Financial Justifications for the Software-as-a-Service Business Model Trend Based on Financial Differences between Companies in the Software-as-a-Service and Pharmaceutical Industry
Abstract: The Software-as-a-Service (SaaS) business model is a new type of business model that hasgained great attention from both researchers and practitioners. The rapid growth has resultedin a more and more refined business model and is described as the future of software. Thus, itis not unexpected that the model is frequently used for many start-ups. The business modelrelies on the so-called SaaS pricing model, i.e. services that are often provided and developedcontinuously and paid recurrently. This is in contrast to the more traditional industries, suchas the pharmaceutical (pharma), who are supplying pharmaceutical drugs used formedication, where many of the large multinational corporations originate from the 19thcentury. The pharma business model is characterized by its substantial initial projectinvestments, long project and product life cycles with lump-sum payments.The purpose of this report is to assess the justifications of the SaaS business model trend, bycomparing the financial differences between the SaaS and pharma industries. The aim is toidentify differences between capital structure, profitability, and cash flow to embrace anunderstanding of the financial implications of the business models. In order to ease financialdecision-making regarding business models, in both academia as well as the business sector.The methodology was based on a deductive research design, that was executed through anexternal and objective approach with emphasis on a quantitative collection and analysis ofdata. The collected data was based on a sample of 20 companies, with 10 in the SaaS industryand 10 in the pharma industry, for the time period 2015-2019. The analysis was conductedthrough unpaired t-test for the variables capital structure, free cash flow in relation to bothrevenue and operating, and profitability in the sense of return on assets and profit margin.The findings indicate that there are weak justifications for the SaaS business model trendfrom a financial perspective, in terms of capital structure, cash flow and profitability. Thus, ifthese are of high importance other more traditional business models should be considered. Onthe other hand, there are other justifications for the SaaS business model trend, as thebusiness model embraces scaling, low initial and marginal costs, recurrent payments, andcontinuous development during deployment.
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