One of my current areas of focus is in SaaS Product & Solutions Engineering for ISVs and Enterprises and I attended the SaaScon 2008 conference in Santa Clara. Attended the first day and I found the session by Bruce Richardson, Chief Research Officer, AMR Research titled Balancing Customer Acquisition Costs and Elusive Profitability. He presented data that showed that high percentage ( I think 40%) of cost for SaaS companies like RighNow, Taleo and NetSuite is sales & marketing costs or customer acquisition costs.
This seems to be in line with another article I came across from the blog Unreasonable men (with interesting follow-up posts at SmoothSpan by Bob Warfield and another at SaaSBlogs by Sinclair Schuller). The high cost of customer acquisition combined with the long customer ramp to profitability (SaaS companies requiring a critical mass of users and sustainable growth to attain profitability) are two key factors that will remain a challenge to emerging SaaS companies.
This might be an opportunity for global SaaS companies from countried such as India, China and Asia in general to leverage their lower cost of operations to deliver world class SaaS solutions to US customers. This could pose a challenge to US based SaaS companies. One example of an India company emerging into the SaaS space is Zoho that has launched a suite of SaaS solutions including CRM, Recruiting, Invoicing, Conferencing and many other business solutions. Zoho seems to be gaining quite a bit of attention in the market and I am guessing that their cost structure for both customer acquisition as well as R&D is significantly lower than the likes of US companies.
One of the ways US based SaaS companies can address such a threat from foreign competitors will be to consider offshore BPO and R&D setups of their own or through partners in order to reduce their onsite costs. It is not only about the cost but also about scalability. Being able to extend the respective services into platform and/or marketplace channels for their vertical or horizontal markets. The other aspect is to be able to expand the SaaS solution to emerging global markets rapidly. Thus having operations in one or more of emerging markets such as China & India can be instrumental in capturing the high volume sales required to realize the true business potential of the SaaS business model.
It will be interested in hearing thoughts from people in SaaS companies on this.
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