Software as a service (SaaS) applications are typically
rented on a per-user-per-month basis. There are no up-front
licensing costs, and no need for up-front equipment and
development resources. The subscription fee covers software
maintenance and operational costs as well as any upgrades.
CIOs like that model. In fact, “I would like to
convert traditional applications to pay-as-you-go,” says
Peter Young, vice president of IT at pharmaceutical firm
MedImmune—something he’s begun to discuss with his
traditional vendors come upgrading time. (“There’s
no requirement to link subscription pricing to
on-demand,” notes Rebecca Wettemann, an analyst at
Perhaps the toughest aspect of SaaS pricing is figuring out
whether the subscription pricing leads to a higher total cost
of ownership (TCO) than deploying the software internally.
While enterprises know how much the licenses cost and what the
annual maintenance fees are, most don’t know the
operational costs—those for the operations and support
staff, the hardware, the network resources and so on—so
they can’t compare in-house TCOs to SaaS costs. Those
that can make the calculations also have to estimate how often
they expect to upgrade and what the upgrade would actually
cost—not just the new licenses, but also the integration,
training and operations, notes Rick Milazzo, CIO of retailer
American Eagle Outfitters.
Similarly, predicting usage of SaaS applications is inexact.
“The costs are not perfectly predictable either
way,” says AMR Research analyst Rob Bois.
But for many, it doesn’t matter what the TCO is for
SaaS. Enterprises make a rough calculation that if a SaaS
application costs no more than a traditional license amortized
over five years, plus the maintenance costs, it’s worth
buying. Even if it costs a little more up front, not having to
manage the software is often worth the price.