What about the software vendor? What are the benefits for software companies to sell software on a hosted basis as a service? Ed Sim enumerates the benefits for the vendor:
1. Easier to sell
-shorter sales cycle-do not have to test extensively in a customer’s environment
-lends itself to telesales, can demo over phone and web, do not need a huge sales infrastructure to close deals (just need quota bearing reps without a huge staff of sales engineers and professional services guys to get the job done)
-not a capital expense, usually sold as monthly or annual subscription which can many times be taken out of business budget as opposed to IT budget
2. Easier to install
-no messy installation process, long testing process, or even waiting for hardware to be delivered to customer
-can leave a customer and simply point them to a URL, train them over the phone, and get them up and running
-all of this means that the business can scale rapidly
3. Cheaper to support
-browser-based delivery and richer client interfaces like DHTML make it easy to use for the customer=less training=less customer support costs
4. Easier to integrate
-standard APIs make it easier for software delivered as a service to integrate disparate systems
-once again, reduces costs to deliver product to customers and also removes obstacles to getting customers
5. Cheaper to build
-versus a few years ago, you now have much cheaper bandwidth, storage, servers, and software
-think Linux, Intel boxes, cheap bandwidth, commodity software stacks, and smarter entrepreneurs changing the economics of building and delivering software as a service.
-the economics speak for themselves
Ray Lane adds:
Many established software companies will see the benefits and figure out how to make the transition: A service delivery and pricing model gets software vendors out of the hockey stick sales dynamic at the end of the quarter. It gets the customer out of having to buy something before they can use it.
Even the largest, most entrenched suppliers can start by offering software online, especially to under-served markets and incremental offerings to existing customers. Companies can also use the down market and its lower expectations to begin offering more remedial commercial arrangements, such as term licenses or leases, for example. And then, vendors must learn to say no to big discounts to get deals done in the quarter. Every deal done for quarterly gratification by a sales team or analyst expectations erodes long term value. Customers already know this and drive supplier to highly discounted deals, which many times turn to shelf ware.
Small private companies starting up have an advantage. They can develop a service model from scratch and use it as a competitive advantageIt boils down to simple economics. With a large customer, you can discount very large product sales up front and erode the value of a relationship or develop a long term relationship that is a win-win in terms of price/value that builds a more sustainable and predictable business. Any economic analysis will show that the service model will offer a better opportunity long-term for profits and cash flow, despite more required investment in the short term.
From an emerging market perspective, sellers have few choices. If their packaged software is good, it will likely get pirated and they will be forced to increase their prices which can further encourage piracy. Most software companies then opt for customization which locks the customer, but prevents them from building a large, scalable business. In India, accounting software maker Tally has been the only exception even as it ahs built a near-monopoly market share, it too suffers from very high piracy levels. It has now reduced pricing of its single-user version to under Rs 5,000 ($110) and backed it up with a large advertising campaign and channel building exercise to capitalise on the adoption of VAT across India. Software companies will need to learn from the Chinese gaming companies: shift to an online model to eliminate piracy and increase reach. Going the ASP route is going to be the only option for ISVs seeking to build a large and profitable business.
Tomorrow: The Problems
TECH TALK The Coming Age of ASPs+T