AYX - 2 Software as a Service Businesses That Are on My Watchlist
In the past, technology companies would release software that clients needed to purchase as a one-off product. If upgrades or updates were required, the company would then release a new version of the product that the customer would have to purchase all over again. This practice pushed up overall costs for clients, as they found it both expensive and troublesome to keep repurchasing similar software to what they had originally bought. With the advent of the internet, cloud computing systems, and smartphones, business models began to evolve and change. A more successful and robust business model emerged, known as "Software as a Service" (SaaS). SaaS involves a subscription model whereby clients pay an annual fee to gain access to the software, rather than having to continually purchase the license for new software updates or patches.
These SaaS companies have huge advantages over traditional product development companies. Firstly, they create stronger customer loyalty by introducing high switching costs for users, as it would be difficult to disengage from a software provider in order to switch to another without it being massively disruptive to one's business. Secondly, SaaS companies enjoy recurring and predictable subscription income that enables the business to make more effective capital allocation decisions. Finally, the SaaS model also eliminates the need for companies to constantly come up with upgrades or new products in order to sell to customers. This ensures working capital flow is smooth and that staff can concentrate on the software and platform aspects of the service provided.
Here are two SaaS companies on my watchlist that show great future potential.