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Software-as-a-Service – Formula for success

According to Gartner, worldwide Software as a Service (SaaS) revenue in the enterprise software market was forecasted to surpass $8.5 billion in year 2010. This was up 14.1% from 2009 revenue, estimated to be $7.5 billion. Softletter, a research publication firm, published the SaaS survey results in June 2010, which pegs the number of SaaS businesses (company or business unit) that are still not profitable at 41%. This explains that the success mantra of SaaS business still has some unexplored territories that need to be understood. Below are the top 5 success mantras to build a profitable SaaS business.

1. Select your market segment: Hold the adrenaline rush in response to a great idea or a solution and take a step back. Who is it for? How are they going to use it? How are you going to make money from the venture? There are plenty of questions to be answered before you can take a deep dive going about creating this solution. Many experts suggest different strategies and below is the summary that I have collected over various blogs, articles, etc. It is important to note that SaaS is a volume business and the SaaS solutions offered must address the critical mass to start with. A SaaS market research on the need of the solution as well as growth of the solution must be done before taking the plunge.

2. Price your product: You need to make sure that your SaaS solution is priced competitively and is attractive. There are plenty of options to choose from. Companies have been innovating the pricing of their solutions and it ranges right from periodic subscription to revenue sharing model. The selected pricing model must fit in to the larger business model. There can be a slab based pricing. Even if you chose to go with periodic subscription, select what is best for you – monthly, quarterly, yearly, etc.

3. Manage your revenue and profitability: SaaS solutions are not sold as a block deal and revenue generated is not accounted for till the services are consumed. So, though your sale numbers may look attractive, the balance sheet will reflect differently. The revenue for services not consumed, also known as Deferred Revenue, along with tracking renewal rate and expense versus revenue is what financial analyst and the market will be looking into. Another scale to measure how your business is doing is to track your Magic Number. A 2008 blog post by Will Price explains the magic number for SaaS companies.

4. Lower customer acquisition and retention cost: As in any business, profitability is simply defined as “expense must be lower than the revenue generated”. SaaS business is profitable as long as there is continuous billing happening and money coming in. But there is another angle to it – customer turnover or a challenge, known as customer retention. If cost of customer acquisition is high, enough safeguard and mechanisms must be devised to ensure that customer retention rate is high. To enable profitability in a SaaS business,
a. Customer retention must be high
b. Customer acquisition cost must be brought down
c. Customer acquisition must increase

5. Features, Releases and Upgrades: SaaS applications are more agile and need to be updated frequently. SaaS solution providers are slowly moving away from a fixed release timeline towards feature-ready mode. In SaaS applications, instead of having a major release, features are released as and when they are ready and this happens more than 3 to 4 times a year. Some argue that SaaS added to the momentum of Agile adoption and without going into a debate, if you understand the undercurrents, limitations and advantages of Agile, SaaS and Agile do go well together.

This presentation lists down some of the challenges and success factors in Software as a service (SaaS) as a delivery model for your software products. What are your challenges in SaaS?

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