To SaaS or Not to SaaS? Here’s What Investors Think

Moving on-premise software to a software-as-a-service model can have a lot of perks, but how do investors feel about it? That’s the core question researchers wanted to answer in a recent study that looked at how the market reacts to software companies launching new SaaS offerings or transitioning an on-prem software product to as a service.

According to the Harvard Business Review, investors preferred new SaaS products over product conversions and valued having a product fallback option. “These choices may change the intra-day stock valuation by as much as 3.5 percent and 2.2 percent, respectively,” according to HBR.org.

The research, based on the event study method, was conducted by researchers at Technische Universität München in Germany and Josef Waltl, Global Segment Lead, Industrial Software, Amazon Web Services (AWS) from 2001 to the end of 2015.

Among its findings the study found that partnering with an external cloud service provider to deliver SaaS leads to a further 2.9 percent increase in stock price on announcement day.

The study also found that partnering with an external cloud service provider to deliver SaaS leads to a further 2.9 percent increase in stock price on announcement day.

Based on its findings, the research suggests that software companies look at their existing products, processes, and culture, ensuring that they do not prevent the SaaS model from working, and collaborate and partner with cloud platform providers. It also recommends that vendors do not give up on their on-premise option entirely when first starting out.

On the last point, investors actually increase their valuations of software vendor’s stock by an average of 2.2 percent if the vendor makes clear in its announcement that the SaaS option is available in conjunction with a perpetual licensing model.

“Our study found that the existence of a previous version of the product prior to the introduction of the SaaS offering reduces company value by an average of 3.5 percent compared to new product launches with the SaaS model,” according to the researchers. “Thus software vendors should look to approach the SaaS business model by creating new product lines rather than converting their existing product portfolios, when possible.”