Cloud Computing/SaaS: The Subscription Economy and Customer-Focused Selling

Salesforce.com deserves credit for being an early pioneer in  the SaaS market.  Now, a little more than a decade since Salesforce.com opened its doors, the SaaS market is estimated to be a $12 billion one, and it is growing at a healthy rate of  21 percent annually in the US and Europe. [A PriceWaterhouse Coopers study found that the US and Europe currently dominate the SaaS market, with the US holding a 44 percent market share and with Europe having a 36 percent share]  And the rate of SaaS growth in China is even faster — 49 percent CAGR.  But despite the growth of the SaaS market, on-premise software hasn’t simply vanished.  In fact, on-premise software still dwarfs SaaS software with annual revenues of $150 billion annually and is growing at a rapid rate of 12 percent annually.

Barb Darrow wrote for GigaOm that “SaaS revenue will to continue to grow fast, as there’s too much green-field opportunity. But as companies like Oracle, IBM, Microsoft and others sell more SaaS, pure-SaaS players like Salesforce.com will face more pressure.”

But why the move to the cloud?  Much of the attraction of the cloud has been lower costs, or at least perceived lower costs.  Gartner’s modeling actually found that while SaaS is cheaper for companies during the first five years of use, longer term, on-premise solutions actually are cheaper.  But SaaS brings along with it long-term benefits like improved cash flow and reduced IT costs.  SaaS has also proved itself to be easier and faster to deploy and to be able to more flexibly meet ever-changing business requirements.  And, SaaS has reduced the pricing barrier to a categories of Enterprise software that previously had been outside the reach of many small and medium-sized companies.

Another interesting facet of SaaS is how it changes the vendor-customer relationship.  SaaS is more personal, more social, compared to the traditional product-centric model for selling software.

Tien Tzuo, CEO and Co-Founder of Zuora, recently told Forbes magazine that “Software, like SaaS, designed for the subscription economy is based on a very, very different way of thinking about business. Contrast companies like Netflix against traditional video rental, companies like Zipcar against GM, and so on.  You have to know how many customers you can address, how many customers you acquired, how many customers you can retain, how much revenue you can get per customer. You have to know all of this in great detail and in real time.  Rather than putting the focus of the business on the product or the transaction, subscription economy companies live and die by their ability to focus on the customer.”