One of the key selling point of SaaS is the pay as you go model. In fact, some people even consider this to be part of the very definition of cloud computing. Yesterday, Phil Wainewright wrote a post about SaaS vendors selling multi-year contracts. He quotes a talk given by CEO of Workbooks.com, John Cheney, at the EuroCloud UK meeting where Mr. Cheney talks about the advantages of selling such multi-year contracts to the customers.
He argued that the high startup costs of operating and growing an as-a-service business generate such a huge funding requirement that you have no choice but to sell one-, two- and three-year contracts to get cash in the business. Booking long contracts doesn’t increase the bottom line — the revenue can only be recognised as it is incurred — but getting the upfront payments in the bank certainly boosts the cash balance.
This is not a new argument per se. Salesforce.com took the same approach when they were faced with crunch after the dot com bust. In fact, we can even attribute the longevity of Salesforce.com to this move to selling multi-year contracts (Read Marc Benioff’s book Behind The Cloud for more information on this strategy by Salesforce). In fact, I also share Phil Wainewright discomfort towards this approach but I also how this could help a SaaS startup plough through the marketplace with limited access to cash.
I am not religious on the pricing model as such. However, i feel that a customer, at least in the initial stages, will be empowered if they stick to the pay as you go model. Once they are convinced about the service and reliability of the vendor, they could go for a long term contract. I am pretty convinced on the right path from the buyer point of view. However, I would like to hear from the SaaS vendor side. If you are a SaaS vendor, I would request you to take the following poll. I would also appreciate if you can offer your thoughts on the topic in the comments below.