Rethinking ISV deployment model

Independent Software Vendors (ISVs) are standing at one of the most important inflection points since the birth of Software-as-a-Service (SaaS). The emergence of Generative AI (GenAI), combined with the cloud’s evolving economics, is forcing every software company to reconsider whether the SaaS model that dominated the last two decades still makes sense for the decade ahead.

From True SaaS to Cloud-Deployed Software

When SaaS first emerged, it represented a massive architectural and business model innovation. One software package, hosted centrally by the ISV, served all customers. Each customer was a tenant within a multi-tenant application, separated logically by software design rather than physical infrastructure. Customers paid a subscription fee, typically per user, and the ISV owned the full operational burden — from compute to database to network.

As cloud platforms matured and Infrastructure-as-Code (IaC) tools became commonplace, that model began to blur. The line between “SaaS” and “deployed software” grew thinner. ISVs could now use automation and deployment frameworks like CloudFormation, Terraform, and Kubernetes to spin up isolated customer environments within minutes. Each environment could have its own infrastructure, databases, and networking — yet the ISV could still call it “SaaS” because it offered subscription access and handled operations.

This hybrid architecture combined managed services, proprietary software, and underlying cloud infrastructure. It worked well in the early cloud era, but it also introduced a quiet problem that ISVs have largely tolerated for a decade: margins eroded.

The Hidden Economics of the Modern SaaS Model

In the traditional SaaS model, every dollar of subscription revenue had to cover:

1. The human capital required to operate the platform — DevOps engineers, SREs, support teams.
2. The customer success and product teams needed to deliver features and satisfaction.
3. The infrastructure costs for compute, storage, and networking.
4. The third-party tools and API integrations necessary for operations.

By the time the ISV paid for all of those components, there was often only one sustainable source of profit — the intellectual property (IP) created by the product team. The real value wasn’t in hosting the service but in the proprietary algorithms, data models, or user experiences the ISV built.

GenAI has made that imbalance even more pronounced.

The GenAI Cost Shock

Generative AI isn’t just a technology trend — it’s an infrastructure consumption explosion. Every GenAI-powered feature has a cost curve tied directly to model inference and data processing. The more your customers use it, the higher your underlying compute bill.

For ISVs running centralized SaaS architectures, that creates a dangerous tension. You want users to engage with your product, but every interaction can consume expensive GPU cycles. It’s no longer sufficient to think of infrastructure as a background cost; in a GenAI world, it’s a direct variable expense tied to feature adoption.

That raises a fundamental question:
Can ISVs continue to absorb the risk of hosting and paying for all infrastructure while offering GenAI-driven features under a fixed-price SaaS subscription?

For many, the answer is becoming clear: No.

Rethinking the Deployment Model

If SaaS as we know it is no longer economically sustainable, what’s the alternative?
Fortunately, the modern cloud marketplace offers a way forward — one that allows ISVs to preserve their IP value, meet enterprise customers where they already operate, and offload the infrastructure burden back to the customer’s cloud account.

The AWS Marketplace AMI with CloudFormation product type represents that shift perfectly.

Instead of running the software in the ISV’s environment, this model deploys the software inside the customer’s AWS account. Using a CloudFormation template, the ISV can automatically provision all necessary resources — EC2 instances, IAM roles, S3 buckets, Lambda functions, and even Bedrock or SageMaker integrations — directly in the customer’s infrastructure.

The customer subscribes through AWS Marketplace, granting permission for the deployment. The ISV retains the subscription revenue and IP rights while transferring infrastructure ownership, costs, and security context to the customer.

Why Customers (and AWS) Love This Model

This approach doesn’t just benefit the ISV. It also makes everyone in the ecosystem happier:

• Customers maintain full visibility and control of their cloud resources. They can monitor usage in their own AWS Cost and Usage Reports (CURs) and apply existing governance, compliance, and security policies.
• AWS Account Teams are thrilled because the consumption of AWS services — compute, storage, AI APIs — shows up under the customer’s bill. That means higher AWS spend and potentially higher discount tiers for the customer.
• ISVs maintain their product revenue while avoiding the need to host expensive GenAI infrastructure. They can focus their engineering effort on innovation, automation, and product differentiation.

It’s a win-win-win that preserves customer trust and accelerates enterprise adoption.

How can ISV’s Deploy in Customers Cloud Estates?

Of course, there are nuances. Deploying software into customer accounts via AMIs and CloudFormation templates introduces new challenges around automation, licensing, and configuration management. That’s where what we call the “Dummy AMI” pattern comes in.

The Dummy AMI pattern is a technique in which the AMI itself serves primarily as a deployment vehicle, not as the main runtime for the product. The AMI can contain bootstrap logic — scripts and CloudFormation templates that automatically configure the necessary AWS resources or copy application code from a secure S3 bucket. Once deployment completes, the actual workloads can run entirely as native AWS services (Lambda, ECS, DynamoDB, Bedrock, etc.), rather than on EC2.

This pattern enables ISVs to deliver a highly automated, cloud-native installation experience while maintaining all the benefits of marketplace-based subscription management. It’s also perfectly aligned with modern DevOps and GitOps practices, where everything is infrastructure-as-code and easily updatable.

Product-Led Growth in the Marketplace Era

The good news is that AWS Marketplace supports free trials, metering, and flexible subscription options — allowing ISVs to adopt a Product-Led Growth (PLG) strategy even with this new deployment model. Prospective customers can deploy the AMI in their account for a time-limited trial, explore its features, and then upgrade to a paid subscription — all while staying in their own AWS environment.

That’s critical because it removes one of the last friction points in enterprise software adoption. Security teams don’t need to whitelist external endpoints, and procurement teams can approve subscriptions through familiar Marketplace workflows.

The result: ISVs can sell faster, at higher margins, with less infrastructure liability.

The GenAI Imperative for ISVs

GenAI has fundamentally changed the equation for software vendors.

• Inference costs are unpredictable.
• Customer usage is spiky.
• GPU resources are expensive and scarce.

Trying to absorb all that under a fixed-price SaaS contract is a recipe for margin compression and customer dissatisfaction.

By moving to customer-deployed architectures — enabled through AWS Marketplace AMI with CloudFormation — ISVs can deliver GenAI capabilities natively inside the customer’s cloud estate. This allows the customer to control model selection, scaling, and cost governance while the ISV focuses on IP, automation, and business logic.

It’s a shift from “we host it for you” to “we enable it in your cloud.”

The Future of ISV Deployment Models

In the next few years, we’re likely to see a clear bifurcation in the ISV landscape:

• Operationally heavy SaaS vendors will continue to own and operate large multi-tenant environments, but only where economies of scale or data-network effects justify the cost.
• Cloud-native ISVs will adopt deployment-inside-customer-account patterns, leaning on AWS Marketplace automation to simplify provisioning and billing.

How Cloud Scal3 Can Help

At Cloud Scal3 Inc., we’re not just advocates of this model — we actively use it.
As an ISV ourselves, we’ve implemented the Dummy AMI pattern across our own solutions, including FinOps Center, Agent Bill, and other agentic and automation frameworks built for AWS. That means we’ve navigated both the technical architecture and the go-to-market (GTM) realities firsthand.

We understand what it takes to design, package, and deploy software products that run inside customer AWS accounts while maximizing alignment with AWS programs such as Marketplace AMI deployments, MAP funding, Competency programs, and Service Delivery designations.