SaaS Business Model for Software Enterprise
Hancheng Liao
School of Software,JiangXi University of Finance & Economics,
Nanchang, JiangXi, P.R. China
liaohancheng@hotmail.com
Abstract—Revenue of traditional software enterprises are from
software copyright licensing and software upgrades,
maintenance and other services fees. As a rapidly growing
operation model of software contrast to traditional
perpetual-use license, SaaS (Software as a Service) softwares
are subscripted by users from vendors. From views of business
and technique, software product/service selection, software
service classification, service pattern and charges, advantages
and disadvantages of SaaS business model were analyzed in
the paper. A conclusion is that SaaS business model could not
only provide vendors more development opportunities but also
contribute to SME‘s informationization.
Keywords-SaaS;Business model; software enterprise
I. INTRODUCTION
The traditional income sources of software firms include
software copyright and software upgrades, maintenance and
other services fees. But the thought of turning software into
service, which is a separation of software’s ownership and
use right [1], has great influence on the traditional software
business model. Traditional product sales and license fees
have declined, and software firms’ revenues have shifted to
services [2]. Michael A. Cusumano discovered that product
sales might continue to grow, but services grow faster [3].
The Software & Information Industry Association presented
the next generation ASP (Application Service Provider)
model is SaaS [4]. Markku Sääksjärvi. et al defined SaaS as
follow: “Software as a Service is time and location
independent online access to a remotely managed server
application” [5]. Business model for software firms has
become hot research topic for entrepreneurs and academics
recently. Having analyzed the development of Microsoft and
Netscape and Linux, Maureen Mckelvey sum up three
business models, Firm-based control, Network-based and
Hybrid [6]; On the basis of cases analysis, Rajala induced
software business models in the light of the industrial
organization and transaction cost theory as follow: software
project business, system solutions business, services and
semi-finished solutions business and Standard offerings
business [7]; Shi Jin-Chuan et.al. studied PC operating
system software market structure determinants and the
formation mechanism by extended Hotelling model, and
analyzed different software vendors’ business models[8];
Vidyanand Choudhary has proved theoretically that
compared to perpetual licensing, SaaS model could promote
IT companies increasing more investment in software
product development and improve higher quality of a
software, and also the software suppliers could earn greater
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profits while social welfare is also high[9]. With the support
of Web2.0 and Chris Anderson’s theory of Long Tail [10],
many traditional software suppliers, including IBM, Oracle,
Microsoft so on, began to set foot in SaaS domain, released
some software products on the basis of SaaS; In November
2006, Microsoft introduced software called live online
service. In July 2007, Oracle Corporation announced the
latest version of Oracle Siebel hosted CRM software in china
market. In September 2007, the biggest ERP software vendor
SAP launched the SaaS business management software A1S.
The paper discusses product (service) selection, service
classification, service pattern, service fees after SaaS
business and technique was briefly commented. We hope
that SaaS model could help software suppliers enlarge their
customer bases and contribute to SMEs’ informatization.
II. TWO VIEWS OF SAAS
The evolution of Internet has induced the change of
software architecture, the improvement of software
development technology and hardware performance
promotes software business model innovation and change of
customer segments.
A. Business view of SaaS
Generally, SaaS adopted Multi-tenancy architecture,
namely, a set of standard hardware equipment and software
system could provide services for many different customers
at the same time Software suppliers provide Internet
applications and the software's offline operations and local
data storage, customers leased certain software services to
manage their business activities without an amount of
investment for hardware, custom software, personals except
personal computer and Internet connection software (mostly
free).
SaaS model lays stress on services and pays close
attention to the software application customization and
extension. SaaS software applications are paid according to
the number of rented software functions or the used length of
time by customers, who choose these functions or used time
to meet their actual needs (Shown as in Figure 1), but ASP
model belongs to traditional software business model,
Customers should pay for software use fees, server
managerial expenses and software update costs. In practice,
ASP model is adopted easier by big companies and the
application could likely be the enterprise’s special system.
But SaaS follows with interest in large quantities of small
and medium-sized enterprises; SaaS model can reduce the
purchasing and maintain infrastructure and application costs.
and expands the ASP application scope.
