I was talking to one of the SaaS vendors and he was mentioning that their Sales & Marketing expenses were 75% to 125% of their new sales bookings. He was also mentioning that anything below 75% and anything above 125% is considered to be danger zones. I was relating this to one of my earlier posts on this “To SaaS or not to SaaS – An ISV’s perspective”.  In that post I had dealt in detail as to why ISVs may not be going for SaaS discounting the benefits of moving to SaaS.

This high percentage of Sales & Marketing expense adds another dimension to ISVs possibly not wanting to move the SaaS way. For them to be successful, it becomes extremely important for ISVs to ensure that their sales and marketing is cost-effective, for which they need to have extremely good visibility on their sales funnel and ability to predict and forecast accurately. Additionally, they need to identify metrics that would be able to measure the returns on every program that they do in the mix. Keep what brings revenue and throw what doesn’t in your marketing mix.

This also makes it necessary for the ISVs to have access to quality funding that will allow them to do increased sales and marketing spending towards achieving breakeven and eventually profitability. As more and more customers seek SaaS, this may not result in a level playing field as big platform players would be better positioned to offer them as opposed to non-funded setups. Else, you need to have substantial legacy revenue for you to easily move the SaaS way.

There have been various industry reports that keeps suggesting that most companies will move towards SaaS as the customers want them more than the willingness of ISVs to offer their product as SaaS. But then, not many are offering SaaS and the possible reasons why they aren’t offering is what is covered in this post.

  • Most enterprise software vendors don’t want to move their offering to SaaS as the sales cycle is too long and the buyers aren’t going to get convinced easily on the service levels
  • Entry barriers for the software vendor is quite high, and some statistics that I pulled from the web suggest the same. They are as follows: It takes 1.6x longer to get liquid; it needs 3.65 x more capital, it takes 1.75x more revenue to hit profitability
  • Every time a vendor adds a customer, it costs them more cash that quarter that is a result of the customer acquisition, because of huge infrastructure investments. When you are looking at huge number of customers and the cash requirement multiplies accordingly
  • Sales and marketing expenses are too high for them to acquire customers and service levels also need to be on the dot to retain them. Only then, they would ever achieve profitability
  • SaaS business is an investor’s nightmare for liquidity takes much longer than expected and the risks are multi-fold in comparison to license revenue business models. Additionally, even if you grow at xx% tending towards hundred quarter-on-quarter, it still doesn’t give you the profitability as your infrastructure expenses also grow along with it
  • It is less likely to prove to your investors that your customers will achieve profitability; you will be able to retain close to 100% of the customers that you acquire; and your market isn’t saturated
  • Movement from on-premise model to on-demand model is all the more complicated, for most companies that contemplate that are already profitable and they wouldn’t want to risk the high-cost entry into SaaS
  • If you are looking at going the IPO route, then the revenues that you need to garner will be far higher to support that move and the best possible route that SaaS companies will look at will be the acquisition route. This effectively means that the buyers are going to be even more wary in them opting for a SaaS solution

Considering all of this and the fact that they have to look at the feasibility of offering SaaS, it is going to be really hard for an ISV to move the SaaS way.