Understanding the Economics of SaaS in Cloud Computing - dummies

Understanding the Economics of SaaS in Cloud Computing

By Judith Hurwitz, Robin Bloor, Marcia Kaufman, Fern Halper

The economics of the Software as a Service (SaaS) market in cloud computing are different than the traditional perpetual license software model. In the perpetual license model, the customer pays for the total cost of licensing the software and agrees to pay a per-year additional cost to cover maintenance and support. The most important difference is that there is actually a lower barrier to entry when a company is trying to sell you a SaaS product.

Say you’re a customer who’s looking for a customer relationship management (CRM) product. If you decide that SaaS might be the way to go, you can shop around at various vendor websites, find a product that looks promising, and try it out for free for 30 days. If at the end of that trial you decide that this product is really good, the company may decide that it is time to buy.

Even though you might eventually want to have the product used by 50 people in the company, you might actually buy an entry-level configuration like a 5-user pack to get started. If the individuals in the company really like the product, you can add packages until you support all 50 users.

Determining the right revenue model costs with SaaS and cloud computing

What does this mean in terms of the revenue model for vendors and how customers should think about weighing the costs between traditional perpetual licenses and SaaS-based license? Look at these numbers over a five-year period. It can be complex to work out all the details, but here is a general rule:

  • Take the initial cost for the traditional software purchase.

  • Add an annual fee of 20 percent for maintenance and support.

  • Consider IT costs (including support services and hardware renewal, and so on).

The other factor to consider is that the vendor might do everything it can to make you a customer. They might have some special incentives.

Calculating two SaaS examples

If you buy a traditional software product, it will cost you a one-time fee of $100,000. Now you have to add an annual fee of 20 percent for maintenance and support. If you look at the costs over five years, for example, you may determine the following: Software will cost $100,000; maintenance expenses will add another $100,000 over five years, for a total five-year cost of $200,000.

Many small- and medium-sized businesses lack or don’t want the data centers that their larger counterparts have. Larger companies that can calculate the long-term impact of adding applications are also looking seriously at the SaaS cloud model.

If you go the SaaS route, here’s what you’re looking at: You determine that to support 50 users, it will cost you between $10 and $150 per user, per month. That figure includes support, general training, and data center services. Even if you take the high-end estimate of $150 per user, the cost of using the CRM SaaS application for those 50 users for 5 years will run about $37,500 — far less than the $200,000 cost of on-premise software, even when you add other costs (such as customization of business processes within the application and personnel training).