If the argument then becomes “there aren’t enough large companies on the SaaS model” well then I think you have to ask a different question, which is “can companies get big on this model?”. If so, then why are there not more?

Bob, I read your post and have a couple of comments. First, when I was with SAP Ventures we invested in Webex so I do understand that business pretty well. I am inclined to take exception to your inclusion of them in your data collection because they were more like a telecom business than any of these SaaS models. However, I won’t object because if one is an orange and the other an apple, well they are both fruit. I would give Webex lower weighting in your analysis but that’s probably not material in the end.

I will say that you ask a compelling question: why aren’t these companies more profitable? The financial data is clear, they aren’t in investment mode because they spend very little of their dollars on R&D and their datacenter operations costs, while significant, don’t rise to the level of R&D spending. I believe SFdC spent $50m on datacenter buildout over a multi-year period.

http://smoothspan.wordpress.com/2007/07/17/its-cheaper-for-saas-companies-to-acquire-customers/

It really is cheaper for SaaS companies to acquire customers than for equivalent sized perpetual companies. In fact, its quite a bit cheaper.

Companies like Oracle have achieved a level of scale that largely boils down to brand and a huge tail of highly profitable maintenance revenues. Funds like Silver Lake will tell you there is a pronounced knee in the cost for sales and marketing as perpetual companies exceed $1B in revenue. What remains to be seen (SaaS is too new) is whether a similar knee will make it even cheaper for extremely large SaaS businesses.

Meanwhile, the lack of profitability in most SaaS is self-inflicted–they’re spending for growth because they can.

Besides, the SaaS model is still young and requires a lot more publicity..That should explain why so much money is going to marketing and sales.

Your point about selling direct to SMB is the key point in this debate, and as I have written on many occasions, in a mature industry like software sales and marketing will invariably become the largest expense category. Having said that, the SaaS companies have generally claimed two advantages, lower cost of delivering product (development cycle and to the actual customer) and lower cost of sales through low touch direct sales instead of channels.

I’m not convinced, and the numbers certainly don’t suggest, that lower cost of sales is a benefit at all.

Software sales to SMBs can be very lucrative (Microsoft, Intuit on down) if you can create, or if there is innate, pull for your product. Or if you can create a high-volume web lead business (WebEx, eFax, etc.)

But if you have to generate demand directly, via campaigns, noisy PR, outside sales, cold calls, inside sales for very small deals (

As I said in my post, there may be an apples to oranges comparison because of lifecycle, but as I think about it even more so because of it being SaaS and I’m not up on what they call SG&A and how it differs from the on premise vendors.