Figure1 Business view of SaaS
B. Technical view of SaaS
With the development and popularity of service-oriented
architecture (SOA), various kinds’ structures of the service
were advocated. However, these architectures could not put
together all customers’ demand from the view of product
/service. SaaS software has some main features: centralized
management; Single Multi-tenancy,; isolation data among
the different customers for the security and the privacy of
each data, which has personalized surface, business logic,
data structure and so on; And the application software
remote accessed at all time through Internet. As shown in
Figure 2.
Figure2 Technical view of SaaS
Service technology layer includes the service description,
service discovery, service negotiation, service delivery,
service composition, which handle user customization,
scalability and Multi-user efficiency and connect the SaaS
applications provided by the software vendors (or ISV).
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SaaS service providers use the Single Multi-tenancy to
reduce maintenance and upgrade costs. Customers can use
some technology (e.g. parametric applications, customized
controls and Connector), to define work flow and approval
flow and to expand the application themselves without
programming knowledge, according to the company's
business logics.
III. SOME ELEMENTS OF SAAS BUSINESS MODEL
For a long time, the traditional software industry has
been driven by demand for product upgrade and operation
growth. Due to the fierce competitive, such as serious
homogenization of products and diversification of user
requirement, the software business model face a new
challenge. The concept of SaaS is the key to solve these
problems. According to follow aspects, product / service
mode of choice, type of service, service charges and so on,
SaaS is discussed to provide a new development direction
for software companies and interface to SMEs.
C. Product /Service Choice
SMEs’ informationization has not been high popularity
due to few IT budget, lack of professional technical support
staff, long time for decision-making. However, flexibility
and rapid development of SMEs make them urgently need
professional IT system to promote management quality,
reduce the operation cost and enhancement core competitive
ability. Understanding the practical needs and management
methods of SMEs and using best practice, the SaaS service
providers could have caught the development opportunity to
develop appropriate informationization system for SMEs.
According to the majority of SMEs actual informatization
situations, the following products would be realized for them
by SaaS model.
TABLE I. SOFTWARE PRODUCTS SUITABLE FOR SAAS
EBS E-Commerce,CRM, SCM, ERP
EOS OA /RO, KM, HR ,E-Communication
ITIS Security, Data Backup
A. Classification of Service
According to the classification of SaaS applications users,
SaaS service is usually divided into two categories:
1) Enterprise-oriented services. Usually they are large
customized business solutions to help E-commerce,
financial, SCM and CRM, human resources management
and other business and office work etc, such as EOS and
EBS shown in Table 1. This kind of services is usually
leased and paid by the annual (monthly) / per user fee.
2) Consumer-oriented services. They meet individual’s
demand for entertainment and communication. These
services are usually provided public freely, revenue of these
services providers come from the advertising or virtual
electronic money bought by users.
B. Service patterns
Transforming the traditional purchasing software licenses
to the tenancy, software suppliers should adopt different
business model to reduce operational costs, improve service
quality for the growing profit in the low end market. There
are usually two patterns as follow.
1. Providing services platform
Since even the largest firms were not assumed to be able
to provide all of the applications needed in SaaS solutions,
SaaS application platform can provide customized flexibly,
deployed immediately, integrated fast and developing tools
to ISVs and terminal users, who can fast develop or
configure their own SaaS application seamless integrated
with platform operators’ application on the universally
platforms. SaaS platform would unify numerous small and
medium enterprises and a large number of powerful ISVs
together closely, who would like to develop rapidly a mount
of SaaS applications for SMEs and public to meet their
specific business logics.
2. Providing full services
Professional SaaS software companies develop their own
products and market is liable for professional operators.
They manage their development teams, sales channels,
business partners, end-users, who can exchange information,
share fully data and integrate valuable application software
into an online service infrastructure to form online virtual
community for the advantage of network effects.
Salesforce.com expertise for the CRM target market;
www.sdo.com focuses on online games; www.qq.com
provides instant messaging services and other services such
as video chat.
C. Service charges
Faced with a large number of small and medium-sized
enterprises, the traditional software distributed model will
increase software providers marketing and services cost and
it is very difficult to play economies of scale.
SaaS model has abolished the traditional software
licensing fees, only the software module rented by the
customers, which can be subscribed according to customer’s
demand, might be charged. SaaS application software
vendors will deploy application services on their own unified
servers and network security equipment. Software upgrade
maintenance-free will be born by SaaS providers.
Customers pay for the SaaS software according to the
using time of subscribe software module. It could make
software firms’ revenues more robust and provide more
predictable cash flow.
