The other day as I typed a post on Vox, i noticed something that hadn't been there before. Suddenly there was a dotted red line under my presumably misspelled word. The day before, I needed to click on the spell check button to find all the words I had inevitably misspelled. Now I had an inline spell checker. A week later I noticed a similar dotted red line in a message I was typing on LinkedIn. Inline spell checking on LinkedIn as well. Fantastic. The best thing about it was that I didn't have to do anything to get the new feature. The software was updated and suddenly these services were better than before.
A lot has been made of the power of the software as a service business model. The enterprise software sales model is a challenge. Once you've met your numbers in any given quarter, it is off to the races selling for the next quarter. While there have been a number of wildly successful companies selling software licenses quarter after quarter, software as a service gives much greater predictability of revenue. By tracking a few simply metrics -- cost of customer acquisition, growth rate, and attrition -- it is possible to determine just how successful a service will be. And by tweaking any one of those metrics, you can drastically change the profitability of an online service. Predictability is music to the ears of VC and entrepreneur alike.
But as fantastic as it is having greater predictability of revenue, I think that the product benefits of software as a service are what make the model truly compelling. Take, for example, PayCycle, a small business payroll service I invested in some time back. When I first invested in PayCycle, the team was just building the first version of the service. They had to make tough decisions about what states to roll out first, what features to build for each state, how to implement direct deposit, how to automate Federal and State tax payments, etc. With each new release of the software, the service reached more people, had richer features and was easier to use. Now tens of thousands of small businesses use PayCycle to do their payroll every month and they can bank on the service getting better and better as the development team continues to mature the service. The same story could be told of Salesforce, Facebook, Typepad, YouTube, NetSuite, the list goes on.
The beneficiaries of the service architecture are the end users -- simply log in and get a better service than the day before. But this capacity to rapidly innovate also leads to greater revenue as attrition is driven down to single digits and lower over time. Ultimately, software as a service is a win-win for end users and startups alike. I have no doubt that I will be investing in interesting software services for years to come and look forward to watching the ones in which I have already invested continue to thrive.
UPDATE: As the commenters below rightfully point out, the inline spell checker I praise is not actually a result of service updates. It is a result of a fantastic browser update, namely Firefox 2. Thank you Mozilla for your ongoing innovation. I guess Vox and LinkedIn were tackling other features that will be coming soon to a browser near year. Which is precisely why I still love software as a service.