Is There a Price Shakeout in SaaS' Future?

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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 SandHill.com. 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.