Seven reasons why SaaS is not main street in SMB

It was the week of Web 2.0, the annual conference that celebrates the new new new web. Tracking the news from the conference, it was clear that the new web still mainly targets consumers and individuals, and did not make any significant headway into the small- and mid-size business space (SMB). A quick scan of the tech news this week (all thanks to good old techcrunch) reveals that the industry is focused on photo editing, Internet TV, and web 2.0 mashups for your car. Even applications that are more business-oriented, like InterviewUp, are focused on the individuals (interviewees) and not on the interviewers.

There must be a million reasons why, almost 10 years after the first SaaS solution was launched, the usage of SaaS business applications is so limited. Take one example: Business management applications—NetSuite, Intacct and a few others—have a total of 10,000 customers out of a total market of a few million businesses. I scratched my head hard and came up with seven reasons for this phenomenon:

  1. Microsoft—While the link is not intuitive, Microsoft has a lot to do with the slow penetration of SaaS into the business world. For the SMB owner, Microsoft equals mainstream, so if Microsoft is not offering SaaS, it must not be ready yet. Other companies like Oracle and SAP can add the needed legitimacy to the industry as soon as they demonstrate measurable success in this space.
  2. Google—Google? For most people Google equals Internet and the other way around. Since Google is perceived as a consumer-oriented company, it colors the rest of the web as “not serious enough for business.”
  3. There are not enough options—While the first two reasons have to do with big powers that can be considered as “Force Majeure,” this one is perhaps the most important reason. There are no 3 good CRM systems, 3 good ERPs and so on. People like some selection when they decide; it adds a sense of security (if there are 3 good ERP systems to choose from, one can’t really go wrong).
  4. Old technologies die hard in SMBs—If you wish immortality for any technology, just sell it to SMBs… With no IT staff and no free cycles, SMBs are not running first in line to buy any new technology (sometimes waiting 10-15 years to replace a software product), and SaaS is no different.
  5. Not enough differentiation—There is still not enough differentiation in these new and modern applications. The SaaS players convinced themselves that “No Software” was a big enough differentiation and forgot to innovate in basics like UI, utilize the benefits of the web much more and yes, solve some real customer problems.
  6. SaaS efficiency does not translate into cost saving—The SaaS model creates proven efficiency in support (one version to support, easy access to data) and in R&D. These savings are overshadowed by high sales and marketing costs, and the end result is a high price tag. Unlike personal PCs and other disruptive innovations, this one is not coming with a significantly lower price tag. At least not for SMBs.
  7. The Internet—About half of the SMB owners still would rather managing their business data in-house. Comments like: “my father worked for 45 years building our customer list and I am not giving it away” are still common. It will take time (and example) for SMBs to understand that their data is actually safer in a secure data center.

Got more? Use the comment tool to add some…

Update (10/30/07): a new post from small business trends is adding 3 more reasons…

Seven reasons why SaaS is not main street in SMB

7 thoughts on “Seven reasons why SaaS is not main street in SMB

  1. Iam still not convinced with Saas platform, what is that SaaS is trying to offer when there are no cost benefits, it proves to be more expensive than buying a software and having people and resources to manage them.

    I have to agree with your first reason that as long as Microsofts and Google’s still continue to produce their products for end customers, SaaS will have to wait longer till it goes into SMB players.

  2. When Microsoft decides it can make more selling Word, Excel, Powerpoint and Project as a service for a per-use charge passed to the customer through the ISP, then it will no longer be possible to buy these products on media, or download them to your own computer. SaaS will be the only way. It will happen.

  3. Two real life reasons:

    A. Change
    B. Trust

    Your #1 and #4 reasons touch on the issue of change.
    The SMB finally got used to the idea of the in-house IT Guy or outsoured IT firm and now you want them to change.

    Your #7 reason touches on the issue of trust.
    While technically, the secure data center might be safer than their own network, the sense that an outside entity has access and more control of their treasured data/information creates an uneasy feeling.

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