How to make money from SaaS

Unlike traditional software, which has big up-front costs, SaaS is usually sold on a subscription model, where users pay a smaller amount on a regular basis. Learn the steps to profiting from the SaaS revolution.

By Yuval Shavit, Features Writer

Software as a Service (SaaS) is growing in popularity, and with the buzz around it, your next client may ask whether it's something they should be looking at. For a reseller or systems integrator (SI), SaaS requires a few adjustments, but service providers and vendors alike agree there's a role for the channel with SaaS. Especially in the small and medium-sized business (SMB) sector, companies will still look to a SaaS reseller for advice and implementation help.

As with traditional software, as a SaaS reseller or SI, you can build a business based on a high volume of lower-complexity projects or fewer, more intensive projects. If you target SMBs, you may want to focus on volume sales and earn money on margin from subscriptions, as well as consulting work with clients, to determine their needs. If you specialize in SaaS, you'll generally spend more time on integration work and building custom applications for clients to run within the SaaS framework.

Your approach to SaaS will also depend on your vendor. Some vendors, like Salesforce.com, don't let partners host the software, but provide a rich development platform for SIs who want to customize applications for their clients. Microsoft allows its partners to customize and host its new Microsoft CRM 4.0, code-named "Titan," which the company also hosts itself. Other vendors may have a partner program based more on margin from subscriptions.

Regardless of your approach, a substantial part of a SaaS reseller or SI's job is to help customers determine whether and how to use SaaS. The SaaS model means that the software hosting company stores user data, which some clients may not be comfortable with. On the other hand, SaaS requires much less maintenance -- patches and updates are applied by the vendor and automatically pushed through to users, and your client won't have to maintain the servers and storage infrastructure to host the applications.

A SaaS reseller who does less integration work may need to focus a bit more on volume of sales than it would with traditional software, said Scott McMahon, managing director of Apollo Consulting LLC, a San Francisco firm that is one of the initial partners for SAP Business ByDesign, a SaaS offering for small businesses. McMahon said Business ByDesign has relatively limited integration capabilities so far, and SAP is keeping certain services in-house, such as form creation, data migration and the hosting of the software itself.

Unlike traditional software, which has big up-front costs, SaaS is usually sold on a subscription model, where users pay a smaller amount on a regular basis. If you get a referral fee from the vendor, it is usually as a percentage of the subscription. That means your SaaS revenue stream will start small but has good growth potential. For example, if you sign up 10 customers in your first year, and then 20 in your second year, you'll still be earning money from those initial 10 referrals in the second year; over time, that cumulative effect can add up, McMahon said.

One of the incorrect, but lingering, stereotypes about SaaS is that it works within a silo and can't be integrated with other systems, said Narinder Singh, founder of Appirio Inc., a San Mateo, Calif., consultancy for Salesforce.com and Google Enterprise. That was true in the early days, but some SaaS vendors have worked hard to address that concern; today, integration is often much easier with Salesforce.com than many other CRM applications, Singh said. He estimated that about 70% to 80% of a traditional SI's skills transfer to SaaS, especially if that SI has worked with service-oriented architecture (SOA).

Although SaaS is gaining popularity, it is still in the early adoption phase, Singh said. Most of his leads seek him out, rather than him having to seek them out. But Singh said that could change in the next couple years, as the model becomes more mainstream; when that happens, SaaS resellers may need to shift their strategy to address the changing dynamics.

This was first published in January 2008
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