Naturally the most discussed topic right now is how this “economic crisis” is going to affect the SaaS business. Will the lower cost of ownership finally persuade CIOs to adopt SaaS? Or will all the small businesses (which make up a majority of SaaS revenues) go bankrupt drying up the wells of ‘recurring revenue’ that most software companies depend on? It’s a tough question.

Sinclair Schuller over at SaaS Blogs poses an interesting question: Is it the right time for ISVs to enter the SaaS market in this economy? Will the economic turmoil provide an big opportunity for subscription software?

Sinclair argues that companies aren’t looking to cut monthly recurring expenses to reduce cost. Instead they’re looking to cut large expenditures or big ticket items that will make a significant dent on cost. Therefore Schuller argues that SaaS is, in a sense, is immune to corporate downsizing for the reasons above.

I’d like to add my thoughts to this discussion. First of all let’s assume that we’re talking about software that is business critical like CRM or ERP. As a SaaS provider, your product has to have some degree of importance for your customers’ day-to-day operation. Otherwise, it doesn’t matter economic crisis or not, you’ll be out of business sooner or later.

With this in mind, I would say that companies ARE NOT going to make an all-or-nothing decision. The CIO is not going to say “Should we completely scrap our Salesforce CRM to cut costs?” Instead, they will begin to throttle their consumption of these services to reduce their monthly costs. I mean isn’t this the value prop for SaaS? So instead of doing the right thing and buying a login for each employee. They’ll start doubling up or sharing logins. Or they’ll only provide logins for sales reps and not the marketing department. Or they’ll downgrade their version since they extra features aren’t always mission critical. Anyways you get the idea. Just think, when money is tight at home; you don’t stop eating you just eat less.

So I’d suggest to ISVs looking at getting into SaaS to pay close attention to the pricing model and make it recession proof. Just because you offer hosted services doesn’t mean people will flock to your company. This is not like the movie Field of Dreams with Kevin Costner where “if you build it, they will come”.

Take for example, Omniture. Their pricing is NOT based on per user. I can create as many users as I want because it’s based on the amount of data you send to their system. Basically, Omniture is BI system where marketers can embed code into their website to collect data and analyze visitor behaviour. In this case, you can’t really throttle the amount of money you spend on Omniture. What you pay is directly related to the amount of traffic on your site. And what are you going to do, tell people to stop visiting your site? Or will slowly stop implementing Omniture across your entire site? You could do that, but without the intelligence you wouldn’t be know how to enhance your site and generate more sales. So this doesn’t give customers a way to throttle their consumption but at the same time it provides a critical service for the company and thus cannot be axed altogether.

I think that’s the key. Figure out a subscription model that is well within your customer’s budget make it difficult to throttle. If you provide extreme value to your customers then it’s difficult to be on the cutting block. It’s best to nail this down before acquiring a single customer. The pricing model isn’t something that you can just change without pissing everybody off. Why else do you think Telcos charge per minute for your mobile, but charge a flat rate for the landline? I bet it even costs the Telcos less when you make a call on your cell phone than your home phone. But what’s done cannot be undone and if they all of a sudden started charging per minute at home, hell would break loose.