Over on Debbie Wilson's blog, there's a thought provoking suggestion that SaaS or on-demand vendors might find themselves in a painful position now that many of the original contracts are beginning to role over. Debbie notes that she's been "noticing a very interesting micro-trend in my inquiries this month. I've taken several calls from clients who are nearing the end of a subscription to a software solution and are now taking the opportunity to look around... The implication of this phenomenon is that SaaS/hosted vendors are likely to see greater levels of customer churn than traditional on-premises solutions providers... in procurement, where alternatives are plentiful... this phenomenon may spell some long-term pain for SaaS vendors." But will it?
To take the other side of their argument, I'd suggest that SaaS vendors are actually playing a much higher margin game long-term if they get a large percentage of renewals because many -- either knowingly or not -- price a hidden risk premium into their monthly or yearly costs to cover the cost of lost business. I was having this conversation at dinner on Monday night with the management team of a larger provider (collectively, there was probably 75+ years of SaaS and enterprise software experience at the table) that has a product line in the Spend Management arena but many more products outside of this area and we got into the nitty-gritty on pricing and margin -- SaaS vs installed.
All of us felt strongly that sometime around year two to year three, on average, SaaS often becomes more expensive for large Fortune 500 companies (and hence, higher margin for vendors) than a well-negotiated license deal if you factor into account the cheaper cost of application support today and lower cost hardware, lower cost off-shore support, etc. So Debbie, I would not feel bad for the SaaS guys. I'm glad to hear people are evaluating their options. But the smart vendors have already priced their 3-5 year contracts knowing that they could very well lose some of them when it comes time for renewal. Practitioners are paying for the risk premium whether they know it or not when they rent a SaaS product. Perhaps this should give further ammunition to companies to negotiate harder on SaaS renewals deals given what are often obscene margins that vendors enjoy if they can land the renewal.