Software as a Product vs. The Economics of Software as a Service (SaaS)

There are numerous ways of selling software these days. Software as a Service (SaaS) has been in the consumer market for a while, and is now making significant inroads into the enterprise software space. If you’re considering purchasing or using software, you should understand what SaaS means and how it differs from software products of the past.
This article is not about the challenges of product management for a SaaS product, nor is it about multi-tenant architectures and other SaaS implementation details. This article looks simply to compare—from the customer’s point of view—software purchased as a service versus software purchased as a product.

Software as a Service?
Software as a Service is an interesting concept. It implies that, instead of purchasing the software, you are purchasing it as a service—which really means the right to use the software.

You are also (usually) purchasing a hosting and infrastructure service along with the rights to use the software. SaaS providers maintain the hardware, perform upgrades, backup your data (sometimes), and otherwise perform all of the “keep the lights on” services and activities required to keep the software running.

Imagine a typical, 1990s style software purchase:

  • You buy a source code control system.
  • You set up a server and install the software.
  • You pay ongoing support costs: providing power to the server, keeping the server cool, applying security and operating system updates to the server.
  • You pay costs associated with administering the hardware and labor costs to update and upgrade the software.
  • You carry risks—a botched upgrade or a hardware failure—which can cause downtime or lost data.
  • You bear the costs of designing and maintaining a secure system. Do you allow your people to access the software (on the server) from other computers on your network? Do you allow them to access the software when they are not on the network (traveling, working from home, etc.)? How do you prevent your competitors from stealing or, even worse, destroying your data?

Now imagine that you’re outsourcing all of the “keep the lights on” activities above:

  • You pay an IT services firm to manage the hardware and the software for you, including the security model.
  • And you just use the software.

That’s one of the benefits of purchasing SaaS. To really grasp the economics of SaaS you have to contrast it with the economics of software license purchases.
Widespread misunderstanding
There is a widespread misunderstanding about purchasing software. In the last section, we used the word “purchase,” but that isn’t completely correct. You don’t purchase a copy of the software; you purchase a restricted license to use the software.

You probably have heard the phrase “site license,” which means that you are purchasing the right for everyone in your building (or company) to use the software.

Sometimes software is sold in terms of “numbers of seats”—the number of people that are licensed to use the software at any one time. You might have 100 engineers who share ten seats (single-seat licenses) of analysis software. Since each engineer only spends about 5% of his or her time using the software, they can easily share licenses. At any given time, five engineers (on average) will need to use the software. With a license for ten simultaneous users, each engineer is likely to be able to use the software whenever he or she desires.

So, even when you think you are purchasing software, you aren’t. As with SaaS, you are purchasing the right to use the software.
Economics of software licensing
There are infinite creative ways to purchase a software license. The most common situation is that you purchase a license, and then later purchase upgrades.

An obvious example is Microsoft Office (productivity software). Microsoft releases a new version of Office every couple of years. If you own the previous version, you can purchase an upgrade for less than the cost of buying the software for the first time. You are not required to purchase an upgrade, of course, but you may want to in order to capitalize on the latest features and fixes—and to stay current. If the people with whom you work all upgrade, you may want to upgrade, too—so that you can use the documents they create.
Microsoft does a good job of providing free utilities to read documents from the newer versions, and allowing people with newer versions to create documents that can be used by people with older versions. Microsoft, therefore, gives you a choice. They rely on market forces to create the pressure to upgrade, but you never have to upgrade.

On the other hand, Intuit, makers of Quickbooks (small business accounting software), is a little pushier. Intuit releases a new version of the software every year. Once a new version of Quickbooks is released, support for some or all of the integrated online services is dropped for older versions of the product. You can continue to use your old version, unless you want to use one of the integrated services.

When companies sell software (licenses), they usually sell a version of the software, and then make updates to that software with some frequency—anywhere from daily to annually. Companies also manage those updates as two distinct types of updates:

  • Minor updates are usually free and often include bug fixes or features that were intended to be in the major release, but were delayed. Or they might just be the introduction of capabilities with “small” value to their customers. A lot of software will automatically notify you, download the update, and install it for you. That’s great service.
  • Major updates usually require the purchase of an upgrade. Major updates are usually more significant; they introduce capabilities that have “large” value to their customers or are intended to make the product appealing to additional markets.

To understand the economics of software license purchases, you have to look at both the value over time and the costs over time of purchasing a software license.

