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Whatever happened to the pay-as-you-go beauty of SaaS?

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Remember when the touted advantage of Software-as-aService was that whole pay-as-you-go model where you could add/subtract users at will and avoid big up-front license buyins? Well, it hasn’t really happened that way.

Most SaaS vendors — you know who they are — want customers to pay for one year of service or whatever in advance for a set number of users. So what’s big diff between paying $125 per user per month for a CRM SaaS as opposed to say, $100,000 or $200,000 to some legacy enterprise software player? Not much. Putting 200 users on’s enterprise edition costs $300,000 per year list. That’s a pretty Oraclean number.

I touched on that a while ago here but Gartner(s IT) Distinguished Analyst Robert Desisto drove the point home in a blog post last week.  He pointed out that it’s not just the on-premises enterprise software vendors that are ripe for disruption. The supposedly newer-blood SaaS guys are also at risk.

He wrote:

“The reason is the vast majority of vendors who offer SaaS in the enterprise market do so with a fixed term subscription basis. This means there is no ability for a SaaS customer to pay for what they use, something we commonly see with infrastructure as a service or in many lower end consumer or SOHO applications.  This was supposed to be one of the foundational tenants of SaaS but has rarely been offered because SaaS vendors want large contract lock in.  SaaS vendors were also supposed to be agnostic to the end of quarter or end of year deals. Clearly, in my experience of reviewing 100s of contracts a year, SaaS vendor salespeople behave just like their on premise ancestors.”


The Structure Show

On last week’s podcast we heard from CTO Andrew Montalenti about the upside of relying Amazon(s amzn) Web Services — within reason — and we talk about Netflix’ latest engineering feat.

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9 Responses to “Whatever happened to the pay-as-you-go beauty of SaaS?”

  1. Charles R. Lightner

    I think the issue is the willingness of the vendor to create the price structure that the customer finds to be fair and that meets his needs. As a SaaS vendor, my sense is that, while our basic pricing model is pay-per-use, if a customer wanted a tailored solution that better fit budgeting and cash needs, I’d certainly try to accommodate that customer.

  2. I think the author should talk to more customers. We’re a SaaS vendor and our customers are large organizations. They WANT yearly pricing, because it makes it easier to budget and pay for. Sometimes it’ll take us 3 months just to get through their process for an annual renewal (quotes, purchase orders, etc) — this doesn’t work well with a monthly variable model.

    With SMBs I’m sure it’s different, but many large corporations act like… large corporations.

  3. Business is about maximizing profits through providing customer value. Until a competitor begins offering equivalent value at a lower price, why SHOULD the vendors charge less? Because that’s what the talking heads said would happen?

    If these vendors are vulnerable, who are you placing your bets with?

  4. I don’t really see the payment model as the real driver of SaaS. Instead I think SaaS is a winner because it makes it easier for companies to implement and maintain because those are handled by the software vendor and not the customer.

    As far as paying for this stuff goes, I don’t think yearly subscriptions is a bad deal at all. Do large enterprise customers really want to have variable costs? I don’t really think so, except at the edges. I think for the most part a big customer like this wants predictable costs. Further, obviously when you buy in bulk and for a year you are going to get a discount over a la carte pricing. Its probably much cheaper for companies to not buy SaaS software in an adhoc manner.

  5. Boingnet

    Pay as you go applies perfectly to the marketing automation world. Despite what, Marketo’s & Hubspots might have you believe – marketer resource needs vary tremendously from campaign to campaign (which, by their definition, are limited time efforts). When locked in to yearly or multi year subscriptions, vast quantities of code are sitting idle for long periods of time, yet are being paid for regardless. Ultimately, this reality will disrupt the models of the red hot marketing automation vendors.

    • There are really only a handful of industries/departments that have the sort of variability that would benefit from a pay-as-you go model. Retail and call-centers are two examples of where such a model might work because there is often high turn-over and large influxes of seasonal workers. However, a lot of the SaaS vendors that you alluded to in your article have recognized this and have granted exceptions to allow companies to scale up and down throughout the year; usually month to month. A niche player may be able to temporarily disrupt the SaaS market by offering better terms, I don’t think the market is really that large nor have I seen an unwillingness by the major players to alter their models when needed.