Some time back Jason Lemkin posted a nice brief on ‘Is it SaaS? Is it ARR?‘ .

As everything is ‘Digital’ now a days, even though there is enough ambiguity over what exactly ‘Digital’ means to service providers/consumers.

Similar thing is happening in Start-up space where companies prefer to tag themselves as SaaS (Software as a service).

What does exactly SaaS mean ?

  1. You deliver software as-a-service and charge consumers per unit pricing where unit can be transaction/month/year.
  2. This per unit pricing is generally tagged as ‘ARR’ – Annual Run Rate for the companies. It is generally guaranteed subscription amount (sort of Annuity) and can be extrapolated/maintained at low cost over long period of time.
  3. Typical gross margins are in the north of 70%. As Jason mentions ,

The beauty to software is you write a few (million) lines of code, compile them, upload … and then it cost $0.02 to ship those bits anywhere in the world.  The more you ship, the more you make, at almost no variable cost.

So, if your variable costs are high (even at 20-30% of the revenue), then it is not really ‘Software’, it is more like a ‘Service’.

Now consider the any marketplace which connects to Providers and Consumers (e.g Amazon/Flipcart etc). It is driven by GMV (Gross Merchandise Value) rather than Annuity (ARR) , so it is not considered as SaaS or Software. It is more like the ‘Service’  than enables collaboration between various parties.

It gets complicated further if you consider variety of models in Start-up space.

Zenefits offers free subscription to users and charges service providers accordingly. It does not fit into ‘SaaS’ terminology either.

Consider API based services like Twilio or Algolia. They do not fit into ‘SaaS’ either.

Consider App based economy which mostly offers free software with services attached, does not fit into it as well.

True SaaS represents recurring revenues based on Software. While you still have to provide best customer service/enhanced features over extended period of time, you should be able to manage it at very low cost.  That is key to successful SaaS operation.

That should eventually drive higher valuations for true SaaS companies as compared to Pure-play e-Commerce/marketplace or Service companies.

 

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