I would say start with the second method first. This gives you recurring sales and the ability to gain a customer base who all use the same hosted version. It also centralizes deployment and makes support much much easier.
After you've been selling via the hosted option for a while some larger enterprises will want to host their own copies. This is mainly due to security reasons as they are not allowed most of the time to have externally hosted data. These are profitable deals but can be a pain due to having many install locations, different versions deployed to different companies, and providing training to local IT staff. The main money maker on the "host your own" option is not the original sale but the support and training. You really need a large self services customer base first in order to have the resources and know-how to go after the self hosted solution.
Hope this helps and that I wasn't too far off point.