SaaS Vendors Can Grow Despite Tough Economy

SAN JOSE, Calif. – Not many sectors of the tech economy think the current economic malaise service will be good for them, but Software as a Service SaaS vendors might weather the storm better than most as enterprises look to save on IT spending.

Measuring SaaS success can be tricky though. “The model is entirely different from the P&L (profit and loss) and GAAP models,” Josh James, CEO and co-founder of Web analytics firm Omniture, said in his keynote speech Tuesday at SIIA On Demand, the Software Information Industry Association’s conference on SaaS, being held at the San Jose Marriott Hotel through Wednesday.

James said the most important way a SaaS vendor can determine whether or not it is succeeding in business is to focus on the magic number.

To calculate this, companies find the difference between the current quarter’s and previous quarter’s revenues and multiply that by four to annualize it. Then divide that by the amount spent on sales and marketing in the previous quarter. The result is the magic number.

“Any time a magic number is more than 0.75, that’s an indication you should hire more sales people,” James said. “You should try to get it down to the 0.5 range, assuming you understand all the other components.”

The SaaS business requires high upfront investment, and management must be confident about its model. “When you look at your business from a GAAP perspective it makes people really nervous,” James said.

Reasons to be scared

“Even if you say beforehand what you’re about to do and what that will do to your P&L, it still scares everyone to death when that happens,” he added. “There were times when we were burning through the money and were in negative revenue and even though our investors were begging us to do this and giving us the money, there were some times when it was nasty.”

In order to succeed, SaaS vendors must make sure their interests are aligned with their customers, and that their CEOs and CFOs are committed and spend time to understand the model, James said.

SaaS vendors must also pick one thing to focus on and keep on hiring sales and customer service representatives, James said. “When we started out, we didn’t have the kind of relationships Salesforce had, or the experience, so for us it was about hiring more and more reps and making sure we had a good feeling for the magic number,” he added.

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