Calculating the cost of SaaS

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 $65 per user, per month for the Professional Edition and $125 per user, per month for the Enterprise Edition. Both packages include 1GB of free storage. Beyond that, storage is $300 per year for each additional 50MB — for the organization, not individual users.

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

Core pricing for NetSuite is higher, at $99 per user, per month. Advanced NetSuite modules such as the Revenue Recognition module cost as much as $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 percent, also based on the total annual subscription fee. One hundred users at $99 per user, per month would mean an annual support cost of $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 a $1,500 per gigabyte, per year.

So, if we do the math, 10GB of storage for Salesforce will cost you $54,000 annually versus $0 for NetSuite. If you need 20GB, then it will cost you $114,000 with Salesforce versus $15,000 per year with NetSuite.

Zach Nelson, CEO at NetSuite, says that 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 Donald 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 $750 to $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 percent.

Of course, price isn’t everything. Josh Greenbaum, principle 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 customizing 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.