Business & Technology Nexus

Dave Stephens on technology and business trends

SaaS and Profitability

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It’s been interesting to monitor profits for public SaaS companies over time. Ever since Bruce Richardson’s 2008 research report “SaaS and the elusive path to profitability” I’ve been looking for examples where gross margins look like they will trend towards the 40 points that so often seem the target for the wold’s best software businesses.

So far, I haven’t seen it.

It’s possible that the reason is that these businesses are simply viewing today as “land grab time”. When operating in that mode, a SaaS business may be willing to spend 1.5-2 times the annual recurring revenue to acquire business, especially if they have direct evidence with 90+% renewal rates.

But once the mindset takes hold that profits aren’t a key measure, you end up in an interesting predicament. Whenever you adjust (and it is inevitable) towards a profit-motive in the business, employees and outside parties tend to view the adjustment as a capitulation that growth has slowed and will continue to slow.

Until the big SaaS players can “show Wall Street the money” we should all be skeptical that the business model will prove as lucrative as its’ “on-premise” predecessor.


Written by Dave Stephens

07/18/09 12:01 PM at 12:01 pm

Posted in Software

One Response

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  1. Some Analysts expects enterprise software-as-a-service revenue (SaaS) to more than double by 2012.

    There has been a 27 percent increase in SaaS revenue this year, up to $6.4 billion. The popularity of the on-demand deployment model has increased significantly within the last four years. Initial concerns over security, response time, and service availability have diminished for many organizations as SaaS business and computing models have matured and adoption has become pervasive.

    — Sada Siva Rao


    07/22/10 10:08 PM at 10:08 pm

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