SAP Watch

Jul 5 2007   3:47PM GMT

SAP A1S: The true cost of SaaS

JackDanahy Jack Danahy Profile: JackDanahy

We wrote about the increased crowding in the SaaS/on-demand space earlier this week, as NetSuite went public and announced ambitious plans to go up against Microsoft, SAP and others. But then there’s a financial detail buried in there that may play a role in SAP’s A1S plans even though it’s not immediately obvious.

As you know, putting the financial cards on the table is a key part of the IPO process. It turns out NetSuite, like Salesforce.com, is spending vast gobs of money on sales and marketing efforts. We’re talking well over 50% of revenue for SaaS vendors, versus 20-25% for traditional software vendors. InformationWeek’s Mary Hayes Weier summarized it pretty well:

Marketing and sales costs for SaaS vendors run high for a number of reasons. Because they’re typically pursuing small and midsize businesses that don’t want to pay high upfront costs for software licenses, a lot more outreach is required, both through online advertising and marketing and in person. SaaS vendors also spend money on not just marketing to new customers, but to replace those that have left.

That makes a lot of sense when you think about it. A Fortune 50 company or a public works behemoth has money to spend, and it won’t just jump ship at the drop of a hat. That’s SAP’s bread and butter right there. Now they’re going after considerably more fickle game. Of course, SAP has been chasing smaller fish for years through its Business One and All-in-One products, but A1S is seen as the big kahuna that’s going to bring SAP the 60,000-something new customers it needs to hit the 100,000-customers-by-2010 mark.

Is SAP equipped to handle this kind of churn? There’s a lot of smart people working at SAP so I’m assuming they’ve thought of this already in terms of customer support, retention programs and so forth. Of course, the biggest impact of the different models will be felt by the number jockeys on Wall Street; a profit-per-customer number based on Business One and All-in-One obviously won’t translate well to a considerably more expensive SaaS customer win. Let’s hope SAP manages those expectations as well, since investor backlashes rarely lead to good things for the company or its customers, and especially not the product line that triggered the backlash.

Matt Danielsson
Editor

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