Is There a Price Shakeout in SaaS' Future?

Ann All

Software-as-a-service is certainly looking like an industry darling. Gartner is forecasting a growth rate of 22 percent a year for SaaS through 2011, vs. annual growth of 9 percent for the overall software market. And Goldman Sachs reports that SaaS moved from 37th to 18th in its IT Spending Survey in just five short months.


But can SaaS sustain this kind of interest? Probably not, writes Ken Bender, managing director of the Software Equity Group, on Like others before him, Bender raises the specter of application integration. He says:

... integrating a SaaS deployed application with a large enterprise's internal applications, which are highly unlikely to feature an SOA/Web Services architecture, can be a daunting, time-consuming and expensive process that can negate many of SaaS' benefits for both the software provider and the enterprise customer.

Bender isn't the only one who thinks so. As IT Business Edge blogger Loraine Lawson wrote earlier this week, Microsoft software architect Nick Malik is raising a ruckus in the blogosphere over the need for SaaS integration standards.


More interestingly, Bender believes that price, which most folks categorize as one of SaaS' primary strengths, may actually be its undoing, at least in larger enterprises. SaaS providers have underestimated the costs of creating an infrastructure robust enough to support their apps and will be forced to adjust their pricing models accordingly. He writes:

Look for higher -- perhaps much higher -- subscription fees in the future. Or in lieu of higher subscription fees, look for unbundling - separate fees for maintenance, support, implementation, customer-specific database fields or functions, and the like. Look for new pricing models not based on the number of users or concurrent users, but the number of employees or transactions or aggregate dollar amount processed. In certain vertical markets, such alternative pricing approaches may pass muster, but among many large enterprise customers those approaches will likely elicit a strong backlash.

Add Comment      Leave a comment on this blog post
Feb 18, 2008 6:17 AM R Nayak R Nayak  says:
SaaS vendors today are relying on an easy to use interface (Is there training to use google?) and quick return on investment. There is perhaps truth in the statement that SaaS vendors have underestimated the cost of integrations. Partly because their target markets were small and medium businesses which tend to have lower IT budgets and hence used off the shelf software. SaaS vendors must now unbundle their integration effort as Bender rightly points out. If they do not do so, every implementation becomes cumbersome and the buyer has no incentive to simplify the integration process. SAP is an example or an Enterprise offering which requires companies to change their processes to extract the maximum benefits from the software. SaaS vendors must learn from this and find ways to price customizations and integration services. Reply

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