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 has gained great attention from both researchers and practitioners. The rapid growth has resulted in a more and more refined business model and is described as the future of software. Thus, it is not unexpected that the model is frequently used for many start-ups. The business model relies on the so-called SaaS pricing model, i.e. services that are often provided and developed continuously and paid recurrently. This is in contrast to the more traditional industries, such as the pharmaceutical (pharma), who are supplying pharmaceutical drugs used for medication, where many of the large multinational corporations originate from the 19th century. The pharma business model is characterized by its substantial initial project investments, 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, by comparing the financial differences between the SaaS and pharma industries. The aim is to identify differences between capital structure, profitability, and cash flow to embrace an understanding of the financial implications of the business models. In order to ease financial decision-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 an external and objective approach with emphasis on a quantitative collection and analysis of data. The collected data was based on a sample of 20 companies, with 10 in the SaaS industry and 10 in the pharma industry, for the time period 2015-2019. The analysis was conducted through unpaired t-test for the variables capital structure, free cash flow in relation to both revenue 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 trend from a financial perspective, in terms of capital structure, cash flow and profitability. Thus, if these are of high importance other more traditional business models should be considered. On the other hand, there are other justifications for the SaaS business model trend, as the business model embraces scaling, low initial and marginal costs, recurrent payments, and continuous development during deployment.