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Is SAAS really a low margin crappy business ?

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I just stumbled across an interesting post – Why we compete with Google – written by Sridhar Vembu of Zoho who are into providing SAAS solutions.

What Vembu does is to compare revenue per employee and profit per employee metrics of major players like Microsoft, Google, Ebay, Adobe and few other to make his point that SAAS is not really a easy business to get into – Infact it is a low margin one that Google will have difficulty in adjusting to (given that they currently enjoy highest margins in the Industry.)

Here is an excerpt from his post:

Now it is clear why we compete with Google. Google is perhaps the most stunning technology success story ever, but we simply don’t believe Google has the rational business incentive to get too deep into the business/IT software category. The lower revenue and profit per employee figures would be tolerable if there were huge growth opportunities there, but when very successful companies like Adobe and Intuit pull in revenues well shy of a Yahoo, when even the enterprise software leader SAP is smaller, and slower growing than Google (Google makes nearly as much in profit per employee as SAP or Oracle Salesforce make in revenue per employee), it is fairly clear this market is not going to make a material contribution to Google’s growth and profitability objectives. So what is Google’s plan here? It is fairly obvious they are in it to put Microsoft on the defensive on its home turf, so that Microsoft’s offensive capability in the internet is diminished. It is also perfectly clear why Microsoft wants to be an internet player – as Google has shown, it is a higher margin business even than its monopoly-profit core business.

What is your opinion? Is SAAS market really a low margin business?

  1. ravi says

    Neither of the two examples are pure SAAS players like Zoho, so other factors such as established infrastructure, deep pockets, strong brand, etc. come into play as far as adoption is concerned. There are very good indications that it has a good future and the big players will be looking long term. Sridhar Vembu has a great perspective being in the thick of it, the response to his blog is worth a read as well.

  2. ravi says

    SAAS is just reaching a level of maturity at this point. It is a low margin, high value business in most cases due to the free, pro, enterprise modelling where max. subscribers are in the free part (more usage with no returns). As SAAS grows into myriad domains, there will be areas where this will not be the case. The SF example is in that sense not valid as CRM has a lot of players and the barrier to entry is low as it is essentially a business support function without the Siebel like facilities. Zoho, being in a variety of online domains and growing will definitely strike a few vital niches where the margins are good though overall it still seems this will be a low margin high volume play for a few years atleast.

  3. Richa says

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  4. YouTube Video Blogger says

    Arun,

    SAAS is certainly NOT a low margin business.

    Google is basically the starting point of online SEARCH. Meaning it also serves as a solution to my SEARCH for a SAAS. :)

    And that’s the reason why Mr. Vembu, puts it – “It is also perfectly clear why Microsoft wants to be an internet player – as Google has shown, it is a higher margin business even than its monopoly-profit core business.”

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