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Economics of SaaS

Attended the SaaS Economic Summit last week and there were some interesting sessions that talked about the economics of SaaS.

Lauren Kelley, CEO, OPEXEngine presented some operating benchmarks on SaaS companies that was aggregated from data OPEXEngine collected from SaaS & non-SaaS companies. Some of the key points from her presentation:

  • She quoted Will Price’s data summarizing that SaaS companies take 1.6x longer to get liquid, 3.65x more capital and 1.75x more revenue to hit profitability versus traditional license software companies.
  • Growth rate of SaaS companies are much higher vs traditional software companies however, the SaaS companies are struggling to reach profitability. Her explanation was the SaaS companies have higher per subscriber costs due to the overheads related to reliably hosting and managing a SaaS application. The cost of revenue as a percentage of revenue recognized is 30-40%.

    SaaS Profitability

  • A key conclusion was that in the current economic scenario there will be pressure for SaaS companies to attain profitability sooner at $50M rather than $70-$100M. The other key data was that majority of SaaS revenues are from US so far. But EMEA and APAC is likely to be growth markets this year.

    • A copy of Lauren Kelly’s presentation is available here.

    Will Price’s blog pointed me to a very interesting post by Lars Leckie titled Magic Number for SaaS companies that summaries a talk by Josh James that presents a metric for assessing the health of your SaaS company based on MRR growth rate. If you are running a SaaS company or planning to launch a SaaS product then you should check this out.

    Todd Gardner, CEO of SaaS Capital talked about funding the SaaS business. He had the chart shown below that shows the cash burn for SaaS companies initially is more requiring higher capital investment. His presentation is available here.

    SaaS Cash Burn

    The other interesting presentation on SaaS Economics was by Jeff Kaplan of Thinkstrategies. One interesting slide he had was the SaaS Supply Chain opportunities where he is showing offshore software engineering engineering firms as key SaaS technology enablers.

    SaaS Supply Chain Opportunities

    Jeff Kaplan also has an interesting article that talks about the challenges traditional software software companies face in Straddling the hybrid on-premise and on-demand worlds.

    Based on these data points and economic scenario, SaaS Product Engineering services companies especially with offshore presence will be a key partner for companies who are transitioning to a SaaS model. It is likely to be applicable for existing SaaS companies in attaining profitability sooner by leveraging offshore SaaS delivery centers for scaling up as well as continually grow their SaaS applications. Offshore SaaS engineering partners may also be able to play a key role not only in internationalization of the SaaS products but also in penetrating the global markets where many of the offshore players have presence in selling and supporting applications.

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