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SaaS vs. Software: The Pros and Cons of SaaS Pricing

by Guy Creese  |  May 24, 2010  |  6 Comments

Software pricing is usually a large up-front cost; SaaS typically is pay-as-you-go. This difference leads to the pluses and minuses of SaaS pricing.

The pros of SaaS pricing are:

  • It’s cash friendly: Financially, the SaaS license fees are treated as an operating expense on the income statement, rather than as an asset burning a hole in the balance sheet. Furthermore, using SaaS avoids paying for in-house servers and some in-house administrative personnel. Stated simply, using SaaS frees up cash for other uses in the enterprise. Back in the 2001 recession, when companies were putting out bids for web analytics systems, some CFOs mandated that the winner be a SaaS solution, because it conserved cash.
  • Support and upgrades are included: Because it’s pay-as-you-go, the license fee includes support and any new features that get rolled out from time to time. This contrasts with software, that often separates out support and upgrades–“Oh, you want us to support the software you’ve purchased? That’s an additional annual fee–18% of what you’ve paid for the software.”

The cons are:

  • Licensing is more expensive in the long run: While SaaS licensing has lower up front costs, over the years the total cost is inclined to be more expensive. The rule of thumb for web analytics is that three or four years of annual SaaS payments matches the cost of buying a comparable software license. The wild card here is the other costs that SaaS helps an enterprise avoid, such as server hardware and salaries for in-house personnel.
  • The loss of the huge price bump which makes enterprises rethink their purchases: Software has long had a discontinuous cost model. For example, an enterprise will buy version 3 of Product X, run it successfully for years, and eventually decide to go to the latest and greatest: version 6. However, at that point, the cost and effort of moving is huge–a new set of licenses, new training for both administrators and users, and a costly migration process (since product X now had a “new and improved database schema.”) The specter of this huge cost–typically in the millions of dollars for a large corporation–often makes enterprises rethink about whether they really need Product X. “Hey, if it’s going to be that expensive, let’s see what else is out there. At this point, maybe there’s a product that will do a better job for less money.” Because SaaS pricing remains relatively steady, the prod to rethink the solution is gone, and enterprises may stay with an outmoded solution longer than they should.

While I’ve seen the first three points discussed before, I’ve never seen anyone bring up the fourth one. To counteract getting too complacent about their cloud solutions, enterprises should schedule a complete re-evaluation of their SaaS solutions every once and awhile–say, every three or four years–whether pricing forces it or not.  Enterprises need to periodically rethink and reaffirm their commitment to a solution–otherwise, they may be settling for the suboptimal.

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Category: saas  

Tags: software-as-a-service  

Guy Creese
Research VP
4 years at Gartner
32 years IT industry

Guy Creese is a vice president and research director for Gartner Research, within the Gartner for Technical Professionals division. He covers a range of topics at the intersection of collaboration, content management, and communications. Read Full Bio


Thoughts on SaaS vs. Software: The Pros and Cons of SaaS Pricing


  1. Cris Wendt says:

    The well stated points in this article aren’t so much a comparison of SaaS vs Software, as much as they are a comparison of a perpetual license vs. a subscription license. Many software companies successfully deploy a subscription license, while some software and SaaS companies use a little more exotic pay-per-use models (that are similar in argument to the SaaS pricing above).

    I think besides the cash flow and CAPEX/OPEX discussion, the major benefit of SaaS is it’s plug-n-play nature. SaaS software doesn’t typically have the requirement for the setup and configuration associated with much software.

  2. Jake Fox says:

    Guy you raise an interesting point questioning whether SaaS enables customer complacency. Two points to emphasize as a counter argument. SaaS providers promise and seemingly follow through in delivering frequent functionality updates. Salesforce and many other mature providers are releasing updates 3-4 times per year, while the smaller saas providers are releasing updates as frequently as monthly. It’s my opinion that these frequent updates help to mitigate customer complacency, as customers have learned to expect rapid product advancement, and if this slows or ceases, they will likely be looking elsewhere. Additionally, When you are consuming a saas application, you realize that if you decide to change you are no longer affecting infrastructure or staffing budgets, or requiring a C level approval on a multi-million dollar capex project. This realization, allows consumers of saas applications to keep an open mind and as a result are more likely to keep an eye out on what else is available. For those who have become comfortable with consuming SaaS applications, the traditional on-premise approach is a lot like laying a concrete foundation. A lot of work goes into getting it in place, but it’s even harder to get out. Where SaaS is more flexible. Still a cost to replace, but not as costly. I guess when you deploy an SAP or Oracle, you don’t do so, expecting to replace in 3 or even 6 years. But with SaaS, I think the expectation is that I can replace if I need to, and even if I don’t replace, I can augment with small complimentary saas offerings to get a best of breed approach.

  3. Michele Aymold says:

    I disagree with “point 4” and think that SaaS actually provides MORE opportunities to rethink and evaluate the purchase. I think it is a great benefit that many cloud solutions have user ratings, reviews and comments capabilities built in, which allow companies to have to work less hard to “hear” what their users are saying.

  4. Lloyd says:

    Hi Guy, All,

    I think that there is much more to software than the boolean option that many see as a desktop pre-built package or a SaaS pre-built package.

    I see companies every day acquiring the very best of both worlds – the cloud, but 100% customised – with no setup and configuration complications and progressive, evolving with their business needs – in the pricing model they choose, under an open source AGPL license – so they are not crippledd by software license hell or stuck with data in a consuming proprietary SaaS implementation.

    Not everything’s black-and-white. Some things are green (like Ireland) 😉

    But if an organisation has to change to suit the software, to learn someone else’s proprietary idea of CRM or other SaaS, well – that’s awful washed-out, don’t you think? 😉

    Lloyd
    Enterprise Resource Planning (Ireland)

  5. Michele Aymold says:

    Lloyd,

    “But if an organisation has to change to suit the software, well – that’s awful washed-out, don’t you think?”

    Absolutely agree with you!

    In my post above, I forgot to mention that not only can decision makers keep track of their users’ feedback to constantly evaluate a product, but the product team can and SHOULD do the same. After all, if your customers aren’t happy and aren’t using the product, they aren’t going to renew or upgrade whether its Software or SaaS.

  6. As well as subscription licensing, the other model that has the same effects as noted above is usage-based licensing, which can work in either a SaaS or traditional model. For an interesting example, here’s a case study of how FICO are offering a usage-based subscription license for their credit-rating tools:
    http://agilis-sw.com/casestudy/Fair_Isaac.html

    Dominic



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