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

Written By: Dharmesh Shah December 31, 2006

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.

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