Web Apps with a multi-tenant architecture offer the vendor many revenue model opportunities; but they aren't "hidden."
I just saw an interesting post by Phil Wainewright on the eBiz site titled "Why Bother with Multi-Tenancy?" In fact, it's great for someone like Phil, as an analyst with a great public podium, to tackle these issues that are not the most visible issues in SaaS. I welcome a public discussion on this topic as it is what we and our partners have been preaching to our clients for years. We have been consulting with our SaaS Vendor clients for a long time to take advantage of the revenue streams beyond the core application; to take full advantage of being a SaaS Vendor. In fact, quite often the network-effect data that is collected from the application is more valuable and can be monetized in more ways than the application itself.
What is disconcerting, however, is that Phil cited a story by Zoli Erdos at CloudAve (who cited a compelling post by Dennis Howlett) that talks about "The Hidden Business Model in SaaS" as if it's something Vendors are keeping from their customers. At first Zoli talks about eyebrow-raising concerns over privacy in selling anonymous, aggregate information. The reality is that many non-SaaS businesses have been doing this for years; we tell people that this is currently being done with incredibly sensitive data. From the credit reporting agencies to hospitals, anonymized, aggregated (A/A) data is leveraged from multi-tenant environments every day and is completely safe and compliant (HIPAA, etc.). You have to know your industry and your governance issues, but it can be done.
Ken Boasso, a long-time friend and Managing Director of Keychain Logic, a Sixteen Ventures partner, likes to point out other examples when he talks about this subject. For instance the Dow Jones Industrial Average is merely anonymized aggregate (and often highly personal) financial data. Credit card fees are set based on A/A data, as are anything having to do with insurance premiums; including specific health risk information that drives the costs and coverage for prescription medicines. The list goes on and on, and the key take-away is that SaaS or not, A/A information is leveraged by many types of companies to generate revenue, to make internal decisions, and to offer guidance to industry.
Zoli, in his blog post, thankfully moves quickly into the other benefits of a Multi-Tenant environment from the vendor standpoint (including improved Customer Service, which outside of our small group of colleagues, we don't hear much about). What is unfortunate throughout the article is just his use of the term "hidden." That makes it sound like SaaS Vendors are keeping this from their customers or the market as a whole. Unfortunately, for most SaaS Vendors, it isn't hidden; it is often either unknown by the vendor ("I can do what?") or it is known, but they cannot take advantage of it because they didn't architect their application properly.
In other words, they might be "SaaS" vendors, but aren't truly multi-tenant and can't easily aggregate data. Or they are Multi-Tenant, but only included core-application functionality and didn't effectively productize their offering for the SaaS Business Architecture. For whatever myriad reasons, I can tell you that far fewer SaaS Vendors are taking advantage of their Multi-Tenant environments than there should be; for many, its simply not knowing about this early enough in the product development process to do anything about it.
I wrote a two-part article for Softletter (first-part was published on 5/31/2009; the second part comes out on 6/15/2009) about "SaaS Multi-Tenancy: The Business Case." I will be speaking on this topic at SaaS University in Chicago at the end of this month, too. The crux of the article and the presentation is not just the benefits of Multi-Tenancy, including direct monetization of network-effect data, improved customer service and retention (reduced churn = on-going revenue), etc. but to show that to truly take advantage of Multi-Tenancy, support must be built into the application. When we work with SaaS Vendors, or those migrating to SaaS, this is part of the Strategic Product Development process that we use to help Maximize Revenues. You must think about these "hidden" parts of the business early in the process so you can actually take advantage of being a SaaS Vendor.
Of course, there are other non-technical issues surrounding the use of A/A data, (data ownership, etc.) that need to be addressed by the SaaS Vendor. Since those are legal in nature, it is outside the scope of my expertise. However, SaaS Vendors do need to ensure that their terms of service or other service agreements indicate that the customer owns their data, usage data, metadata, etc. is owned by the SaaS Vendor, and that all of it will be used by the SaaS Vendor in A/A fashion to offer better service, etc. Again, this is something to take up with the legal department or your attorney, but its as simple as making those definitions clear for this to all be above board.
In fact, Boasso has stated that the SaaS industry ought to beat their critics to the punch and start including "usage data ownership" language in their contracts. I agree and would say that it is up to us in the industry to bring this to light beyond the contracts. This way, the market can see we aren't hiding anything and that the usage of this data is all about providing better service. Yes, we have ulterior motives for offering better service (increased revenue, increased customer lifetime value, lower churn, etc.) but If we can adequately indicate what is in it for them (the customers) then we (the vendors) will be fine.
So I welcome Phil, Zoli, and Dennis' public discourse on this topic. I hope others will join in. For Sixteen Ventures, Keychain Logic, and others within our ecosystem, this will help spread the message that we have been extolling for years. For SaaS Vendors, or those wanting to move into SaaS, it will open their eyes to some of the "hidden" (read: unknown, less publicized, etc.) benefits of being a SaaS Vendor. I would just urge those talking about this to switch from saying "hidden" to understanding that these advantages of Multi-Tenancy are largely unknown to SaaS Vendors and their customers. We're working to change that.