Calculating SaaS costs isn't so simple

Direct price comparisons alone won't do the trick, says Ephraim Schwartz

This week I thought as a public service I would lay out the real cost of deploying a SaaS (software as a service) solution, starting with a look at two major SaaS providers, Salesforce.com and NetSuite, both of which offer CRM solutions.

Pricing for Salesforce starts at US$65 (NZ$92) per user per month for the Professional Edition and US$125 per user per month for the Enterprise Edition. Both packages include 1GB of free storage. Beyond that, storage is US$300 per year for each additional 50MB — for the organisation, not individual users.

Both Salesforce packages provide basic support. If you want more, Premier support is 15% of the total annual subscription fee. In other words, if you had 100 users on Enterprise Edition, the annual subscription fee would be US$150,000, and that would mean Premier support would cost you US$22,500 per year.

Core pricing for NetSuite is higher, at US$99 per user per month. Advanced NetSuite modules such as the Revenue Recognition module cost as much as US$499 per month, but for an unlimited number of users. Of course, Salesforce’s AppExchange also offers additional modules with various pricing schemes.

NetSuite’s Silver support fee is 22.5%, also based on the total annual subscription fee. One hundred users at US$99 per user per month would mean an annual support cost of US$26,730.

If you require a lot more storage, the fees are less for NetSuite than for Salesforce. The first 10GB are free with NetSuite. Beyond that, the charge is US$1,500 per gigabyte per year.

So, if we do the math, 10GB of storage for Salesforce will cost you US$54,000 annually versus nothing for NetSuite. If you need 20GB, then it will cost you US$114,000 with Salesforce versus US$15,000 per year with NetSuite.

NetSuite CEO Zach Nelson says the data storage fees are more than justified, considering all the database tuning, backup, security and maintenance that is required.

“This is storage in an Oracle database,” Nelson says, “not on an iPod.”

Nelson also says that when you sign an annual contract for 20 users and later reduce that to 15 users, you are still going to pay for 20 users until the annual contract expires. A Salesforce salesperson indicated that if you reduce the number of users before your contract is up, your contract is negotiable.

Based on my talks with both companies, my impression is that pricing is not written in stone. Flexibility above all prevails.

To that point, I also spoke with Ronald Askin, CEO of OrderMotion, a provider of a SaaS solution that does everything “behind the buy button”, as Askin puts it.

OrderMotion has a flat fee for hosting, from US$750 to US$2,500 per month for unlimited users. It also charges a fee for each transaction. This fee also varies — from 30 cents to 50 cents — depending on the needs of the customer.

When all the numbers are added up, Gartner puts the total savings of deploying SaaS in a large enterprise at about 11%.

Of course, price isn’t everything. Joshua Greenbaum, principal at Enterprise Applications Consulting, says that if your business model is to run IT as a core competency that creates strategic advantage, then on-premises may be a better solution.

“Fundamentally, you are customising IT to fit your business, rather than fitting your business to what the [SaaS] software can provide,” Greenbaum says.

If that remains true, SaaS will soon hit a brick wall. But something tells me big changes are ahead.

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