I have recently seen more conversation than usual regarding the software-as-a-service (SaaS) model versus the enterprise licensing model. Usually, that conversation is generated from the vendor community more than the user community. Full disclosure and perhaps some foreshadowing of where this post is going: my company supports both models. There are reasons for both vendors and network owners to favor one model over another. It is sort of like the old “great taste, less filling” debate, only perhaps less entertaining. (Note: I miss Red and Rodney)
Let’s have a look at three reasons why vendors or users would find themselves enamored with one model or the other. On the SaaS side, vendors and many of their investors favor the SaaS model because:
- The single image, multi-tenant model is a marvel of efficiency. Development efforts go into enhancements that every customer receives and infrastructure is leveraged across all customers. In a classic SaaS environment, there are no “forks” in the road that lead to inefficient use of resources.
- The subscription model that is typical of SaaS deals results in a growing stream of recurring monthly revenue that grows as the customers and the customer base expands. It is the gift that keeps on giving.
- A SaaS sale is often easier to close because it makes the software a variable expense rather than a capital expenditure. It can be the path of least resistance. Salespeople like that.
Customers often favor the SaaS model because:
- Because a SaaS deal limits cap ex dollars, there is less risk in the early stages of a network. If the network rolls out slower than anticipated (gee, does that EVER happen?) costs are kept low. If it doesn’t work out, then there is not a depreciating asset getting no use. It is the path of least risk, and costs are fairly easy to forecast. CFOs like that.
- Speed to deployment is unparalleled. Because the infrastructure and support is already up and running, a network can be launched just as fast as the player and display hardware can be installed in the field.
- SaaS does not require the purchase of software, the purchase and maintenance of centralized servers and a content distribution network, or the administration of support staff. Good SaaS vendors have this figured out, and they bet their business that they got it right. If a customer wants to invest in content, operations and ad sales, but not IT, SaaS is a great choice. Additionally, many SaaS buyers with strong IT departments just don’t want to add digital signage to their portfolio for any number of reasons.
And then there is the enterprise deal, wherein a customer purchases the actual software, installs it within their own infrastructure and effectively operates the network on their own. The purchase typically includes a substantial downstroke for a specified number of seats (as measured by media players), with further purchases required at predetermined thresholds. Instead of monthly SaaS fees, a monthly maintenance fee is charged that reduces monthly expenses significantly. Vendors may like enterprise deals because:
- While supporting an enterprise deal can often involve taking a development “fork”, creating different versions for different customers, the added complexity and expense is balanced by the injection of the large up front payments for tiers of seat licenses. While the recurring revenue (maintenance) from an enterprise deal is far less than that of a SaaS deal, the vendor realizes more cash in the early years, while the customer realizes very significant savings over the life of the deal. Conventional wisdom says that a “crossover point”, that point in time when the customer starts to realize savings versus a straight SaaS model, of 24-36 months is acceptable. Vendors will gladly bet on their ability to generate new deals before the crossover point on older deals.
- It is harder to sell SaaS for very large networks. Without fail, as a network plans for, approaches or crosses the 1,000 player milestone, a monthly SaaS fee begins to catch the attention of the person signing the checks. This probably has to do with the universal ability of people to multiply a number by 1,000 without a calculator. The typical question that is asked is “why are we renting, and not owning?” The ability to offer an enterprise licensing program is often a requirement for large, growing networks, or networks contemplated by companies with strong IT departments and good infrastructure. It often does not make sense at 1,000 players to contemplate a switch, but that is when the information starts to get gathered.
- SaaS software, even though it may be fundamentally the same as an enterprise product, tends to be viewed as a commodity. Monthly prices are compared more readily than features and functions. An enterprise license tends to be viewed as a product, and value can be linked to functionality, ease of customization and integration points. Enterprise deals allow a vendor to sell based on differentiation, and price plays an important, but subsidiary role to fit and function. The ability to sell on value versus price is critical.
Customers may prefer enterprise deals because:
- They want to own the software and integrate it with other applications in their portfolio. They view digital signage as strategic and want the control to use it strategically within their business. I usually refer to this as making it onto the portfolio map behind the CIO’s desk.
- The reduction of operating expenses achieved by swapping higher SaaS fees for lower maintenance fees has a positive P&L impact, especially in an ad supported network model. Additionally, the large downstrokes for blocks of seat licenses can be placed on the balance sheet as an asset and depreciated (a non-cash expense). In many companies, managing the impact of a deal on financial statements is of paramount concern, and an enterprise license fits the model well for larger companies.
- If there is a feature or function that is needed by the users, an enterprise customer will generally have the ability to specify and pay for a custom enhancement, whereas a SaaS customer will have to wait until the needed feature is delivered in sync with product development priorities and resources. This is not something to overlook. Managing a SaaS product efficiently involves assimilating, abstracting, juggling and prioritizing customer requirements in a way that advances the product and satisfies the greatest number of users. “Do this now” can be a tough request to honor consistently in that environment, even if someone asks nicely. While any software company would want to minimize the number of versions out there, in an enterprise environment there is more freedom to create one-off enhancements for a customer and then bring those enhancements to the other versions if that makes sense.
There is no right or wrong answer, but there are many reasons to consider both SaaS and enterprise models. Our notion from the outset was that SaaS would have the most immediate and general appeal for a new technology, but as large deals evolved or appeared, an enterprise model would be the price of admission. That has proven to be true. Managing a product offering that includes both SaaS and enterprise options requires careful planning, extra resources and a thoughtful sales and marketing effort, but the cross-pollination and ability to meet the needs of early entries and mature networks alike seems well worth it. Taste great? Less filling? Sometimes it is OK to feel strongly both ways.