SaaS For IT Management
This blog is all about using Software as a Service (SaaS) for IT Management.
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Clip: Why Do SaaS Companies Lose Money Hand Over Fist?
Posted on May 19th, 2009 2 commentsJust saw this one in my RSS reader: there’s a blog from a stealth-mode SaaS company called Smoothspan, written by Robert W. Warfield that has a post today entitled "Why Do SaaS Companies Lose Money Hand Over Fist?"In the article, Warfield argues that SaaS companies spend far more on sales and marketing than their on-premise counterparts, and compares them in terms of how many sales and marketing cents are required for each company to earn a dollar in revenue. From the post:
Sales and Marketing
Let’s start here, because this is really the crux of the argument. It’s where SaaS companies spend the Lion’s share of their budgets, and where On-prem seemingly doesn’t spend much at all. Here’s what the numbers look like:t’s start here, because this is really the crux of the argument. It’s where SaaS companies spend the Lion’s share of their budgets, and where On-prem seemingly doesn’t spend much at all. Here’s what the numbers look like:
- SuccessFactors spends a ripping 56 cents for each dollar of revenue they bring in. Analysts expect about 85% growth in exchange.
- Salesforce is spending almost as much: 54 cents to bring in a dollar for which the analysts expect 44% growth.
- SAP has a much more frugal 29 cents per dollar brought in, but the analysts only expect them to grow 17.5% next year.
As a function of pure cost, SFDC and SFSF spend 2x what SAP does for an incremental dollar of revenue, which on the face of it looks highly inefficient. But, before we write the SaaS guys off, note that by spending so much, they manage to deliver 2.5X to nearly 5X the growth of SAP. Which one is more efficient? Not hard to make an argument for the SaaS guys when you look at S&M dollars as payment for growth.
He then goes into administrative costs:
General and Administrative
This is a category everyone loves to hate. It’s overhead that delivers no value. Surely the SaaS companies must be wasting a lot of money here? Large organizations benefit from economies of scale on G&A, don’t they?
- SFSF spends 21 cents on this for every $1 of revenue.
- CRM spends 16 cents for every $1.
- SAP spends 17 cents.
And R&D:
Research and Development
- SFSF spends 16%
- CRM spends just 10%
- SAP spends 21%
Finally, he tallies cost of revenue:
This is one of my favorites. Keeping the cost to deliver the service low is essential for SaaS companies. The fact SAP says they lose money on every sale of BBD is a direct reflection on this number. SaaS companies use a variety of technologies like multi-tenancy to keep costs lower, and it seems likely SAP has missed these tricks. We can’t get the numbers for BBD, but we can compare SAP’s cost to deliver software (largely cost to deliver maintenance, which is Tech Support) to the costs of a SaaS company:
- SFSF spends 24% to deliver their service.
- CRM spends just 13%
- SAP spends 22%
His conclusion is that SaaS companies could be just as profitable as SAP if they were to sacrifice growth for profit, but since SaaS as a delivery model is still young, companies are in the "land grab" process. They’re more interested in growth than profit in this stage, so it makes more sense to spend when spending equals growth.
Now, obviously this post is basing its information on SaaS specifically on CRM SaaS products, but I wonder if the same strategy extends to all SaaS players vs. their on-premise counterparts.
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EVAN September 6th, 2010 at 19:27