The business model challenges are far more complex and brutal than the technology or architectural challenges for SaaS and they get compounded when selling to an SMB. It has been argued that the success of complex to implement enterprise software in marketplace is attributed to the channels, ISVs and VARs, to a certain extent since they step in and do the dirty job and it is a very lucrative business for them. If the VARs are not selling it, customers won't probably buy as much. This has serious implications on the SaaS as a delivery model. The fundamental benefits of SaaS such as pay-as-you-go type subscription models, try before buy, personalize against customize, and no physical box are some of the factors that work against the SaaS vendor since there aren't enough incentives for the indirect channels with the current business model.
If a vendor believes that a product is so good that it does not need any (value add) channels, the vendor can use web as platform for volume sell. Google recently slashed down the price of Postini by 90% and it is a move to get rid of the channels since it was an artificial cost barrier. Google believes that now it has much better shot at getting to the right customers at the right price. This move has upset some VARs but it is all about your supplier being smarter than you.
This is the business model innovation that the vendors should be paying attention to. Many enterprise software vendors have never sold over the web and they relied on their direct sales force driving around in their BMWs and selling to the customers. They also relied on the partners heavily. When these vendors move towards SaaS delivery model for volume selling to the SMBs, they have an option to build new infrastructure or use an existing infrastructure to volume sell to the customers. I also see the benefits of web as a volume selling platform to sell anything and not just the software. I can imagine Amazon’s e-commerce platform as a SaaS sales platform and it is also not farfetched for a software company into the business of providing platform via SaaS delivery to sell SaaS software.
Many SaaS solutions originally designed for SMBs do get subscriptions from large enterprises as well since in some cases the IT is fragmented into many departmental solutions for a large enterprise. These departments do not want to deal with the IT and would rather go for a SaaS delivery model even if it means a limited functionality and no integration capability with other departments. This decentralized strategy is a nightmare for many CIOs but in some cases loose integration could also mean higher productivity and a CIO is willing to make that compromise. There are also behavioral issues that a vendor will have to deal with on how to approach customers and whether a customer is comfortable making software purchase over the web where they relied on the partners in the past.
This is an interesting trend that SaaS vendors should be watching for since it simply changes the definition of an SMB. More and more knowledge workers are inclined to bypass IT if they have an access to better and easy-to-use solution. One of the new features of Google Apps is targeted towards this behavior. If you are a Google Apps consumer in one department, you can see who else has signed up for Google Apps (based on the domain name) and can collaborate with those people. This is what I would call it loose integration.
In a way, selling to small businesses is similar to a selling to a set of individual consumers and not to a business since a lot of these small businesses behave as individual consumers. Turbotax is a good example to compare channels for on-premise and SaaS delivery models. Intuit has separate sales and marketing channels to sell TurboTax. Intuit partners with financial institutions such as Fidelity, Vanguard, and Bank Of America to offer discount on the online offering and also distributes coupons for the on-premise offering at brick-and-mortar discount stores such as Costco.
SaaS delivery model, for an SMB or a large enterprise, has many channel challenges and the concept and definition of these channels are likely to be redefined as the SaaS adoption continues.