Cloud services increase SMB profitability

Cloud services make inroads into larger SMBs - Part 1

Thursday, September 15, 2011 | Dan Blacharski

The benefits of cloud computing accrue in one form or another to companies across the size spectrum, but the most dramatic benefit is evident to cash-strapped start-ups looking to avoid capital expenditures and get up and running quickly. But, according to a Microsoft-sponsored study from Edge Strategies, the cloud is no longer just for young SMBs in growth mode, but also for those who are focusing more on increasing their profitability. And beyond that, larger SMBs, and SMBs with multiple offices are expected to make more use of SaaS and IaaS.
For providers of cloud services, this is good news indeed. The study further noted that 39% of SMBs with between 2 and 250 employees, will be paying for cloud services within three years. This is significant, especially given the proliferation of unpaid cloud services. Several new cloud providers use the business model of offering free access, usually while still in beta, moving to a paid delivery model only after the service has matured and enough subscribers have been captured.

A reasonable expectation of paying customers will drive the cloud model forward despite the difficulty some providers are facing in moving to this type of delivery model. The older system of charging large up-front licensing fees and ongoing maintenance fees being wholly replaced by a lower month-to-month subscription model is a difficult transition for many.

But despite that difficulty, "traditional software companies are typically being forced into the cloud,” says Eric Pelander, partner at Waterstone Management Group, LLC . "The economics of the cloud over time can be interesting and compelling, particularly for the non-incumbent or the lower market-share player. But what looks good to them doesn’t necessarily look good for the big player.” But, whether it looks good or not, those big players are having to bite the bullet and move to a cloud-based offering, simply because it is what the market demands.

But once those cloud providers get over the initial shock of the end of the big up-front fee, those providers with the resources to weather the storm will come out looking good. "I think there will be a rule of five or six years, and if you get to that point where you have a steady flow of subscriptions and a good retention rate, the economics can look pretty good, because it is a stickier, more predictable revenue stream,” added Pelander. Part of what leads to failed companies is unpredictable revenue streams - and ultimately that is what the cloud gives back to providers, while also giving them an opportunity to open up additional markets, add extra professional services around the cloud, sell downmarket, and pick up greater volume.

On the business-to-business spectrum (provider-to-business client), business consumers of cloud services can look forward to both a new set of start-ups offering innovative cloud services; and larger, incumbent providers of traditional software also moving to a cloud model. The latter will bring more costly, enterprise software into the hands of SMB consumers, while also giving those incumbent software providers a new market and a predictable revenue stream. Along the way, there’s bound to be a little shakeout and we’ll look at that in a follow up article - click here.

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