Ever since the Web delivered reliable and low-cost connectivity, software as a service (SaaS) has evolved into a formidable business model. Profiting from SaaS, however, continues to challenge the industry. In a post on Chaotic Flow, Joel York writes that SaaS success requires rigorously aligning your business to the underlying economics of the Web and, if necessary, navigating the risk of a hybrid approach.

"When the going gets tough, many find themselves falling back on traditional enterprise software approaches," says York. "There is a big difference between making the strategic decision to deliver your product in a hybrid model and stumbling onto a hybrid model through tactical mistakes."

The SaaS competitive advantage is the Web—and a constellation of capabilities that create value. York describes the benefits along two lines:

1. A lower cost structure through economies of scale (aggregating a multitude of customers).
2. Re-engineering and automating high-value customer processes (online purchase, deployment and support, connecting customers).

"Moving away from a pure commodity product (toward managed services) breaks economies-of-scale, while moving away from pure online delivery (toward packaged software) breaks network-native capabilities," York writes. "Deviation due to lack of discipline without compelling market requirements results in the textbook failure of competitive strategy: getting stuck in the middle."

A hybrid approach should facilitate serving your customers more profitably. For example, York says, "if your competitive advantage comes from Internet-based innovation, but you have very unique and demanding customers that require you to customize your product or service, then mixing SaaS with a managed services approach might be the right choice, because the premium you can charge will cover the hit to your cost structure."

The Po!nt: Getting stuck in the middle of two business models can dilute profit. Know where your competitive advantage lies and steer your business in that direction.

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