Competition Between Software-as-a-Service Vendors

We propose a model of software-as-a-service (SaaS) in a competitive marketplace that brings clarity to the choices that competing vendors must make for pricing and quality strategy. We focus on several features of SaaS competition, including differences in vendor offerings, incomplete information on application functionality, the potential lock-in risk of SaaS clients, and their cost of learning about what it will take to make the vendors' software work well. Clients can sample the fit costs of adoption, but can switch to another vendor. We obtained several findings through the use of a game-theoretic model. First, a client's switching cost is important for its decision-making regarding SaaS adoption. With a relatively high switching cost, a more cost-efficient vendor of IT services will be able to drive the less cost-efficient competitor out of its market. Second, the impact of the client's switching cost on vendors works differently. An increase in switching cost enables one vendor to charge a higher price and achieve higher profit, while the other will be forced to charge a lower price and hardly make a profit. Third, what matters is not how much a vendor can enhance service quality, but instead how costly it will be to improve quality enough to attract sufficient customer interest to achieve profitability.