How SaaS makes free a good option

by admin on March 17, 2010

in Cloud Computing/SaaS


The notion of free doesn’t always sit well with many colleagues. If there is no monetary sale price then the theory runs that there is less value to be had than from levying a monetary charge. But is that true? One argument in favour of SaaS is that the buyer doesn’t have it make an investment in the software. Even though software tends to be a fraction of the overall total cost of acquisition and ownership, it remains a bargaining point, especially when you’re looking at a large deal involving many thousands of pounds/dollars/euros.

That in turn fuels discussions around the maintenance element. Depending on which vendor you’re buying from, maintenance runs 15-25% of the initial software price. On a rough average and as a rule of thumb, you end up paying for the software twice over a 5 years period. That’s the conventional wisdom. There are many shades of grey in this discussion. In some cases, software licenses almost end up free as long as you pay book price on maintenance. In other cases, maintenance will be based on the net price paid. The point is that the locking together of an acquisition cost AND a maintenance number creates a tension that keeps people like my pal Vinnie busy.

Look what happens when we examine the SaaS world. At the very small business end of the market, it is hard to deny the success that many of those I mention here have enjoyed the last year or so. In relative terms, they’re doing far better than the incumbents. Ray Wang, another colleague, has been keeping a scorecard on the difference between the realtive financial performance of on-premise providers and the SaaS players.

You’ll need to click the image to see what Ray is talking about. His explanation is intriguing:

As we tally up the winners and losers for 2009, SaaS vendors have shown to the industry what’s required for success in today’s tough economic condition.  The secret to their success transcends subscription pricing, cloud services, rapid levels of innovation, and point solutions.  In fact, the success in SaaS comes from the attention to the relationship and the willingness to take a customer friendly stance.  On-premises vendors who have delivered on a partnership with their customers have known this for years.  However, they risk being consumed by the new business models of SaaS and Cloud.   Customers expect their vendors to deliver hybrid options; and private and public clouds.  Expect on-premises vendors without a Cloud deployment option to fade away in this decade as they become the legacy vendors they replaced in the client/server and Internet eras.

I sense there are a few holes or perhaps unspoken factors in Ray’s analysis. The notion of service resonates well and is well founded in the highly visible and genuine praise we see heaped upon the smaller players. Is the same true when we look at the larger players? Yes and no. Most of those in Ray’s league table have had ‘issues’ of one kind or another. Even so, they continue to score. Given the economy is supposedly tight, how is it then that SaaS players continue to grow at such a fair clip?

I don’t think it has anything to do with the technology or the tech pitch. I sense that Ray is getting close when he talks about service but is missing a vital element. Wittingly or otherwise, it seems the SaaS players, while often still trying to work out economic models, are playing a fundamentally different game to the on-prem folks. My sense is they’re playing a game that is based much more on the principles underpinning behavioral economics thinking. Here’s a simple example taken from an intriguing video (see above) by prof Dan Ariely of Duke University:

Which do you think was the most attractive offer? The one that’s free with the $5 shipping charge. In prof Ariely’ words: “There is no negative downside with free.” But notice instead that the customer is paying for the service of having the product delivered.

In (parts of) the SaaS model, the same allure holds true albeit you can argue about the economics to some extent. In essence the vendor is saying to you: ‘You can have the service/product but we will charge you a reasonable economic rate for all the other things that you expect of a software vendor. More important, the vendor has a clear obligation to deliver because without the service element, he/she has nothing to offer.

So from the buyer’s perspective, he/she is getting what appears to be a relative bargain. And that is what appeals. Of course my example is over simplified but it speaks well to the issues that SaaS vendors should be addressing when they’re fleshing out their value propositions. In closing out, I’m going to pose a few questions but first a word of congratulation.

Kashflow has been selected as the system of choice for AIMS clients that would otherwise be shoebox/spreadsheet style record keepers. That’s a big win. But look carefully at what Henry Ejdelbaum, AIM’s MD said:

“We are impressed by the functionality and the reliability of the software having submitted it to a rigorous evaluation process. We see KashFlow appealing to those of our members who are acting for small businesses that have typically used spreadsheets to record their financial transactions.  Because KashFlow allows small business owners access to their books from any computer with an internet connection, it means that they are more likely to keep accurate records.

The first and second statements make sense. The third doesn’t. Why would clients keep more accurate records by having internet access? History doesn’t teach us that to be true. Quite the reverse. It represents a leap of faith that I sense has been taken because of unspoken factors that play to the irrationality that is an important feature of understanding behavioural economics. In this analysis, AIMS has made what might be considered an irrational choice. As a social scientist by education, I find this intriguing.

  • Do you agree?
  • And if so, what does this kind of decision making mean for the software industry as a whole?
  • Do behavioural factors put the SaaS players in a price position against which the incumbent cannot readily compete?

I have other examples that I may be able to share at a later date. In the meantime, this will present difficulties for a profession that prides itself on the daily exercise of applied logic.

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Portfolio Marketing March 17, 2010 at 10:52 am

You are right – online does not mean more accurate bookkeeping! It just means accountants can log in a see the mistakes!

It would be interesting to compare the quality of bookkeeping as well as the number of users. I know from our own experience with MORE that 98% of clients are doing bank reconciliation. But, then we built it that way!

Portfolio Marketing March 17, 2010 at 1:52 pm

You are right – online does not mean more accurate bookkeeping! It just means accountants can log in a see the mistakes!It would be interesting to compare the quality of bookkeeping as well as the number of users. I know from our own experience with MORE that 98% of clients are doing bank reconciliation. But, then we built it that way!

