The opening made by software as a service (SaaS) has allowed the possibility of everything as a service in the broad technology space and beyond. This is one of the finest examples of how an old idea or practice successfully applied to a new territory can further extend the (old) idea to many new avenues. Surprisingly, few seem to know this and, instead, ascribe the success of such a model to other factors
Marc Benioff, promoter of Salesforce.com, created an opening from which many have benefited and continue to do so. Salesforce.com offered customer relationship management (CRM) as a SaaS at a time when users had to buy software licenses to be able to use it. Customers purchased licences for a specified number of users, installed the software and signed an annual maintenance contract, in effect producing three revenue streams, one of the strongest businesses for Indian IT services companies. The important point, for our purposes now, was that, once you bought it, you paid the annual license fees whether the software was used by all licensed users or not. That has now changed forever. In my view, Marc Benioff can take credit for that.
According to Kill Bill, a billing and payments software on a SaaS basis, “one of the reasons that subscription-based products are so popular these days is due to the heavy influence of the millennial generation. As it turns out, millennials are just not as interested in becoming owners of lots of different products, and instead have indicated a notable preference for leasing or renting cars, appliances, laptops, furniture, and software” (https://killbill.io/blog/why-the-subscription-business-model-is-trending-right-now/). Many others talk of the success in service through subscription/consumption ushered in by Netflix, Amazon Prime and many others now as having pioneered this path. There are others who consider some other factor such as ease of use as being the influence. Surprisingly, no one mentions Salesforce.com, and I remain strong in my conviction that its success was the single biggest factor as it demonstrated that it was possible to build a business in selling software as a service.
Selling software as a service
Most gave Benioff and his offering no chance of success, because the license model was entrenched in the industry. Larry Ellison of Oracle, where Benioff worked before setting up Salesforce.com, never lost an opportunity to make slighting remarks. After a hard-achieved success, he is smiling all the way to the banks, although success wasn’t easy. It took five years to achieve $1 billion in revenue – from $176 million in 2005 it reached $1.07 billion in 2009. By 2021, armed with a number of acquisitions, it earned revenues of $ 21.25 billion ((https://www.macrotrends.net/stocks/charts/CRM/salesforce,-inc/revenue). It was just a CRM company in the beginning but today offers a range of software on the same model, including many specific clouds for specific industries. And the global SaaS market size is projected to reach USD 307.3 Billion by 2026, from USD 158.2 Billion in 2020! (https://www.chargebee.com/blog/subscription-revenue-long-term-revenue/0
I am not a spokesperson for either Benioff or Salesforce.com but understanding genealogy is important, and I am astonished at the ignorance that informs most writing on this topic. This reminds me of another infamous omission. While at TCS, I had reasons to study the evolution of Indian IT industry and even a cursory glance was sufficient to amply demonstrate the decisive role that Y2K played in it. Driven by the fear that all systems would cease functioning on January 1, 2000, a large number of companies in the world looked for firms who could address this issue. Many thought this was a low brow job and shunned it. Whatever the specifics, this opened the world to Indian IT. Once the opening was made, companies in India which took up the Y2K business began seeing a dramatic change in fortunes. Those who sunned the Y2K work just didn’t make the grade. Anyone who has followed the Indian IT industry ought to recall the phenomenal growth rates that has made many of them giants today.
The difference
SaaS made a fundamental difference in one key aspect of any software: its architecture. SaaS had to enable many users to access it at the same time and the architecture had to incorporate this dimension. Let me emphasize. In the traditional model of software sales, a company licenses its use to clients, installs it in the clients’ system and maintains it. To each his own. In the SaaS model, multiple clients draw from the software (residing in some server in some data centre – dedicated or otherwise – although it is typically cloud today), which means that the software’s architecture should support what is called ‘multi-tenancy’. This is not simple. A global giant in application software encountered serious problems in its attempt to offer multi-tenancy and had to return to the drawing board to redesign the architecture.
Anyway, once Salesforce.com became a success it demonstrated to customers an alternative way which, over time, initiated change across different kinds of software. Adobe’s Creative Suite, SAP’s application software, to mention two extremes, have been available under this model for quite some time now. SAP is particularly interesting because few thought it possible to draw from such a huge (interconnected) system rather than have it installed. According to Ernst & Young, “Worldwide, perpetually licensed software revenues will shrink by a compound annual growth rate (CAGR) of 6.1% between 2020 and 2024, while software subscription revenues will grow by a CAGR of 16.6%” (https://www.ey.com/en_us/tmt/tech-companies-adopting-subscription-and-consumption-models).
From the perspective of business history, I would like to mention that the idea that you ‘draw on the software’ as and when you need isn’t new. In the early years of the first decade of 2000, there were two models on offer: thick client and thin client. A thick client came with all the software pre-loaded in the PC but a thin client came with just the OS, everything else being left to you to ‘draw on’ whenever you needed and pay. In simple language, the software did not ‘reside’ in the PC but elsewhere – today it would be called ‘in the cloud’. It was a revolutionary idea but wasn’t really marketed so. Or perhaps, it was ahead of its time or the communication was ineffective, because thin client just failed. Anyway, that is another story.
Not just software
Today, many more businesses are evaluating such a model. Would it surprise you to learn that “luxury car manufacturers are switching up their traditional business models and adding subscription options? Cadillac, for example, launched a car subscription concierge service of cars and SUVs in 2018. The service allows for the company’s vehicles to be delivered and picked up on demand for customers via a smartphone app” (Source: PYMNTS.com). Not just Cadillac. “Offered by popular brands like Audi, Porsche, and Nissan, car subscriptions are generally all inclusive – the car, insurance, and maintenance cost are combined into a single monthly fee. Unlike in a traditional lease, here the customer has the option to switch cars during their subscription easily. The model benefits the car manufacturers by creating an additional channel for predictable income and allowing them to quickly adjust to changing customer demands” (https://www.zoho.com/subscriptions/guides/what-is-recurring-revenue-business-model.html).
Naturally, this business has its own challenges and the biggest challenge could be pricing, which, in SaaS, becomes a strategic issue. I will visit this later as it involves a detailed discussion.
Takeaways
Salesforce.com is the poster company of SaaS
Ignorance of the real origin is common
Demonstrated success has inspired many other businesses
Pricing becomes a strategic matter
