The SaaS paradigm

Software-as-a-Service (SaaS) has never been hotter. It was the top topic at SandHill Group's Software 2005 conference in Santa Clara last week. And an array of companies have emerged to capitalize on the trend. Given the situation, it might be worth reconsidering the growth advice provided by TripleTree, an investment banking firm, and the Software & Information Industry Association (SIAA), in a prescient report released last year.  Among the key factors of success they identify:

Scalability and Critical Mass. Above all else, SaaS firms must maintain their focus on building their customer base and scaling to profitability, since payment streams are considerably smaller at the outset when compared to the traditional licensing model...Once a threshold is reached, the SaaS can enjoy the benefits of stable revenues and predictable cashflows butreaching critical mass can be asignificant challenge... 

Narrow Solutions and Quantifiable ROI. Due to the investment required to reach scalability, the SaaS firm cannot afford to run the risk of being "all things to all people." ...As a result, many of the successful SaaS firms have carved out niches in the market to address particular "pressure points." We believe this narrowly focused approach that quantifies a ROI for a client is an effective go-forward strategy.

Client Acquisition & Retention. Strong customer acquisition and retention metrics are vital to Saas firms, as their business model requires a rapidly growing customer base with minimal turnover. These firms must achieve contract renewal rates of at least 90%, and probably higher, in order to achieve positive operating margins. In addition, we believe many SaaS firms will find a more lucrative customer base as they move upstream into larger enterprise accounts.  

Sales Channels & Partnerships. Many SaaS firms find traditional indirect sales channels with major systems integrators somewhat restricted, since their rapid implementation cycles eliminate large sources of revenue for the service firms... As a result, effective direct sales or alternative channels to the market are important for SaaS firms... In addition to direct channels, numerous SaaS firms have sought business alliances with mid-tier consulting firms, VAR/OEM relationships, and even private labeled hosted offerings with third parties as a way to achieve more market visibility.  

Educating the Market. Moving beyond the "base case" for software as a service, which brought the traditional arguments for IT outsourcing down to the application level, the new approach is centered upon replacing the usual software vendor relationship with a new relationship that creates value in terms of both technology and service. This includes a focus on customer service, rapid and significant ROI, and vertical and business process specific functionality.