In my discussions with software houses that already have an on-premise software solution, the question of “Why should we move to the cloud?”, often comes up.
I know it is 2019 and in many parts of the world the discussion is not “Why Cloud?” but “Which Cloud?“, but a lot of software companies founded before 2005 are still having their solution on-premise.
The more “traditional” the software house, the more years in the business, and the more customers it has on an on-premise solution, the bigger the resistance to move to the cloud world.
And I cannot blame the resistance to change.
On-premise software has a higher profit margin than a cloud, software-as-a-service solution. The developers have to build new skills to develop optimally for the cloud. The IT people supporting and developing the solution will have to learn about the cloud infrastructure and DevOps world. The sellers have to change from calling and meeting customers face-to-face, to delivering online demos and following up leads that come from the web campaigns. And the marketing has to transform to a seller-centric department that creates sales funnels and measures web visitors, customer acquisition costs, lifetime value, campaign costs, A/B testing of websites, A/B testing of online campaigns and so much more.
It’s not an easy task. But given all the benefits and the latest trends, it’s an almost inevitable one.
So, here are the top ten reasons that software houses choose to move their solutions to the cloud world. It is a mix of reasons that are valid for IaaS and/or SaaS cases.
#1 Predictability in Revenues
Selling on-premise software, even with a software assurance or a maintenance contract, makes it difficult to predict when you are going to get paid again in the future. New users may use the product without declaring the licenses, and the new upgraded versions are not easily bought by the customers. Moreover, you cannot predict safely the quarter in which the sales will land; and it’s pretty easy for the deals to slip for some months and affect your forecast predictability.
When selling your software as a service, via the cloud, you usually have monthly payments and you build an “Annuity Business”. Or the famous MRR, which stands for the Monthly Recurring Revenues. The equivalent of collecting a monthly “rent”. Knowing that I have 1000 users paying 19 euros per month for my SaaS solution, and my churn rate and monthly growth, makes it pretty easy to predict the revenues in the forthcoming months and quarters. This affects the cash flows and the financial health of the company, as it “protects” it from the effects of a bad sales forecast predictability.
#2 Shorter Sales Cycles thanks to the free trial
A typical sales cycle of an on-premise software solution to a private sector customer is around four to six months, starting from the first meeting to pitch the solution, until the moment that you see the first euro. Yes, I know that many times it can be 12 to 18 months (especially with enterprise solutions) and in the Public Sector case, we count years instead of months. But let’s keep the six months example.
Most SAAS solutions offer a free trial for some days, weeks or months. Usually a 15 day or 30-day free trial. This makes it easy for a potential customer to try the software and decide if it fits his needs or not. And the customer is psychologically driven to make a go or no-go decision after thirty days, especially if there is a discounted price.
We all know the effects of the free-trial but let’s think about it for a moment with a different example. Imagine that you want to buy a new TV and Samsung brings you the TV for free for 30 days in your living room and gives you a 20% discount to purchase it. Otherwise, you can just say no and Samsung will come and pick it up from your house at no cost.
Compare this to the state of “I am thinking about buying a new TV“, or “talking to sellers in retail shops about TVs“. Which one would create a faster sales cycle?
This is what is happening with the free-trial effect on your sales cycle.
#3 Easier Up-Selling of the more expensive versions
Up-selling is the sales tactic of selling the more expensive version of your product. You go to MacDonalds for a single burger and you end up buying a double one. You get the basic low-definition Netflix subscription for 7.99 USD/month and then you get sold the HD one for 11.99USD/month.
In the on-premise world, upselling means that you have to explain the additional features to the customer, set up a new contract, negotiate discounts, get new internal approvals, deal with technical IT issues. The customers will be waiting for the renewal date of the previous contract to decide on new products. And when you are trying to upsell your new version, you often get quotes such as “let’s wait for others to use it first, maybe it’s too soon and it has bugs,” or “I need one feature but not of all the new ones, and I am doing my job fine with the old version”.
It’s more of a psychological game. If you are used to buying a TV every 3 to 5 years, you will not easily “upgrade” after 12 months. On the other side, if you were paying 15 euros per month to own your TV and someone gave you a new bigger and better one after 12 months for 18 euros/month, you would most probably get the deal.
#4 Easier Cross-Selling of other solutions
Cross-selling is the sales tactic of getting sold a complimentary product. You go to McDonald’s for a burger and you always get asked: “do you want fries with it”?
Cross-selling in the online saas world is pretty straightforward. You go to Amazon to buy a book and you are getting sold a Kindle, an Amazon Music subscription, and more relevant books. The online process of cross-selling is all automated and non-dependent on sellers’ incentives and quotas.
