The way I fugure it, there are two distinct types of SaaS business model

  1. SaaS for substitution (SaaS/s)
  2. SaaS with added value (SaaS/v)

Let’s look at the first one – SaaS/s is a situation where a software or manual product is an extremely expensive acquisition or requires significant maintenance. The SaaS methodology of pay as you use on a month by month basis makes substitution of the original product with the SaaS product attractive. Generally in a SaaS/s situation, the functionality being offered is, generally speaking, at a similar level of functionality as solutions offered by non SaaS delivery models.

I would class Salesforce as a SaaS/s business model.

SaaS/v however is a different beast. In this model we create a business that, due to the fundamental opportunities of the SaaS delivery model, creates a situation whereby all that is good about Web 2.0 (the ability to build networks, to user generate content and to collaborate) is added to the original service proposition to create something that is much more functional than the original offerings.

So why are these two models different, which one should investors look to invest in and what are some core requirements of each?

SaaS/s depends on large uptake to gain a critical mass. This critical mass results in user lock in and the offering being seen as the incumbent. To use a bricks and mortar analogy (and a fairly loose one but humour me here), SaaS/s is a WalMart offering – high volume, low margin. It’s a risky proposition, just waiting for a new business to offer the same product at a lower price, or with some new feature. For an investor it’s a short term play.

SaaS/v is different. The Unique selling proposition of the product is such that enterprises will feel a real need to jump on board – not because they can save some money or hassle – but because the value the product adds to their business is significant. It’s fundamentally a more secure investment because (that old adage again) it is a non price differentiated product. higher margin, lower volume and with a customer base that tends to be more loyal. For an investor it’s a sure bet.

So how do we know which of these two models a SaaS startup will turn into? Read between the lines of their product description – if words such as added value, integration, collaboration, network get bandied around then it’s a safe bet they’re thinking along the added value line.

And where does this place recent SaaS startups? That all depends on whether or not we believe that the business has the knowledge, the understanding, the networks and the skills to leverage what they have to create the added value product. Watch this space…

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

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