An analysis of product strategy in cloud transition considering SaaS customization

When traditional enterprise software vendors adapt to software as a service (SaaS) practices and evolving to cloud service models, there is a major change occurring in the enterprise: a new hybrid product strategy consists of on-premises software and competitive customized SaaS. For the first time, we build a stylized model to reveal the influence of SaaS customization on the decisions of monopoly software vendor in the transition period. Increasing the customization efficiency of SaaS results in two possible structural regimes in the market. One is single on-premises software dominate the market if SaaS is customized at a low level and the other is hybrid products segment the market if SaaS is moderate-level customized. Surprisingly, software vendors with high customization proficiency should not allow SaaS products to dominate the market. It would benefit more from offering a competitive hybrid product strategy. Therefore, this paper does not recommend traditional software vendors to transform into pure cloud service providers. This key findings remain valid in the extended analysis of other customization technologies. Besides, the extension models show that both configuration and personalization customization technologies outperform the modification customization technology.