The main advantages of SaaS charge pattern
From SaaS vendors’ perspective:
1. Falling the sustainable costs. SaaS software delivery
model reduced the traditional marketing channels and
operating costs, lower effectively marketing costs. Universal
characteristics of SaaS software are lowering the cost of
customized development and reducing the software provider
investment.
2. Expanding the SaaS software application. SaaS
providers adopt free marketing strategy to expand customer
base Positive network effect. It will help SaaS providers to
attract enough customers in order to benefit from economies
of scale for long-tail effect on their revenue.
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3. Enhancing market competitiveness. SaaS should urge
software provider to design more flexible, compatible and
scalable system architecture, promote system deployment
and maintenance technology for a competitive advantageand
improve the relationship between producers and users to
reduce marketing costs effectively for speeding up product
updates or service entering into the market rhythm to foster
the growth of market size.
4. Avoiding software piracy. The traditional software
business model follows with interest the number of sailed
software, but the software could be copied easily and the
copy cost was almost negligible, so software piracy is almost
inevitable. Counter to SaaS model, all the service programs
are in the hands of SaaS application providers, who govern
user authentication, software upgrades and maintenance. So
it is very good to avoid software piracy.
From the user perspective:
1. Reducing SME’s informatization costs. The traditional
software business model would make SMEs afford a huge
sunk cost, the maintenance costs, staff training costs, IT
professionals’ employment costs when they are in processes
of informatization. Correspondingly, SaaS service providers
are responsible for all the early implementation and the latter
maintenance. By using SaaS services, SMEs could move
resources from application developers to application usage,
freeing valuable resources to their critical business logics.
2. Choosing freedom and subscribing On-demand.
Software application could be subscribed by users according
to their personal-demand. With the SMEs’ development,
ordered software module could be adjusted to adopt their
core business processes. Customers have more choice
freedom and their SaaS applications have more scalability
and Scalability.
3. Enjoying better service. SaaS service providers would
offer customers software and counseling services
round-the-clock over the Web. Based on users’ feedback
information, those SaaS applications could be upgraded in
time to meet the feedback. Users can enable or suspend SaaS
services more flexible acing to their strategies.
IV. DISCUSSION
SaaS model makes software sales no longer one-shot
deal, but become upgrading service to adapt to enterprise
changes. However, some problem should be solved if SaaS
business model were popularized.
1. Individual demands are difficult to meet. SMEs’
informatization demands were different. As most of SaaS
services usually provided the public IT systems, although
some technologies, such as parameters, multi-tenancy and
secondary development of platforms and so on, have been
adopt, but users’ individual needs are not easy to close. So
new software techniques and management methods should
be developed for SaaS model in order to satisfy customized
demands better.
2. Doubt of data security and reliability are still obstacles
to the subscription of SaaS application. Enterprises may be
worried about following: Corporate data, especially financial
data and customer information has risk of leakage; data
transferred by network would likely make all data not to use
unsafe if SaaS operators’ system or network failure; Trojans, [9] Vidyanand Choudhary, Software as a Service: Implications for
viruses, and unexpected disasters and other factors, would Investment in Software Development, Proceedings of the 40th Hawaii
International Conference on System Sciences – 2007
make the data lost and sabotage.
[10] Chris Anderson, The long tail, CHINA CITIC PRESS, BeiJing, 2006
3. Software vendors’ organization and their business
model could affect the development of SaaS. Traditional
software sale management needs a large number of project
consultants in all major cities. The SaaS venders like
Salesforce, provide localization services with the help of
their agents based on the SOA. And it is difficult to manage
the complex network of suppliers, which is required for
integrating the product and service
4. Market environment, include the credit, legal and
corporate IT application maturity, plays an important role in
developing the SaaS software market healthily. A series of
questions, such as the credibility of software services buyers
and sellers, agreements of fees paid, response time, buyer's
data security and the corresponding penalties, have to be a
good social credit system to support.
V. CONCLUSION
Low cost delivery and applying SaaS application greatly
reduce the enterprise informatization cost, so SaaS model
could be a simple way to the current deep end of enterprise
informatization. Along with market gradually mature, more
and more SaaS software vendors, including traditional
management software vendors, Internet companies and
telecom operators, enter the market to provide SaaS service
to customers with cheap price and change their business
models bias of the thought from the product- center to the
user-center commercial model, and seize potential
tremendous long tail in software market, to find new profit
growth point in the software industry.

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