The ASP Model—Cheer, Don't Fear - Industry Trend or Event

Computer Technology Review, July, 2000 by Mory Bahar

Across the country you can hear resellers discuss the growing trend of ASP-based business opportunities. Some fear unknown business ramifications, while others are convinced that up-front revenue streams derived from licensing applications are more desirable than smaller, recurring ones from ASP rental agreements. Whatever the case, user demand for ASP-delivered solutions will likely remain popular, so resellers should begin to seriously evaluate how this business model will impact their businesses so they can embrace it if appropriate.

ASP Risks

First, the downsides. The ASP delivery of software applications is new and requires non-traditional business thinking, as well as a different sales approach. It may also involve establishing relationships with companies that host applications in a data-center environment. In addition, selling ASP-based systems will bring resellers into contact with new, often smaller, companies that aren't experienced application software buyers and users. This may concern some resellers who are not experienced at this end of the market.

Why The ASP Model Benefits Resellers

* They pay far less in up-front costs because users rent, not buy, ASP-based products. That makes this option attractive to large firms, but even more attractive to smaller ones that can now benefit from highly functional business solutions that they simply couldn't afford or even implement in the past. As a result, resellers can open up an enormous new application software market comprised of previously untapped smaller companies. How enormous? Consider the fact that the market segment of under-$50 million in revenue companies contains 98% of all U.S. companies, 55% of all U.S. employees, and 45% of all U.S. revenues. These companies, which have largely missed out participating in the technological advancements of the past, are now excellent candidates for ASP-based products.

* Assuming that resellers can broaden their customer base with ASP offerings, they should also be able to sell more add-on products and services to these new customers. In addition to application implementation services, they might also generate revenue from Web services, business consulting, and sales from related products, to name a few.

* While renting applications means smaller checks rather than larger ones from outright license fees, they will be arriving on a monthly or quarterly basis. The ASP model's steadier revenue stream reduces common spikes in revenue from current software sales models and offers a steady, predictable cash flow. This means that resellers should expect fewer surprises created by business conditions resulting from a few strong months followed by several slow months. This, in turn, enables resellers to better forecast their short and long-term business environment in order to make informed business decisions based on projected revenues.

* With users attracted to lower up-front costs and 30-day no-risk trial offers, resellers will shorten their sales cycles and reduce selling expenses. In fact, many resellers are finding multi-month cycles condensing to a month or less for ASP deals. One reason is that the simple act of shifting software costs from five to six figures up front to $1,000 or so per month eliminates lengthy business reviews and approval cycles.

* Resellers can further reduce costs and increase their bottom line by reducing face-to-face prospect meetings because ASP software runs on the Internet. For example, instead of a face-to-face meeting to walk prospects through a live demo, the reseller can simply provide a Web URL and talk the customer through the demo via telephone or interactive Web software.

* The fallout from bug fixes and updates have traditionally been a time-consuming hassle for resellers. Typically, the software vendor will send such updates to customers via CD. Inevitably, the customer will, then, place a service call to its local reseller to help figure out what's on the CD and how to apply the fix/update. The ASP model eliminates these issues because the ISV provides the update directly to the application through the Internet without impacting the customer or reseller.

* The ASP model provides business opportunities for resellers looking to expand into new areas. For example, many resellers have begun to consider the creation of their own ASP hosting data centers to profit from reselling and hosting of applications.

Cutting through the hype and evaluating any new business opportunity is always a challenge, but, after closely evaluating the ASP model, most resellers will find the benefits far outweigh any perceived disadvantages.

Mory Bahar is the CEO at apps4biz.com (Andover, MA).