Startups: Should You Offer A Hosted and Non-Hosted Version?

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Startups: Should You Offer A Hosted and Non-Hosted Version?

 


This has been the longest time elapsed between posts (12 days) since this blog started over a year ago. Apologies for that. I’m traveling in India for the holidays (which is where I’m writing this from now).

During my time in India, the question of whether startups should offer both a hosted and a non-hosted version of their applications came up. This issue comes up in conversation about once every 4-6 weeks for me, so I thought it was time to try and address the issue. On an unrelated note, I’m also planning on a follow-up article regarding software startups in India which I’ll write once I’m back on home ground in Boston.

So, should startups offer both a hosted and non-hosted version of their software? The short answer is: ideally, no.

Thoughts On Offering A Hosted and Non-Hosted Version

  1. Duplication Of Costs: I’m a big fan of the hosted software model and generally advocate using the Software as a Service delivery mechanism wherever possible. But, regardless of whether SaaS makes sense for you or not, I’d argue that you shouldn’t offer both a hosted and non-hosted version. In addition to the cost of developing the software itself, there is a cost associated with each delivery mechanism you choose. If you decide to install your software on client premises, you’ll be investing in things like install scripts, documentation and some sort of remote diagnostics/support (based on what type of application you have). If you’re providing a hosted version, you’ll be investing in infrastructure (even if it’s outsourced), backups and other kinds of things. By trying to do both a hosted and non-hosted version too early on, you’ll be incurring both sets of costs. This may be fine later, as you have a clearer idea of the revenue opportunity but in the early days, few startups can afford any kind of extraneous expense.

  1. Different Kinds Of Customers: Even though the software is the same, you’ll find that often different kinds of customers will lean towards either a hosted or a non-hosted version. Trying to meet the needs of both these kinds of customers can also be difficult and expensive. The ideal situation for a startup is to find a significantly large pool of potential early customers that have as much in common as possible. This is how you get the most leverage (and can drive the best profits). The more divergent your customer-base, along whatever dimensions are interesting, the more difficult a time you will have. If you pick either hosted or non-hosted, you’ll find that you start “filtering” your potential client-base and focusing on a smaller pool (which is a good thing). For example, at my current startup, we are only offering a hosted version of the product. The reason is that our ideal customers are those that do not have the IT resources to manage their own infrastructure (they’re small businesses). When we encounter potential clients that insist on a non-hosted version of the software they can install themselves, the chances are extremely high that the customer is not a good fit for us as they don’t fit the “profile” of customers that we could bring the most value to.

  1. SaaS May Be More Acceptable Than You Think: I think too many entrepreneurs work under the mistaken assumption that for their market, offering just a hosted version of the software will not be “sufficient”. That too many of their customers will be so concerned about the security of their data that they will be unwilling to let their data leave their four walls onto a hosted software platform. I can understand why it is so tempting to believe this – I believed it myself at one time. One thing I have learned is that clients don’t spend as much time worrying about data security as you think they do (of course, this varies across markets). When they do worry about, they’d much rather it be someone else’s problem than theirs anyways. My advice is to at least try offering a hosted version of your software to your potential market and see what kind of receptiveness you get. [Note: If the market ends up not adopting your offering as quickly as you’d like, make sure you don’t blame the fact that it’s hosted too quickly – it could be something else]. As for the argument that by simply offering an “installable” version of your software, you can cover all your bases and not forego any of your customers. This is a dangerous trap. Its similar to the trap of “if I add this feature and that feature, I can increase the pool of my potential customers…”. In the early stages of a startup, your goal is not to increase the total pool of possible customers, but to go after a narrower pool of customers that have lots in common so you can service their needs extremely well – and economically.


So to wrap-up: Try if you can to offer just a hosted version of your software (note to self: Write a follow-up article on all the benefits of hosted software for startups). If you must provide an installable version of your software too, then do that. Just don’t try to hedge your bets and do both. It’s usually the wrong way to go about it for early-stage startups. If it turns out later that you can capture a sufficient number of other clients by offering an alternative model than you can cross that bridge when you get there.

What do you think? Am I overstating the costs of providing a dual (hosted + non-hosted) option? Would love to hear your thoughts in the comments.

Posted by Dharmesh Shah on Sun, Dec 31, 2006

COMMENTS

I agree with you. I am starting to externalize my chat platform msgpad (http://www.msgpad.com) after using it with my chat application ScribbleHere (http://www.scribblehere.com).

I have thought about offering a black box solution, but I agree that customers who would benefit from a hosted solution are a different type of customer to those who want something they can run themselves.

posted on Sunday, December 31, 2006 at 8:00 AM by Alex Pooley


I have received questions from users about having an offline/non-hosted version of Invoiceplace.com.

Being able to provide a non-hosted version would be ideal when internet access is unavailable or unreliable - but as you stated it effectively means developing two products (albeit with a healthy amount of shared code). Not having millions in VC funding to splash around this is simply not an option for me. :)

posted on Sunday, December 31, 2006 at 8:31 AM by Scott Carpenter


That was a very well reasoned post. My company (Projity) has a complete replacement of Microsoft Project as a SaaS solution. http://www.projity.com Your comments are on the money ! Btw: where are you in India? I recently returned from a trip

posted on Sunday, December 31, 2006 at 10:16 AM by Jim


I think you can't generalize about which is the 'right' choice without looking at the issue of what your application does and the data it touches. The more confidential or mission-critical the data, the more resistance you're likely to run into.

