The ways software is sold also has changed with SaaS and cloud computing. As some guys, like Oracle’s Larry Ellison for example, pointed out, delivering software as a (cloud) service has been around for quite some time. But now the difference is: SaaS or cloud computing is the predominant method of providing software and not just an alternative way. Nearly every decision on purchasing or upgrading business software (we are not talking operating system software here, not yet at least) will consider sourcing it as a service.
But again, what is cloud computing? Have a look at the following video for a pretty good introduction. It is 4:52 min. long:
Cloud computing has a deep impact on the way software is offered to the customer. The main differences are:
- You need a service delivery platform that can host your software and provide it as a service to your customers. If you don’t want to or are not able to build up this infrastructure on your own, you need partners that can provide the service for you.
- The software needs to be specifically designed for it. As Microsoft, SAP and many others painfully learned, software designed for on-premises installation simply can’t be turned into a SaaS application. It needs to be re-developed.
- What used to be one-time perpetual license revenue is now subscription revenue spread over many months. That has a great influence on revenue growth and cash-flow.
The challenges that arise from these differences need to be addressed by every software vendor. However, if you as an ISV can manage 2. then points 1. and 3. can also provide some advantages:
- You can offer your software to be resold by service provider partners like hosters or ISPs. Since the largest of them have millions of users, they provide a completely new dimension of sales channel. Main condition however is, that your software fits into their portfolio and they are able to market it effectively.
- You can build up a guaranteed revenue funnel for the next years. Even with a high churn rate you have revenues secured from your existing customers at the beginning of each fiscal year. Therefore, your revenue (and forecast) for the year does not completely depend on getting new customers.
So, with cloud computing, software sales in ISVs has shifted to both selling a service instead of a software license and to managing service provider partners, which used to be the job of specific channel managers.
From a product and strategy perspective there are two more points to keep in mind:
- Competition will intensify as the number of sales channels will shrink. If service providers become the main sales channel it is clear that they will focus on one (usually leading) application per category. Also, for many categories there are much less service providers than application vendors. For example, there are currently more than 1,000 CRM applications in the world but only ~200 large service providers. As not all vendors will find service provider partners as channel, a large consolidation of vendors will be the consequence.
- With SaaS you are closer to the customer and to the user. Since they now pay for a monthly service, they have different expectations to the frequency of updates. You can use this virtually stronger presence of your product to get better feedback more often from your customers in order to adapt and improve your product faster.