By Dave

Its that time of year again. No, Im not talking about spring cleaning. No, not taxes either. Its the time of year when every MBA student thinks about his or her career plan. Today I had the privilege of meeting with one of Stanford GSBs finest scholars. His number one question: should I get into venture capital?

While I won’t answer that question in this blog entry, I will talk about one of the items we discussed at length. Here’s what I like about SaaS companies:

• Recurring revenue model. One of the most compelling aspects of any SaaS company is its revenue stream. Although it takes some time to develop, once a SaaS company has a customer base and has reached a steady churn rate, it has a predictable, repeatable revenue stream. Then it all comes down to continuing to acquire customers while reducing churn.
• Low cost of sales. Another incredibly compelling aspect of the SaaS model is the low total cost of sales associated with these companies. The product is available for demonstration, evaluation, and long-term use right over the web. While some customer accounts may still require in-person sales, the vast majority can at least get up and running without an on-site customer visit. As a result, a great SaaS company can be very successful at a “land and expand” strategy.

• Ease of delivery. Unlike the old installed software model, SaaS companies, like Consumer Internet companies, get to deliver updates when they want to. Customers lose some control in this model – whereas they used to be able to decide when they would roll out software updates, now the company delivering the software decides that for them. But companies benefit immensely because they get the most up to date capabilities without the overhead associated with traditional software delivery and maintenance. Companies can also deliver these releases more quickly and more efficiently than before.
• Stickiness. Most if not all SaaS offerings require that the customer input or import data into the service. For example, a human resources management offering would likely require a customer to import its organizational data. Having the customer complete the initial work is critical, and sometimes challenging. But once the customer does this, they are likely to stick as long as they are getting some value from the product. Having gone through the process once, they are not likely to switch to another system. Moreover, extracting and exporting data from service based offerings is harder than it was with installed software.
  
• Measurable growth. Finally, with SaaS business model, a company can really measure its performance. Once the revenue stream is established, a company can focus on a few key metrics. Monthly Recurring Revenue (MRR) indicates how much recurring (vs. new) revenue a company has each month from its customer base. Companies can track their customer Payback Time to see how long it takes to recoup the cost of acquiring a customer and getting that customer up and running. Then companies can focus on reducing this time.

Tech, Startups, Capital, Ideas. » Why Software As Service Businesses Are So Interesting

1. Software as a Service (SaaS) » Blog Archive » There’s No Stopping CRM Says:
   April 7th, 2008 at 9:33 am

   [...] Why Software As Service Businesses Are So Interesting [...]

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