There's no way in hell I would be willing to keep my financial data, for example, on an offsite SaaS service. Project planning or group chat, though -- that's a different story.

posted on Sunday, December 31, 2006 at 11:19 AM by NJG from NYC


This article would do well to mention not just the initial costs but the ongoing costs as well. Supporting your customers on a hosted solution vs licensed offering is an entirely different challenge and will put a great deal of strain on any size company that tries to do both.

I laugh about that comment on financial data being "offsite" Your financial data is already "offsite" at your bank, brokerage, mortgage company etc. Per the article, most buyers have connected those types of dots and realize it's better to have someone else step up to infrastructure, security and regulatory compliance than themselves.

posted on Sunday, December 31, 2006 at 12:26 PM by Justin Benson


I agree that focus is key and trying to be everything to all people is a bad idea, but perhaps there is a middle ground worth exploring...

I think it was Fred Wilson (the A VC blog) that posted a while back on users increasingly wanting to control their own data. I think over the longer term he's right.

So rather than looking this at just hosted versus non-hosted, how about hosted with multiple storage options? i.e. separate the application and the storage component.

Why not offer hosted with storage on company servers and hosted with storage on an independent storage service like Amazon S9?

The vast majority of your application remains hosted and under your control. There's no need for the documentation and support that an on-site install would need. But at the same time you can allay some customer concerns about the security of their data.

Just a thought...

posted on Sunday, December 31, 2006 at 1:18 PM by fewquid


Great article! One consideration re: comment #3: "There's no way in hell I would be willing to keep my financial data, for example, on an offsite SaaS service." I think while this objection may be justified in some cases quite often it is based on a flawed perception of security risks. Managers and business owners have a dangerous tendency to consider their on-site applications more "secure" than hosted solutions whereas, especially in the case of small companies, their own network is the worst security risk and it might be a better idea for them to trust a third party that knows about data security and integrity with their mission-critical data. I would rather invest my time in convincing my customers that on-site does not equal more security than to give them a false sense of security by offering an on-site installation.

posted on Monday, January 01, 2007 at 11:19 AM by Christian Flury


I think your analysis is right on. The cost is high especially if the desire for having both hosted and non-hosted is reactionary. In my experience, the pressure for having both options comes from salespeople, which of course came from sales leads asking "Can't we have both?" The sales team should be able to answer why their product's method works best. Things head downhill when the response to a potential client is "We'll go back to the office and inquire about offering both."

posted on Monday, January 01, 2007 at 8:57 PM by Noel McKinney


We have just released a very simple (for both vendors and testers) hosted bug-tracking application. We are currently running a beta. We actually want to only do the hosted version. Lets us see where it goes in future.

Regarding the data security, do you guys think if you would be concerned to have your bug reports residing on our servers? What kind of security features would you expect?

posted on Monday, January 01, 2007 at 11:43 PM by Parhar


when i did the analysis of the customers profile for Enrich (http://www.nrichsoft.in/catalog.html) the Personal Finance Software that we offer, I was astonished. Many customers were from Class B towns and what was also common is that most of them did not have even an email id.

Given the low penetration of internet access in India and the incredible and growing number of PCs in the SOHO segment at the same time, there is a huge opportunity to offer quality and affordable products in the non-host model.

posted on Monday, January 01, 2007 at 11:55 PM by Badri


Hi,

Timely post for startups like us. Btw, if you are still touring India, give a mail. Will meet up or even do a conf. call. I am based out of Chennai, but freq. with Bangalore & Mumbai.

posted on Tuesday, January 02, 2007 at 12:19 AM by Narain


Your points about a startup needing to find customers that are similar to each other is right on. Too many startups try to hedge their bets and be all things to all people, and end up spending a ton of time creating features and solutions to serve a large diverse group of customers and are really more of a consulting company than a product company. Focus on a specific market segment, serve that one well, and then grow from there.

posted on Tuesday, January 02, 2007 at 9:48 AM by Mike Volpe


You also have to explore the revenue streams of both approaches. Typically, when a customer has a piece of software installed locally, they feel as if they have purchased it and prefer to pay a one time upfront licensing fee with perhaps a small support fee.

When you have a hosted service, you have recurring revenue either through subscription or on a "per transaction" basis.

For an early startup, getting those chunks of money from licenses may make more sense because it will allow you to keep afloat.. however in the long run you may find that the cost of supporting many clients running varying versions outweighs the convenience of getting the money first.

posted on Tuesday, January 02, 2007 at 10:12 AM by Wayne


Good stuff Dharmesh. I agree with you 100%. Especially when starting up and even beyond, I think the hosted model is the way to deliver software. Thanks for the great blog and post. Keep up the great work.

posted on Sunday, January 07, 2007 at 7:39 PM by Greg


I'm developing a hosted app that will store our customers' contact information such as mailing address. Customers can login and change their information at will.

There may be some security/privacy concerns there. Is there a way to instill confidence in clients that it is ok to leave their information on our server? How did Amazon, as a startup, convince so many people to store their info with them? I think some of it is that people in some way "just" trust a site they have never seen before.

I know trust*e and BBB Online Reliability offer privacy programs but many people haven't heard of them. It isn't like seeing FDIC. I also don't place much value on those programs.

posted on Monday, January 22, 2007 at 5:53 PM by John Collins


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