Enabling Technology

Is the Pricing Right?

 Software-as-a-Service has been lauded for its many benefits, but is pricing structure one of them?
By Debbie Bolla
The age-old debate that has followed the real estate market for years—buying versus renting—is now being tossed around the technology sector. Traditional, on-premise licensed software represents the “buy” since you purchase the software and install it on each machine. Software-as-a-Service (SaaS), on the other hand, is hosted and managed by a third party, and can be accessed via a web browser, reflecting the “rent.” Proponents of SaaS argue that the model can save millions in implementation and ownership fees, with process upgrades included in the contract.
One thing is for certain: SaaS is growing in popularity. According to research firm Gartner, SaaS surpassed $6.4 billion in total revenue in 2008, a 27 percent increase from 2007. Additionally, the market is expected to more than double with revenue reaching $14.8 billion in 2012. The firm also noted that adoption of the model has been growing for about 10 years, but in the past five years, the market has seen a surge in interest.

Indicators of growth point to the flexibility and scalability the model offers. “SaaS is more of a subscription type of license that has some advantages from a customer perspective,” said Jim Holincheck, managing vice president of finance, HCM, and procurement for Gartner. “Typically the upfront costs from a licensing perspective is lower for SaaS, so if you’re crunched for funds to get a project started, that can be a benefit. Also, in some cases, it can be less expensive than what your IT organization might be able to charge to host it themselves.”
Most vendors charge an implementation fee in addition to a either a monthly or yearly charge per user. For instance, Ultimate Software offers an end-to-end human capital management system through SaaS with its Ultipro. The application delivers a  customized solution offering core payroll and benefits functions with the option to include additional HR processes such as performance management, recruiting, on-boarding, learning management, and others. Ultipro’s pricing structure is based on per employee per month for its core function, with additional costs for optional modules.
 “Our solution services every employee in the organizations and every employee has access to it,” noted Jody Kaminsky, vice president of marketing from Ultimate Software. “We are seeing increasing acceptance of the adoption of the SaaS model. The pricing model can be extremely cost effective, and it’s more affordable to deploy with greatly reduced upfront capital expenditures over buying a typical software license. In the long term, it’s more cost effective since you are paying on a subscription basis.”
Kaminsky noted that Ultipro runs on a two-year contract basis and has a 97- to 99-percent renewal rate.The company also conducted third-party studies of clients to calculate return on investment (ROI) and total cost of ownership. In one case, a service provider to 50 medical practices with 1,200 employees saved more than $383,000 during a three-year period with SaaS compared with a service bureau. In terms of ROI, a manufacturer and supplier of wallboard with 2,700 employees experienced a 157 percent ROI during a five-year period.
Some companies charges an annual per-user fee instead of a monthly fee—SuccessFactor, for instance. Its performance management product varies based on company sizes and modules used. The software has four solutions that accommodate from 1 to 20,000 or more employees.
“SaaS has a much lower total cost of ownership,” said David Cain, vice president of marketing communications for SuccessFactors (See Fig. 1).
Click here to view Figure 1.
As technology progresses, inevitable upgrades to software become available, which really makes the value of SaaS products stand out. Said Holincheck, “The benefit of the SaaS model is that there are more regular and incremental updates to the products. In the traditional model, it was typically bigger upgrades, but significantly less frequent. Organizations on traditional software are upgrading every three to four years, usually skipping over a release. SaaS vendors are updating their product anywhere from one to four months.”
Many vendors offer their client the choice of opting-in or out of the upgrade gratis—meaning there are no additional fees for each application of new technology, which is another attractive aspect of the model.  

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