Phil Richards March 17, 2010 at 2:04 pm

Agreed- online is neutral to book keeping accuracy.

Functionality of the application is key to accuracy, so the main point is does the book keeper understand the system and find it easy to use. ( Software Manufacturers For Accounting> Do you design for the accountant, book keeper or small business owner ?)

I think disregard if the accountant finds it easy to use, sorry guys, its the client that counts.

From an accountants perspective, maybe one accountant would choose an application that means the accountant still has plenty of work to do; and another would make sure the application enables the client or clients book keeper to do as much as possible.

I am unaware of any of AIMS decision making process though.

Phil Richards March 17, 2010 at 5:04 pm

Agreed- online is neutral to book keeping accuracy.Functionality of the application is key to accuracy, so the main point is does the book keeper understand the system and find it easy to use. ( Software Manufacturers For Accounting> Do you design for the accountant, book keeper or small business owner ?)I think disregard if the accountant finds it easy to use, sorry guys, its the client that counts.From an accountants perspective, maybe one accountant would choose an application that means the accountant still has plenty of work to do; and another would make sure the application enables the client or clients book keeper to do as much as possible.I am unaware of any of AIMS decision making process though.

ggruber66 March 17, 2010 at 2:50 pm

Dennis, I agree with a lot of what you’re saying about the value prop of SaaS, but not with the specific example of the $5 product/shipping analogy. Most “free” products are more attractive versus free shipping because typically the product in question is marketed as a reasonable functional alternative to the premium product in competes with and therefore it’s presumed that the value of the product outweighs the shipping costs, so it looks like a better deal.

What you do argue for is that perhaps SaaS companies should be more aggressively promoting the TCO pitch rather than no CapEx (although you get both). I find that many SaaS naysayers reason that SaaS actually costs more over time than buying the on-prem alternative, but they often conveniently remove the costs of upgrades and migration in their calculations amongst other ancillary costs for running their software.

dahowlett March 17, 2010 at 3:03 pm

@ggruber66 – what I’m really trying to understand is whether those that are buying the saas alternative are in some way influenced by the behavioral model that Dan points towards. If so then the remaining arguments the naysayers espouse (and which are certainly a legitimate area of inquiry) become secondary and of less influence in the buy decision. Cause and effect?

ggruber66 March 17, 2010 at 5:50 pm

Dennis, I agree with a lot of what you're saying about the value prop of SaaS, but not with the specific example of the $5 product/shipping analogy. Most "free" products are more attractive versus free shipping because typically the product in question is marketed as a reasonable functional alternative to the premium product in competes with and therefore it's presumed that the value of the product outweighs the shipping costs, so it looks like a better deal. What you do argue for is that perhaps SaaS companies should be more aggressively promoting the TCO pitch rather than no CapEx (although you get both). I find that many SaaS naysayers reason that SaaS actually costs more over time than buying the on-prem alternative, but they often conveniently remove the costs of upgrades and migration in their calculations amongst other ancillary costs for running their software.

dahowlett March 17, 2010 at 6:03 pm

@ggruber66 – what I'm really trying to understand is whether those that are buying the saas alternative are in some way influenced by the behavioral model that Dan points towards. If so then the remaining arguments the naysayers espouse (and which are certainly a legitimate area of inquiry) become secondary and of less influence in the buy decision. Cause and effect?

Portfolio Marketing March 17, 2010 at 10:52 am

You are right – online does not mean more accurate bookkeeping! It just means accountants can log in a see the mistakes!

It would be interesting to compare the quality of bookkeeping as well as the number of users. I know from our own experience with MORE that 98% of clients are doing bank reconciliation. But, then we built it that way!

Phil Richards March 17, 2010 at 2:04 pm

Agreed- online is neutral to book keeping accuracy.

Functionality of the application is key to accuracy, so the main point is does the book keeper understand the system and find it easy to use. ( Software Manufacturers For Accounting> Do you design for the accountant, book keeper or small business owner ?)

I think disregard if the accountant finds it easy to use, sorry guys, its the client that counts.

From an accountants perspective, maybe one accountant would choose an application that means the accountant still has plenty of work to do; and another would make sure the application enables the client or clients book keeper to do as much as possible.

I am unaware of any of AIMS decision making process though.

ggruber66 March 17, 2010 at 2:50 pm

Dennis, I agree with a lot of what you're saying about the value prop of SaaS, but not with the specific example of the $5 product/shipping analogy. Most “free” products are more attractive versus free shipping because typically the product in question is marketed as a reasonable functional alternative to the premium product in competes with and therefore it's presumed that the value of the product outweighs the shipping costs, so it looks like a better deal.

What you do argue for is that perhaps SaaS companies should be more aggressively promoting the TCO pitch rather than no CapEx (although you get both). I find that many SaaS naysayers reason that SaaS actually costs more over time than buying the on-prem alternative, but they often conveniently remove the costs of upgrades and migration in their calculations amongst other ancillary costs for running their software.

dahowlett March 17, 2010 at 3:03 pm

@ggruber66 – what I'm really trying to understand is whether those that are buying the saas alternative are in some way influenced by the behavioral model that Dan points towards. If so then the remaining arguments the naysayers espouse (and which are certainly a legitimate area of inquiry) become secondary and of less influence in the buy decision. Cause and effect?

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