Scale benefits in action

I’ve been thinking a bit more about SaaS. & scale. One of the assertions I made in my previous post was that companies that achieve scale get more profit.  I wrote a piece previously on SaaS provider profitability in it I put this diagram from Mckinseys

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The key element to note here is that both traditional and SaaS businesses are less profitable by a factor of 2 until they reach a certain revenue point, in this instance $1.2b.

 
If you look at the recent financial announcement from SF.com, they are clearly getting into the Economies of Scale (EoS) zone. As a snapshot, PROFIT is going up faster than revenue. This could be from a lot of things, all benefits of scale

  • ·        Brand recognition. People, a lot of people have now heard of SF. That means selling and marketing expenses should come down. By they way, having lots of people know who you are is scale in marketing terms
  • ·        Partner programs. SF are now so topical, they have others selling for them.
  • ·        PaaS, the interesting thing about EoS, its driven by volume. PaaS has given its providers a commercially viable way of increasing their volume very quickly
  • ·        Reduced development. I know SF put out a new release every quarter, but after 9 years or so you would have to assume that they a) have cracked the architecture and b) broken the back of their development..i mean how much more CRM functionality can you add?

 

To me this diagram graphically reinforces the benefits of a scale and particularly the PaaS and potentially gives Salesforce.com a huge advantage.

 
What isn’t clear is if PaaS drive scale and profitability benefits to its other subscribers. For instance, Bob at Smothspan really takes SF to task on its PaaS pricing

I don’t think Salesforce.com, of all players, “gets” some aspects of the Business Model.  If they did, they would radically alter the pricing on the Platform-as-a-Service offering, because the current pricing, even the radically revised pricing, is completely off target for a SaaS vendor.  The service is priced at $50 a month in its normal configuration.  Let me explain why that’s crazy. ….. Salesforce themselves get by for a lot less. ….Most SaaS players charge $50 or less each month for their service, so this math will almost never work. 

What struck me at the time was the assertion that SF could do this at a lot less than $50. My reasoning went like this, the SF marketing folks would know their costs, be charged with making some profit and hence do a mark up on the price. I did wonder if  this meant that SF themselves hadn’t actually achieved the scale benefits? Perhaps they are playing a strategic game here. Giving others an ecosystem that allows them to subsist but marginalises their profits.

I searched for the pricing of other platform providers to see if this SF price was way outta wack but didn’t find anything. Anyone in the PaaS game that reads this is welcome to comment.

As a final comment, two things strike me. 1) the PaaS provider market is about to heat up – just look at the number of SaaS companies coming online… they all need a platform and these guys could do very well out of this and 2) SF shares should be in high demand . Why? they look like they are at a profit inflection point,  they don’t really have a SaaS or PaaS competitor of note within any sort of striking distance and finally i referr you back to the diagram. Large software companies (showing clear signs of EoS ) simply make more EBITDA.

(The unreasonablemen are not share brokers, you should consult a professional before purchasing any shares)

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