I met a consultant from large advisory firm and specializes in negotiating pricing with Oracle.  This is fascinating to me.  A career built around negotiating pricing with Oracle.  She explained how complex it could be and how important it is to stay up-to-date on all the latest strategies.  My favorite story was about Oracle trying to double pricing on per processor licensed products that ran on servers with dual core chips.  Another great trick was bundling support contracts to get companies to pay for support on products they barely use.  I asked what effect SaaS pricing would have on these complex pricing maneuvers.  “Eliminate them” was her reply.  I left the meeting convinced that SaaS will change the world.

Why will SaaS change the world?  SaaS aligns incentives and creates a more efficient market.

By paying over time instead of a huge upfront license fee, the software provider is motivated to make sure that their product creates ongoing value. Gone is the temptation to convince a buyer with smoke and mirrors.

Since upgrades can be deployed seamlessly, they are more frequent. Great new features make it into the product more quickly, thus generating more value. Gone is the painful, wasteful upgrade nightmare.

SaaS pricing is inherently variable. You only pay for what you use.  If you thought that you would need 10,000 licenses but only ended up needing 300, you can stop paying for the 9,700 that you don’t need.

SaaS is good.

UPDATE: The market has agreed. When I wrote this post in 2009 Salesforce was selling at about $25/share. In six years the price has climbed around 600% (the share price is at about $60 but there was a 4:1 stock split in 2013) and now has a market cap of about $40 Billion.