The 2nd Article in our Age of Bespoke Series
Based on conversations between Alex Mrvaljevich, Founder/CEO of Growth Kinetics & Bodhi Philpot, CTO, The Plant
SaaS solutions have a lot to offer. For many businesses, they are a convenient and effective way to take care of generic services. Yet the real costs of SaaS are often overlooked. And that’s troubling, because they can be dizzying, especially when SaaS solutions are operated at scale. For enterprises, in particular, the ill-considered use of SaaS often leads to dramatic overspending.
It doesn’t have to be that way. Between us, we have decades of experience working with and around SaaS components. We know that they can be valuable, but that value can only be understood when the full picture is taken into account. When the total cost of SaaS needs to be considered, and measured against the alternatives.
So here are the most common hidden costs of SaaS. Rather than an exhaustive list, we’ve tried to keep things simple, with four key areas everyone should look at to make a fair audit of their software architecture.
The upfront costs of enterprise SaaS can be staggeringly high. This can come as a shock – a central tenet of SaaS marketing is that the upfront costs associated with software are virtually eliminated, from expenditure on development, to investment in hardware.
But SaaS solutions need to be integrated with existing systems. And, for enterprises especially, the cost of that process can be higher than the expense of developing a custom solution.
How much higher? In our experience, it’s not unusual to encounter SaaS integration projects priced at several times the cost of building an equivalent from scratch.
Why would it be more expensive to integrate a SaaS solution than build a custom one? One driver is that companies need to build additional components to integrate SaaS solutions, because those solutions aren’t a perfect fit for their needs. Other issues include data migration, API development, purchasing integration plugins, and customizations.
But at the root of this expense is a simple fact: most of the time, integration is done by third parties, and not by the SaaS providers themselves. Those third parties never have a complete understanding of the SaaS platforms they work with – they did not design them, and only have select access to inside information. On occasions when closer cooperation is called for – in order to make adaptations to the platform, for example – third parties only have limited influence over SaaS providers to bring that into effect. Tasked with connecting a company they are not part of to a platform they do not control, it makes sense that their integration projects become expensive, slow, and inflexible.
Tasked with connecting a company they are not part of to a platform they do not control, it makes sense that their integration projects become expensive, slow, and inflexible.
The bigger the enterprise, the more cost-effective it becomes; the more cost effective it is, the more it can grow. Economies of scale are a fundamental business principle: achieving them is one of the main reasons companies seek to grow.
SaaS pricing does not deliver these economies. And by not rewarding growth, it actively inhibits it. It impedes the growth momentum delivered by economies of scale.
Here’s the problem: in a typical SaaS pricing model, companies pay for the services they use, usually either per-user or per-transaction. The cost of SaaS therefore increases linearly with company growth. If a company has 100 employees on a SaaS CRM at $50 per user per month, it spends $5,000 monthly or $60,000 annually on that software. Grow to 1,000 employees, and the company might be offered an apparently generous 50% discount on the list price. Yet it would still find itself spending $300,000 every year on its SaaS CRM.
With only a few users, that SaaS CRM was highly cost-effective: the company operated a fully functional CRM at a bargain price. But as users accumulate, the total cost can exceed the cost of developing a new solution from the ground up. So much so, that even highly discounted SaaS rates deliver poor value in the medium-to-long term.
Say an entirely new CRM solution involves a one-off cost of $100,000, plus $5,000 a year maintenance. If just 10 people are using the SaaS CRM, they get great value by comparison, only spending $6,000 a year. With that number of users, it would take almost two decades before the cost became equivalent. But, in the SaaS model, every extra user erodes that advantage, until, at about 170 users, it costs more to subscribe to the solution for one year than it would have done to make and own it.
Of course, there are still economies of scale at work in these SaaS platforms. The laws of economics still apply; cost efficiencies are still created. The problem is, they go to the SaaS provider as profit. Not to you.
As users accumulate, the total cost can exceed the cost of developing a new solution from the ground up. So much so, that even highly discounted SaaS rates deliver poor value in the medium-to-long term.
Every company is different, but SaaS supports them by taking a one-size–fits-all approach. That means providing lots of features, to cover a wide range of eventualities.
Those features aren’t free. No business is expected to use all or even most of them, but every business pays for the development, upkeep and availability of the whole suite as part of their SaaS package.
There is a case to be made that it is useful to have access to some features, just in case. But there are assiduously and expensively maintained aspects of widely used SaaS solutions that will never be of use to you, and may not even be listed as features.
For example, SaaS providers build their platforms to comply with the regulations in force in all the regions in which they operate. But the cost of meeting those regulations is distributed to all of their clients, wherever they are. Complying with the California Consumer Privacy Act involves complex and expensive engineering, but it is not necessary for companies in Japan – yet Japanese companies subsidise that work, through their SaaS subscriptions.
And there’s another hidden cost. Because SaaS platforms are built to accommodate a wide range of industries and use cases, the features themselves are often generic. This broadness can limit how well the product fits your specific workflows. Companies end up working around the software, instead of the software working for them—investing additional time and training, and sometimes even developing supplementary tools just to bridge the gap. These inefficiencies may not show up on a pricing sheet, but they have real financial consequences.
Low infrastructure overheads were the original advantage of SaaS – companies could avoid expensive investments in hardware and use SaaS to run software through the cloud, without upfront expense.
Today, however, most SaaS uses the same cloud infrastructure available to bespoke solutions. But SaaS vendors are not making that infrastructure available to you “at cost”. Rather than being cheaper, SaaS infrastructure today is often more expensive.
Those markups are no accident. Many SaaS vendors have a Chief Revenue Officer – a C-suite role dedicated in part to extracting as much value from clients as they will accept: a strategy that has steadily eroded the original SaaS cost advantage.
That same approach has seen “pay for what you use” quietly replaced by a pay-per-license model. As a consequence, companies find themselves shelling out for licenses before integration is completed – that is, before the licenses are operational.
One business we encountered found itself locked into paying license fees for years for a product that hadn’t been deployed. Held up in a seemingly endless integration project, the licenses – which were against forecast, rather than actual sales – lay unused. But the company was bound by a multi-year licensing agreement – exiting the contract would incur exorbitant fees.
SaaS is sometimes sold on a promise of flexibility. But whether it’s the small print in a contract, or the sunk cost of investments in time and money, a commitment to SaaS can be more binding than you might think.
Any assessment of value must be relative. If SaaS at scale is poor value, it’s poor value compared to what?
Today, for enterprises, especially, it is often more cost-effective to build custom solutions, than it is to choose SaaS. One reason for that is the availability of cloud infrastructure, meaning that the only fixed cost in a software project is the core engineering team.
That is not to say that the options are as stark as “build or buy”. Today, enterprises are embracing hybrid, task-specific approaches to SaaS, custom and everything in-between.
Some companies do go fully custom; others choose a composable system. Still others opt for a customized off-the-shelf solution. The trick is to recognize where a custom solution could give you a strategic advantage, and where the tipping point lies between SaaS being a benefit, or a burden.
That starts with a full, transparent assessment of the cost of SaaS to your business, set squarely against the alternatives. So – how much are you spending on SaaS? Are you getting good value?