Will SaaS Swallow Everything?
May 7, 2019 | Contributed by: Neal Polachek
Are we in an era of “subscribe or die?” Not exactly. But this article in The Atlantic argues that we now live in a world full of subscriptions. As the writer correctly points out, subscriptions were originally the province of magazines and newspapers but have now extended to a host of other things, including household products, pet food – and of course software.
Some of us may remember eagerly waiting for the current issue of Sports Illustrated or People as part of a monthly subscription. Others may look back to a time when kids would knock on doors to peddle magazines to win prizes or support school trips. Now we have subscriptions for virtually everything, from the highly tangible (Blue Apron meal kits) to the virtual (cloud storage, Office365, WiFi, etc.). So why has the subscription model become so much a part of our lives?
Tomasz Tunguz, the noted venture capitalist, lays out the history of the first Software As a Service (SaaS) business. Concur launched as a CD-rom, flipped to an enterprise-license model and then transitioned to SaaS in 2001. It completed that transition by 2005.
As the chart in Tunguz’s piece shows, the company’s revenues accelerated rapidly after the switch to SaaS. He notes that gross margins improved greatly with each phase, from 40% in the CD-Rom phase to 60% in the license phase and 72% in the SaaS phase. Of course, it was the power of scale within the SaaS model that led to the nearly doubling of gross margins.
Yet subscription expenses tend to creep up on us. According to a study by the Waterstone group, 84% of consumers underestimate their monthly subscription expenditures. The study also found that consumers were generally happy with their subscription services. While we don’t have this data, we’d be surprised if SMBs were any more aware of their monthly subscription expenditures. The difference of course is that SMBs are more likely to be subscribing to software solutions and not entertainment (Spotify) or shopping services (Ipsy).
But just as everyone is embracing the SaaS model, we wonder if “SaaS fatigue” might be setting in. We’ll directly explore their awareness and perception of the value of SaaS at our upcoming LOCALOGY ENGAGE event in Washington D.C. (6/3-4). We’ll dig deep into this topic on day one and ask SMBs how they evaluate SaaS ROI and what other models (perhaps transaction-based) they might find appealing in the future.