Cloud does not equal free

Cloud does not equal free
There seems to be a growing perception that if software is offered through the cloud it comes with no cost or at a very low cost. Richard Doughty, Business Development Director at Cerillion, debunks this myth in an exclusive interview with Shashank Venkat

Hi Richard, what’s the general perception of cloud-based services in the market?

Coming from a world where on-premise software implementations are complex and command a sizeable price, the cloud market has an expectation that’s precisely inverse to that. However, the software is still performing the same functions, so why should it suddenly cost nothing? It’s even stranger when you pause to consider that the ‘cloudified’ service doesn’t just include the software, but also the hardware, hosting, third-party software and support. If a business is coming from an enterprise, on-premise mindset, these would all be chargeable extras on top of the already chargeable software.
In the enterprise software space, the industry is also full of seasoned IT professionals who’ve worked on large projects and know the amount of work required to bring a software deployment to business readiness. But with a SaaS platform the software works immediately, in the free trial, nothing’s left to do! So why should anyone need to pay for it? That’s the general perception.  

What’s the reason behind this mindset?

The delivery mechanism (via the web) has made it easy to reach a very wide audience and to offer software for trial and initial use. Customers can see that they can access it quite easily. It apparently then requires no more work from the vendor and it’s fully available for commercial use. That seems to create a misguided perception that no effort is taken by the vendor. So surely no effort equals no price in the normal order of things?!
What people need to understand is that we have very quickly become used to having access to SaaS or at the very least remotely served applications. These would appear to come at little to no cost with the expectation that the infrastructure supporting those services similarly has no cost associated with it.
There’s also a view that hardware costs almost nothing these days. If you do a simple Google check the rough price of a spec’d up Gen9 HP blade is about £7k and that’s certainly not what I’d call free  This facet of the issue probably suffers from the “if I can’t see it, it’s not real” phenomena. All the user sees is the software; not the hardware, data centre, power and air conditioning, or the operating system, database, app server and web servers, not to mention the research and development invested in designing, building, testing and enhancing the application. All of these don’t come cheap, but none of these show up in the browser for the users to see.

Has the freemium business model played a role in creating this perception?

Definitely. The SaaS industry is booming because of the ease with which companies can access the global market – they can do it directly, without having to convince resellers or distributors to sell their wares. The low barrier to entry means that new vendors are appearing all of the time. This is a good thing. And while it’s easy to get a product to market, many choose to build their customer base using freemium subscriptions or very low cost versions – using a big net to catch a lot of fish, and hoping that somewhere in that drag-net is a whale.
Changing perceptions of customers who’ve had access to the software for next to nothing is hard of course. Laddered versions that introduce new features are useful, enabling vendors to use a carrot to generate greater subscription revenue. But the initial perception has already been set that the core offering is available to everyone for very little.

Is the freemium business model popular because of a crowded marketplace?

It is certainly a key factor. However, what this easy access to the market does is drive a price war, one that often ends with a race to the bottom. Such price wars are not unique to the cloud of course, all markets encounter it. And the results are similarly tried and tested; acquisition, consolidation and companies folding to leave a less crowded field. We should expect the same with SaaS platforms too.
Another influence on the freemium model is the Venture Capital (VC) backed companies who are seemingly under no pressure to turn a profit. Their time will come, of course, when shareholders finally call for some returns. It’s still a relatively young market and it will consolidate, and when it does, pricing will stabilise. We’re starting to see this recently with vendors re-positioning out of geographies and prices starting to stabilise and in some cases rising. 

So, how can software vendors establish value?

Vendors really need to drive the value point across. They should be able to demonstrate that whilst SaaS is a tool that can help to reduce costs, it is about increasing agility and opening up more revenue channels. SaaS is easier to integrate (standards-based interfaces) than traditional enterprise software, allows rapid entry to new markets and empowers businesses to respond quickly to changing market conditions.
As the market matures, businesses will begin to appreciate one of the real and unseen SaaS benefits, that of ‘evergreen’ software versioning; this means they constantly benefit from new features introduced by the R&D programme which is funded from their use of the platform. I think that will be one of the aspects of the SaaS model that will show its worth, particularly for businesses emerging out of the shadows of the long, costly, on-premise models where they were stuck on old product versions with no upgrade path.
Contact Richard now to find out more about our cloud billing platform.