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.