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SaaSonomics: Is the SaaS Business Model sustainable?

Summer 2015

Back in 2010 we created a "quick and dirty" real world model to help us understand the relative efficiency of the SaaS Business Model vs. traditional sales models.

The model explained the key difference between SaaS and the other traditional sales models is when you buy COTS the cost of goods (including the costs associated with customer acquisition) are paid in full on delivery. With the SaaS model these costs are annualized as part of the Customer Lifetime Value calculation.

Each new product sale via the COTS model brings in new revenue to fund growth and R&D. Meanwhile, by annualizing the cost of customer acquisition, each new SaaS customer actually increases the SaaS providers cost of doing business. Breakeven becomes a question of years rather than months. So rather than providing a "low cost of entry" for a new generation of disruptive software developers SaaS requires deep pockets to fund growth. The reason being, as with all networked business models, discovery across the network is the most expensive part of the equation.

The complete analysis can be found here

Validating the theoretical model for SaaS growth was easy. If you map the model against the first 10 years of operations of Salesforce.com you will find a strong correlation between the actual and predicted outcome.

There was however another dimension to the theoretical model that was explored in a post examining the Evernote Business Model. That dimension being the business of SaaS, and software products in general, is not just one of attack but also sustain and decay.

The inherent risk of the SaaS business model is, if growth takes too long to achieve then, by the time the model brakes even with the COTS Model, it will already be in decay.

Back in 2010 the model suggested that Salesforce had taken too long to scale and this tipping point wasn't very far away.

The question today is, some 5 years on, what does the data reveal about the accuracy of the model as a predictive model for sustain and decay?

At the moment the model is holding up pretty well. Salesforce appears to have peaked at the very moment the model broke even on annualizing its total cost of doing business with its customers. Competitive pressures are now squeezing the cost of growth (i.e. COCA & Return on COCA) and therefore the medium to long term sustainability of the model.

The next question is will Salesforce see off this next wave of disruptors and bounce back from this position, will it pivot into a new model/product offering, will it inject new funds into the model or will it simply fall into a period of decay?

Come back in 5 years time and we'll have some visibility on that answer and, of course, the validity of the model as a predictive indicator of total lifetime value of the SaaS business model.

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