Trend Toward Software As Services For Small Business

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Software-as-services is the rapidly growing model for how software will be sold in the future. The impact on small businesses will be significant — both for small businesses that use software and also those small businesses that sell software.

“Software as services” or SAS, its acronym abbreviation, means delivering software over the Internet in the form of a complete service. You sign up for a service and you pay a monthly, quarterly or annual subscription fee. Or, increasingly, you pay nothing, because the service is advertising-supported and the vendor of the service gets paid through ad revenue.

Either way, in return you get the right to use the software. Many times there is no need to download any software on to your computer or install anything. If you want to use the software, you simply log on to a central website or some other Internet-enabled application. And, voila — you are using a new application. The point is that you have to do very little except use the service, and do not have to fuss with lengthy or complex technical tasks — all that is handled for you automatically.

We have all used a software-as-service somewhere along the line. Everything from Gmail which is Google’s Web-based email service, to Flickr for storing and sharing photographs, to Salesforce.com.

Professionals who follow technology business models have been predicting the rise of software-as-service for some time now. Ed Sim, a venture capitalist who writes the Beyond VC blog, talks about software as services repeatedly, starting back in 2003. As he notes in one post, software-as-services is cheaper and easier for the customer to use, not to mention cheaper and easier for the vendor to deliver.

Google, perhaps the bellweather technology company of the early 21st Century, has been releasing one software service after another — to the point that it is hard to keep up with them.

Even Microsoft has caught on, announcing to their employees a few weeks ago that the company would be making a major shift toward delivering its products as services. That tells you how big SAS is.

Here is what the richest man in the world (Bill Gates, Chairman of Microsoft) had to say recently about software-as-services, pointing out how the cost to small businesses using software-as-services may be signficantly lowered in the future:

The broad and rich foundation of the internet will unleash a “services wave” of applications and experiences available instantly over the internet to millions of users. Advertising has emerged as a powerful new means by which to directly and indirectly fund the creation and delivery of software and services along with subscriptions and license fees. Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses.

Microsoft’s Chief Technology Officer, Ray Ozzie, explains the implications for small businesses that develop software perhaps most clearly in his very long and insightful memo. He points out that “tremendous software-and-services activity is occurring within startups and at the grassroots level” and that “the work of these startups could be improved with a ‘services platform’,” i.e., a development platform that makes it easier and more functional for startups to develop software-as-service solutions.

AMI Partners, the research firm that specializes in the small and medium business market, puts a number on the growth of software-as-services vendors, (PDF file) and where they are focused:

The number of vendors offering software-as-service (SaS) solutions has grown exponentially over the past few years: AMI-Partners estimates that there are currently over 500 such vendors in North America. While most providers have concentrated on horizontal business application markets — e.g., customer relationship management and human resources — AMI-Partners’ research points to a growing number that offers SaS solutions tailored to the needs of vertical industries. Offerings are proliferating at an especially rapid pace in the construction, healthcare and financial services sectors.

AMI Partners goes on to point out that it is not only the vendors that are small and midsize businesses, but that the customers are too.

Keep your eye on software-as-services. If you are a small technology company, it has the power to make your products cheaper to build, sell and deliver. You will need much less cash investment in such a business.

If you are a small business that is a user of technology, your choices of affordable, easy-to-implement services are going to become much bigger. You will have access to ever more powerful software, without the need for involving your already-stretched — or non-existent — information technology staff.

UPDATE November 15: The third paragraph has been updated. It was pointed out to me that I had — unintentionally — suggested that SAS needed to be browser-based, and that is not always the case.

4 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

4 Reactions

  1. Anita Campbell, over at Small Business Trends, hones in on the buzz about the “Trend Toward Software As Services For Small Business” which has received enormous play now that Microsoft has begun to legitimize it.

    Anita offers two assertions that may be appropriate for readers of Be Excellent™:

    More at Be Excellent™

  2. Anita,

    Loved the post. I wonder, though, what pursuing this kind of business model for software might bring for companies who provide a vast array of services to clients? What are the possible modifications they may have to make once clients start thinking about “using” software rather than “purchasing” it.

    Do you think there are implications to traditional consulting contracts or retainer arrangements for PR firms or ad agencies (as an example)? Will this kind of model for software help accelerate the trend towards “value-based” pricing for marketing communications and other consulting services – where you only pay what the service was worth? Will it mean that graphic designers or web developers will only “license” their work to a client and expect residual payments if their work “over performs”?

    Lots of interesting questions come up as a result of this new trend – and your post does a great job of summing up the opportunity. I hope we can generate some discussion as a result.

    Please keep up the great work. I’m adding this post to my list of blog entries to read on Wednesday’s (11/16) “Much Ado About Marketing” blog.

    Thanks again,

    Mike Bawden
    Brand Central Station

  3. Hi Mike, very interesting observations.

    The value pricing models for consultants and graphics designers that you suggest are not tied directly to this model, in my opinion.

    However, they are similar kinds of concepts.

    When you start thinking creatively about pricing — for any kind of service — it does lead you to similar conclusions, does it not?

    From the seller’s side it is usually a quest to get paid over and over — developing recurring revenue streams — instead of getting paid a single time. From the buyer’s side it is about paying only for the perceived value, especially as prices for certain things like technology continue to drop.

    Best,
    Anita

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