In the on-premise world, there are some obstacles. E.g., a seller who sells Product A might not be incentivized to sell Product B, if it is not in his quota and sales targets. Moreover, the seller may not want to spend the time to get to know Product B, C, D of the company. Even if the seller knows B,C,D and they are in his sales targets, if they are not easily sold and they risk Product A, which is 80% of his revenue, he might not even bring them into the discussion with the customer.
#5 Global Reach
Just try to sell on-premise software to another country. You will most probably need to set up an office, create a partner channel and find system integrators to work with your products. This means that you end up paying up-front, a big cost, for taking the risk to expand your business in a new country. And if you fail to set up a business in Country A, you have less power to go to Country B and then to Country C.
Enter the SAAS world. You localize the saas solution, the sales funnel and the ads and you try your luck in Country A. You fail fast with a small cost. You go to Country B. And C. And D. Until you find success. Ok, it’s never as simple as that but you get the idea. Trial and error in going global costs much less in the cloud world.
#6 Easier way to create a sales funnel and measure results. Marketing is the New Sales.
In the on-premise world, your sellers (internal or partner sellers), keep the keys to your customers. Are you sure that if all your sellers disappear today, you would continue to sell in the coming days? Most probably not.
In the cloud world, and in SaaS applications, you can build a predictable sales engine. You can build a marketing funnel, which you feed with a specific input (money for ads, keywords, content marketing, social media campaigns, adwords), and you get a predictable output (number of web visitors, number of trials, conversion rates from visitors to trial and to paid customer). You can optimize this by A/B testing and trial-error mechanisms.
In the cloud, you have a smaller dependency on your sales team and a bigger dependency on your online marketing team.
Actually, Marketing is the New Sales in the cloud world.
#7 Lower adoption cost for the end customer
A software solution can be deployed in 4 ways:
- As an on-premise solution to the software solution provider’s own infrastructure
- As an on-premise solution to the infrastructure of the customer
- As a cloud solution to the cloud tenant of the software provider (ISV)
- As a cloud solution to the cloud tenant of the customer
Let’s suppose we are trying to sell a CRM solution to a bank. If it is an on-premise solution to the bank’s infrastructure, then the bank will have to find available servers or purchase new ones, set up the environment, deploy the solution with the help of the ISV and monitor the infrastructure as the solution operates.
This demands time, energy, money, and human resources from the bank.
Now, compare this to using an online CRM solution, from the cloud tenant of the ISV. The IT of the bank doesn’t have to run/install/deploy the infrastructure, and the bank doesn’t have to invest new resources in hardware.
This leads to a lower adoption cost for the customer in almost all cases if the TCO analysis exercise is done correctly.
#8 Lower TCO for the customer
Buying hardware to host your solution is a CAPEX (capital expenses) move. You pay all the costs upfront for at least the next three to five years.
CAPEX costs include: Server Costs, Storage Costs, Network Costs, Backup and Archive Costs, Disaster Recovery Costs, Datacenter Infrastructure Costs, and Technical IT people Costs
Going to the cloud is an OPEX (operating expenses) move. You pay each month for what you use.
OPEX Costs Include: Leasing of Software and Custom Solutions, Scaling charges based on usage and demand.
In almost all cases, when you do the exercise of the Total Cost of Ownership, for having an on-premise environment VS a cloud environment, the return on investment is better in the cloud world after two-three years.
Below you can have a look at the challenge of the Capex model, especially when there are fluctuations of demand over time.
Examples of extreme fluctuations in demand are:
- Black Friday for retail websites
- A local news site with a video that goes worldwide viral
- National Exams Results for University entry (Ministry of Education website)
- Teacher allocation/recruitment results (Ministry of Education Website)
#9 Improve your product by aggregating data on your users’ behavior. Shorten the product development cycle.
In the cloud world, it is pretty easy to get data on how users are interacting with your solution. This speeds up the product development cycle, even up to 33%.
This means less dev time needed and lower development costs.
#10 Attract more easily external investors
If I was to invest in a software solution that is claiming that it can scale to worldwide levels, I would find it very strange if it was an on-premise solution. VCs and tech due diligence consultants show a heavy preference for cloud-based solutions vis-a-vis the on-premise ones.
Moreover, going to the cloud will help you move to a recurring revenue business model. And there are companies such as Pipe, which let you sell in advance your recurring revenue to investors, and fuel your growth without VCs.
Recurring revenue on cloud solutions is the new sought-after currency.