Software on-demand is a commodity business
Software on demand: Not every business is ready for SaaS. If your target market consists of fewer than 500 control-freak customers with highly specific requirements, and lots of unique specifications, then you are wasting time considering the Saas model as an underlying approach to your company’s operations.
The term “commodity” refers to the fact that because of high volume and demand, software is often mass-produced with few variations. The SaaS model provides a low cost advantage for customers over competitors due to this standardization.
Essentially, the SaaS model is an alternative to software licensing that has become increasingly popular in recent years. It works by freeing up physical distribution and making parts interchangeable so it can be delivered as a service instead of through traditional means like installing on your own computer. This often offers lower costs because there are no license fees or setup charges.
- Commodity capabilities
- Remote, network-based delivery
- Massive economies-of-scale
- Easy adoption
- Interoperability
- Usage–based revenue (subscription, transaction, advertising, etc.)
Software on demand
There are many successful SaaS companies, and the cost savings of this model will only grow. These requirements include a much wider set of applications than most people think about when they picture what Saas is. It includes salesforce (the poster child for saas), but also Google, eBay, Amazon-all businesses that rely on their customers to rent or borrow things over the webIt may seem like these industries don’t meet any criteria at first glance; however it turns out that all successful ones combine an inherent low price with some other strategic advantage such as brand loyalty or mass customization.So here’s my advice: get in now before your competitors do!
Some people might argue that this definition is too broad because it includes a variety of different business models. I disagree with these critics, because the framework has been useful in helping me to think creatively and strategically about my own company when considering its options.
Software on Demand
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5 Comments
- joelyork says: December 8, 2008 at 8:23 pm YK I’m not understanding your comment. Differentiated products are price in-sensitive, not price-sensitive. And, the claim that commodity vs. differentiated status correlates to the stack is not true. Standardization does correlate to lower levels in the stack, but this can serve to increase market share and lock in for the differentiated vendor, provided the vendor differentiates along a trajectory that does not violate the standard. Cisco, Intel and Microsoft come to mind immediately. The primary driver of differentiation in IT is innovation. And, this can occur at any level in the stack. It is no accident that Intel releases faster chips every year. I believe the confusion is a result of the two meanings for which I use the term commodity with respect to SaaS. First, the aggregation of customers onto one infrastructure implies that all these customers are buying the same thing…a manufactured commodity, like a Model T, as opposed to a custom built car. The second, arises when the SaaS vendor does not leverage the Internet for real innovation, but simply moves a client server app to the net. In this case, it is an undifferentiated commodity in a market sense. SaaS is clearly a paradigm shift, i.e., innovation. But it’s original goal was simply lower TCO. I argue that to achieve long term competitive advantage, SaaS vendors should leverage the Internet to differentiate. But, they cannot relinquish their cost advantage in the process. That is, you must be a commodity of the first type (a manufactured commodity), but you should avoid at all costs being a commodity of the second type (an undifferentiated commodity). JY Reply
