SaaS and Reynolds ball-point pens….

I am currently reading Art of Innovation by Thomas Kelley, one of the founders of IDEO – a design company. This is the second book I am reading about IDEO and how they have found a way to constantly innovate. The first one was 10 faces of innovation which I have already blogged about earlier. There are several good ideas which are mentioned in the book, one of which is about brain storming. I have attended only one brainstorming session in CDC Software and I could relate to what was being said in the book with what happened in that session. Clearly, at least one or all of the facilitator have read this book and implemented it perfectly.

Another concept that the book talks about which made an impression on me is about new projects. The author says that if you cannot express what you want in 30 seconds or if you cannot have a t-shirt printed which portrays what you want then clearly you don’t know what you want and it is better to stop and think about the requirements with a more clear mind.

One thing that helps in getting clear requirements is to have a metaphor or analogies. In the book he gives an example of a project IDEO did. The requirement was to make a portable hard disk which is sturdy and has enough shock-resistance built-in. Now, to the management it might seem like a good enough description of the requirements, but to an engineer it is difficult to understand how sturdy is sturdy enough for the customers. Fortunately, for IDEO, the customer gave an example – “As sturdy as a digital camera.” If you drop a camera from a 6 inches height on a table top, you expect it to work. If you drop it from a height of 3 feet on a concrete floor, you expect to go to a store and buy a new one. This description really helped the engineers understand how sturdy is sturdy enough.

 I personally believe that analogies are a great teaching tool. While reading this book I came up with an analogy on the difference between On-premise and SaaS based software. Why are people moving to SaaS? What advantages do they provide to the customer? I believe On-premise software like Pivotal CRM are equivalent to fountain pens. They are comparatively more expensive to buy but cheaper to run in the long run. You just have to buy an ink pot and it used to last me for more than 6 months( when I was in school). When an On-premise software needs to be updated, the customer has to manually follow all the detailed steps mentioned in the guides. Many customers face issues with upgrades and Support Incidents are raised. This is equivalent to refilling a fountain pen from the ink pot. No matter how careful I was, it was a messy affair with ink all over my fingers, my clothes and some times on my text books. Then came the Reynolds ball-point pen. It was cheaper to buy at Rs.5( about 1/10th the cost of fountain pen). It also came with pre-packaged units of ink called refills. When it ran out of ink, you could just open the pen and throw out the empty refill and replace it with a new one. No mess, easy to do and I am proud to say I never spilled ink on my clothes while changing the refill on my Reynolds :-)

 The exact same convenience is provided by SaaS software. It would become the responsibility of CDC Software or any other SaaS provider to ensure upgrades are easy and trouble-free. Upgrades will no longer be an “incident” to dread. So, am I changing my stance and supporting SaaS software now?

Umm… yes and no. It is definitely better for the customer, but not necessarily for the provider. Let me explain…

 How did Reynolds survive( no …the word is thrive) in spite of giving away pens at 1/10th the cost of fountain pens? They sold refills at Rs.4 which is 80% of the cost of a brand new ball – point pen. By giving an option to re-fill and by charging a hefty premium for the refill Reynolds ball-point pens made lots of money. Another company that follows the same model is Gillette. All their shavers are sold at a slight loss. However, they make a killing by selling blades for their shaver.

I don’t see an equivalent profitable “refill” for our SaaS deals. I see the current SaaS software deals as take the pen for Rs.5( 1/10th the cost) and you can have the refills for free for next 3 years…. We will make money by selling billions of pens with “economies of scale” blah blah helping us make profit…Hmm… I don’t think this will work out for the company.

What is your company’s current strategy? Does the management expect just the scale of operations to help bring in profitability?I think we need to think hard about selling some add-ons to our SaaS software to make a profit. What do you think? Do you have any ideas on creating profitable refills for software companies? Do comment.

2 Comments

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2 Responses to SaaS and Reynolds ball-point pens….

  1. Paras

    “SaaS is inherently not an early, maximized profit model. Instead, the tradeoff is reduced profit for increased stability. The software industry has done excellent with the traditional model, but as business consumers look for more and more choice as well as a way to reduce IT budgets, SaaS becomes a natural outcropping. SaaS providers need to recognize that while huge margins are gone, as are “upgrade fees”, they will see revenue stability and predictability. The SaaS business model is about reaping the benefits of this predictability.”
    ~ http://www.saasblogs.com/2007/07/16/is-saas-about-maximum-profit-for-the-provider/

    • Hi Paras,
      The poster in the link you have posted also says that the company has to achieve scale first before they can spend huge amounts of money on R&D. My question is how can you be sure the company will achieve scale? What should a company like CDC Software which targets certain niche segments do to achieve scale?

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