say.

    Really my main point was in relation to the non-technical aspects of change being often overlooked or at least not understood appropriately before embarking on change. Irrespective of SaaS vs on-premises solutions providers.

Comments are closed

Comments or opinions expressed on this blog are those of the individual contributors only, and do not necessarily represent the views of Gartner, Inc. or its management. Readers may copy and redistribute blog postings on other blogs, or otherwise for private, non-commercial or journalistic purposes, with attribution to Gartner. This content may not be used for any other purposes in any other formats or media. The content on this blog is provided on an "as-is" basis. Gartner shall not be liable for any damages whatsoever arising out of the content or use of this blog.