About two years, there was a very interesting post by Robert Desisto, the head of Gartner's SaaS practice about the saas business model.
He formulated a hefty critique of the current sales policies of mostly big SaaS vendors for the business and enterprise customer segment. He ended with the question if these vendors could indeed already be "dinosaurs".
A recent pricing strategy discussion with clients, reminded me that it is still a current topic. Thus, I post the comments on this SaaS sales question with a European view (slightly updated and this time in English).
His critique of the SaaS vendors
The reason for his statement is the practice to close long-term contracts with a fixed usage/license volume. This of course kills the main advantage and argument for SaaS in contrast to the classical on premise license sales "pay only for your real usage in a given timeframe". He also mentions that the typical quarter sales thinking has not changed. Therefore, Desito concludes "SaaS sales agents act like their on-premise colleagues."
As expected, the article drew a wide response. Thus, one could think that this should translate into an untapped potential for new SaaS startups or disruptors, meaning that the current vendors - themselves just grown-up to the new stars of software corporates - would be obsolete soon. And not much changed since.
An untapped opportunity for startups or business model innovation?
You have to take the statement with a grain of salt.
Firstly, it is a fully valid strategy for SaaS vendors and for SaaS startups to close long-term contracts. This is for the fact that this business model is cash intensive and such sales practices stabilize the much-needed cash flows, especially when you think of the necessary VC financing. This happens often by discounts, which you trade off for flexibility. This is the problem of all SaaS companies. Therefore, each new market entrant that wants to gain market share via playing the "only pay-as-you-go variable" has to face the same cash problem and needs a solution to it.
Secondly, it points to a critical/interesting point of the business model for SaaS as our experience confirms. The problem of the sales channel and how to close the deal which is closely combined with the upfront features of the software (or call it MVP) and the cash you need for development.
For this argument, you have to think of the market entry strategy of SaaS vendors over time that can be illustrated for example with an in-depth analysis of the Salesforce story as it is told.
Its myth states that for winning the ERP market you first have to access and convert IT regular users circumventing the usual IT decision-makers. This allows a regular income to grow, to add features and a sales entry point into the departments later on for larger contracts or upsell. As such, the positioning is more like for an SME/private user than for a corporate purchase department as this is within the individual user's budget decision. They also should prefer the flexibility way more as they can decide on a project basis and justify theri spending in this way. This positioning in relation to enterprises correlates then to the hierarchical level of departments.
However, does it hold true to win sales like this, especially in Europe, with purchasing behaviour? In short, this is probably a legend, especially when looking at the case of Salesforce with regards to its overall starting position.
The break in the SaaS business model flexibility
For sure, as often observed in the market, a positioning close to SMEs, moving up later, can make strategic sense on a case-by-case basis.
Nevertheless, once one has gained access to corporates over this channel the often-cited SaaS usage case argumentation shifts. The reason is the following: There is a good reason for the old insight that "large organizations like talking to large organizations". This means the weight of the pricing elasticity argument declines compared to the insurance/assurance aspect of such contracts. Also processes in an overall workflow are become way more important. A fact that then again very likely translates into a minimum expected organization size required from your start-up as well as with regards to the feature set.
Thus, it is not necessarily the SaaS vendor but the customer that defines contracts. For your business, this translates into the strategic question to play the flexibility variable and upsell/lock in later or behave like the old vendors with less flexible products. In conclusion, it is worth having a discussion weather you should target large sales immediately given your product fits.
And you as an entrepeneur should consider that Salesforce was the execption of a start-up, and probably never small as one would in general us e the word.
"The last decisive battle about the dinosaur business model" to stay in Desisto's words has not been decided yet.
If you are interested in the SaaS business model, and the question raised by Desisto you are invited to hear more on this this aspect in our next SaaS business model seminar or SaaS online training.
