Continuing with yesterday’s post 7 Ideas for Better Business Models, I wanted to take it one step further and compare Software-as-a-Service (SaaS) to the seven ideas and see how it stacks up. I’ve been a huge fan of SaaS for 8+ years now since the co-founding of Pardot, and want to help other entrepreneurs understand why it’s such a great model.
Here’s how SaaS compares to the seven better business model ideas:
- Switching Costs – This varies depending on the type of product. Basic email marketing tools have low switching costs whereas heavily customized enterprise resource planning products have high switching costs. Generally, this is neutral for the average SaaS product.
- Recurring Revenues – SaaS, by its very definition, has recurring revenue, making for tremendous predictability. This is a strong positive for SaaS.
- Earning vs Spending – Most SaaS products are monthly pre-pay with a good number of annual pre-pays. Monthly pre-pay is a slight positive for SaaS and annual pre-pay is a strong positive for SaaS.
- Game-Changing Cost Structure – Having one version of the product that’s automatically updated for all customers is more cost effective compared to installed software for engineering. But, most of the revenues are spent on sales and marketing, so it isn’t a large cost structure difference from the overall point-of-view. This is neutral for the average SaaS company (the cost structure for the buyer is much better for SaaS as it’s more of a pay-as-you-go model as opposed to a large lump sum up front).
- Get Others to Do the Work – This isn’t applicable for SaaS.
- Scalability – The nature of the SaaS is that it’s massively scalable and there are minimal marginal costs to add more customers. Market scalability is driven by the actual product and target audience, so this is neutral for the average SaaS product.
- Protection from Competitors – Products that have more customization and/or more of a network effect have greater protection from competitors. This is neutral for the average SaaS product.
SaaS really excels in the recurring revenue and earning vs spending categories, and is often very scalable. Other better business model ideas are hit or miss depending on the actual product and market.
What else? What are some more thoughts on comparing SaaS to the seven better business model ideas?