Does SaaS save money?

Around the end of March, Frank Scavo and I were having a back and forth on the cost of SaaS/cloud apps. This is not a new discussion but one worthy of review given the maturing applications space plus the spend shift we are seeing among buyer organizations.

Many years ago I argued that SMEs using a solution like Freshbooks was fine in the short term until you needed to add on additional services or provide access to additional users. Combining FreshBooks with Capsule CRM for instance takes you from potentially free to $19.95 per month for FreshBooks plus $24 per month for say three Capsule users. A total of $34.95 per month may not sound too bad but then say you add in Expensify for four users and you're adding on another $10 per month plus transaction charges. And we haven't got to the accounting part which may easily add on an additional $19-25 per month. The same goes for many other services.

In themselves, these amounts might seem relatively trivial, especially when weighed against the cost of trying to manually manage sales contacts, expenses, knowing your financial condition and so on. You can even argue that spending the thick end of say $1,000 to run your small business is hardly excessive. But it is what happens when you start to scale up that things get interesting.

In a piece Frank wrote on 28th March, he noted a Salesforce.com customer who said:

“Frank, we think we made the right choice with Salesforce, and we believe cloud systems are the way to go. But I’ve got to tell you, they aren’t cheap.”

I indicated that I had been thinking about this subject recently and asked him to tell me more. “Well, when you count the per-user fees, plus the platform costs, plus the partner apps that you want to implement, it can add up to a lot of money year after year,” he explained. “And, of course, you still have the up-front implementation consulting fees.”

Earlier in the year I spoke with a Salesforce.com customer who said that his 15 person business was paying $40,000 a year to Salesforce.com. That's a LOT of money for CRM but he remarked that his business could not run as it does without the functionality he has bought. Value received? Absolutely and an argument that resonates well with many buyers.

I recently spoke with a long time NetSuite customer who said that while he is happy with the solution he uses, he is starting to wonder about ongoing cost. "They never go down and of course I am grateful for the seasonal updates and automatic bug fixes I don't need to worry about. But I now find there are functions arriving I don't need. I think the SaaS providers will have to start thinking carefully about this going forward. I'm starting to wonder what part of my fee is going to what." That's interesting when taken against remarks Zach Nelson, CEO NetSuite made during the latest earnings call when he said:

Obviously, we want to extract the appropriate value for the value we're delivering. And also really, it's a competitive situation. Sort of in the mid-market, we've looked at that and we're kind of surprised to see that a company like salesforce.com is commanding 3x to 4x the bookings of a customer than NetSuite is. And since when was Siebel more expensive than SAP? It never was, right? So even in the mid-market, I think we're somewhat underpriced. So we've look, really, across the board. We haven't changed our per-user pricing at all. It's still $99 per user per month on average. But we've looked both on the enterprise price list and the mid-market price list and made pricing changes where we think the value that we're delivering, be they on the suite or be they on a variety of modules is delivering the customer a lot of value and value they appreciate and respect and are willing to pay for.

What he doesn't say but which will be interesting to pursue at the upcoming SuiteWorld conference is just how the tensions I see in the mid-market play out over the long term when compared to the new pricing NetSuite introduced in the last quarter. As a side issue, that opens up fresh opportunities to negotiate around pricing that has largely remained fixed in many implementations.

In turn, Frank offers four theories as to what is going on in the market:

• Theory 1: SaaS does save money, but customers don’t realize it.
• Theory 2: SaaS does save money, but you only realize those savings when you completely eliminate your on-premises systems.
• Theory 3: SaaS does save money, but vendors don’t pass along those savings to customers.
• Theory 4: SaaS is more expensive than on-premises systems, but it’s worth it.  

He points out that:

...these four theories are not mutually exclusive. For example, SaaS may save money (Theory 1) and also allow vendors to appropriate some of the cost savings as extra profit (Theory 3). Or, a mix of on-premises and cloud systems do not save money (Theory 2), but its still worth it for customers in terms of agility (Theory 4). Furthermore, the answer may be different for different SaaS applications. For example, perhaps cloud CRM saves money, but cloud ERP doesn't.

Developing thought on this topic will take on increasing importance as spending on new applications moves into the hands of business managers rather than being the purview of the IT department. What do you think? Check out this poll:

Images courtesy of saastime and photobucket