To keep this simple, we’ll assume the model described previously—minor updates happen frequently and are free, and major updates require the purchase of an upgrade to the latest version of the software. We’ll also assume that every new update introduces something valuable to the customer.

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Procurement software and Business software or business application

Procurement software is business software that helps to automate the purchasing function of organizations. Activities including raising and approving purchase orders, selecting and ordering the product or service, receiving and matching the invoice and order, and paying the bill is handled electronically, enabling the procurement department to see everything that is ordered, ensure that nothing can be ordered without correct approvals, and lets them get the best value by combining several orders for the same type of good or even getting suppliers to bid for the business.

Buying organisation’s choice can be driven by the particular strengths offered by each individual system and the number of vendors available through them. A multinational or otherwise large organization will use a shared procurement system to take advantage of economies of scale to drive down the cost of purchases.

While traditionally most e-procurement software systems have been designed for larger organizations, there are now also systems available for the SMB market, such as the Free-Procurement Project by SpendMap. Whilst some services are available to purchase through automated systems, the key strength of these systems lies in the procurement of commodities that are much easier to standardise.

The key benefit for organisations using procurement software include ease of administration and potential long-term cost savings. Having a single interface for procurement related management information cuts down the time and effort required to monitor organisational spending. The use of such software also allows procurement managers to control the vendors used by the wider organisation so all employees take advantage of negotiated rates and other terms of service.

Common Features of Procurement Software Systems[1]

Requisitions – Creation of a purchase order with line items to be fulfilled by a vendor.Automated Sending via Fax or Email

Vendor Follow Up – Automated, or reminders to follow up with Vendors to Confirm Purchase Orders.

Receiving of Goods or Services – Maintaining a physical inventory of goods.

Financial Settlement – Creation of financial and/or inventory related transactions as goods are physically received.

Business software or business application is any software or set of computer programs that are used by business users to perform various business functions. These business applications are used to increase productivity, to measure productivity and to perform business functions accurately.

Some business applications are interactive, i.e., they have a graphical user interface or user interface and users can query/modify/input data and view results instantaneously. They can also run reports instantaneously. Some business applications run in batch mode i.e. they are set up to run based on a predetermined event/time and business user does not need to initiate them or monitor them.

Some business applications are built in-house and some are bought from vendors (off the shelf software products). These business applications either are installed on desktops or on big servers.

The term covers a large variation of users within the business environment, and can be categorized by using a small, medium and large matrix:

  • The small business market generally consists of home accounting software, and office suites such as or Microsoft Office.
  • The medium size, or small and medium-sized enterprise (SME), has a broader range of software applications, ranging from accounting, groupware, customer relationship management, human resource management systems, outsourcing relationship management, loan origination software, shopping cart software, field service software, and other productivity enhancing applications.
  • The last segment covers enterprise level software applications, such as those in the fields of enterprise resource planning, enterprise content management (ECM), business process management (BPM) and product lifecycle management. These applications are extensive in scope, and often come with modules that either add native functions, or incorporate the functionality of third-party computer programs.

Technologies that previously only existed in peer-to-peer software applications, like Kazaa and Napster, are starting to feature within business applications.

Types of business tools

  • Enterprise application software (EAS)
  • Resource Management
  • Digital dashboards – Also known as business intelligence dashboards, enterprise dashboards, or executive dashboards, these are visually based summaries of business data that show at-a-glance understanding of conditions through metrics and key performance indicators (KPIs). A very popular BI tool that has arisen in the last few years.[when?]
  • Online analytical processing, commonly known as OLAP (including HOLAP, ROLAP and MOLAP) – a capability of some management, decision support, and executive information systems that supports interactive examination of large amounts of data from many perspectives.[1]
  • Reporting software generates aggregated views of data to keep the management informed about the state of their business.
  • Procurement software is business software that helps to automate the purchasing function of organizations.
  • Data mining – extraction of consumer information from a database by utilizing software that can isolate and identify previously unknown patterns or trends in large amounts of data. There are a variety of data mining techniques that reveal different types of patterns.[2] Some of the techniques that belong here are statistical methods (particularly business statistics) and neural networks as very advanced means of analysing data.
  • Business performance management (BPM)
  • Document management – made for organizing and management of multiple documents of various types. Some of the [3] have storage functions for security and back-up of valuable business information.
  • Employee scheduling software- used for creating and distributing employee schedules, as well as tracking employee hours.