The Commoditization Of SaaS(profitbaron.tumblr.com)
profitbaron.tumblr.com
The Commoditization Of SaaS
http://profitbaron.tumblr.com/post/53228769794/the-commoditization-of-saas
5 comments
Your Salesforce example highlights a SaaS replacing Enterprise Software - Salesforce vs. Siebel. Regarding your point about software being sticky like some hardware offerings have been commoditized - software can also suffer this to some extent (especially in the SaaS space as noone is doing anything that revolutionary that a competitor or competitors cannot come along and literally clone them).
I do however agree with you about the switching costs, Salesforce actually use this as part of their lock-in & differentiator in that they have got their users to associate them with CRM - their stock ticker is it etc - this they become product evangelists for them. As a result, there is a network effect built around Salesforce which has helped them create a lock-in.
However, that sill does not mean users won't switch (look at the new http://www.moz.com it isn't a coincidence that the UI looks like Google Analytics - that is one such example of how to "break" the lock-in). Moreover if a customer is offered a Salesforce alternative for 20% of the cost & it does exactly what Salesforce can do (as well as having a similar UI) that becomes a serious incentive for a business to switch - after all most of the decisions are made by the CIO etc who doesn't necessarily use the product day-to-day.
Finally to address your point about there being no commodity version of MS Office the problem is, is that no alternative has actually managed to provide a product to a similar level - Excel is by far the most superior spreadsheet product on the marketplace.
I do however agree with you about the switching costs, Salesforce actually use this as part of their lock-in & differentiator in that they have got their users to associate them with CRM - their stock ticker is it etc - this they become product evangelists for them. As a result, there is a network effect built around Salesforce which has helped them create a lock-in.
However, that sill does not mean users won't switch (look at the new http://www.moz.com it isn't a coincidence that the UI looks like Google Analytics - that is one such example of how to "break" the lock-in). Moreover if a customer is offered a Salesforce alternative for 20% of the cost & it does exactly what Salesforce can do (as well as having a similar UI) that becomes a serious incentive for a business to switch - after all most of the decisions are made by the CIO etc who doesn't necessarily use the product day-to-day.
Finally to address your point about there being no commodity version of MS Office the problem is, is that no alternative has actually managed to provide a product to a similar level - Excel is by far the most superior spreadsheet product on the marketplace.
The only part I would disagree with you on is that SF.com isn't a significant cost - that's 500 x $100/month or $50,000 a month or around $600k a year. Now I know there would be significant discounts - but you get the idea.
But you are right that the switching costs trump the costs.
For the switch to make sense, I think you need to offer 4x the value to make up for the switching costs. So that can be some combination of cost savings and better functionality.
Salesforce.com is a perfect demonstration of the power of the network effect - the product, in my opinion, has really isn't that great. Yes, it's fairly flexible but feels very dated and the reporting is slow and cumbersome. In theory, their system should be relatively easy to disrupt, but none of the competitors can match the number and level of integrations out there.
A good article about the economics of SaaS: http://pandodaily.com/2013/06/15/what-the-data-reveals-about...
But you are right that the switching costs trump the costs.
For the switch to make sense, I think you need to offer 4x the value to make up for the switching costs. So that can be some combination of cost savings and better functionality.
Salesforce.com is a perfect demonstration of the power of the network effect - the product, in my opinion, has really isn't that great. Yes, it's fairly flexible but feels very dated and the reporting is slow and cumbersome. In theory, their system should be relatively easy to disrupt, but none of the competitors can match the number and level of integrations out there.
A good article about the economics of SaaS: http://pandodaily.com/2013/06/15/what-the-data-reveals-about...
I think there are two conflating ideas here, commoditization and uniqueness. Commoditization will happen over time, especially with open source becoming a bigger part of more industries, but that doesn't mean you need to rush to become a commodity.
You should start with something unique and keep making unique things that delight the people who are willing to pay for those things.
It's not a complicated idea, but it takes focus and time to really get to know your customers and their needs.
You should start with something unique and keep making unique things that delight the people who are willing to pay for those things.
It's not a complicated idea, but it takes focus and time to really get to know your customers and their needs.
I mentioned the uniqueness elements to highlight areas where SaaS services can evolve into from their "solution" service to a "problem" service.
I do however agree with you that, you should always try to offer something unique (as this is the USP and where you can make higher profit margins) and that it can sometimes take time to achieve this. However, SaaS is not revolutionary and it can be copied by anyone and some of them may have a nice user interface and/or great product functionality but it is not revolutionary aka a commodity - which as I mentioned in the post is a death spiral as it focuses on competing on price.
I do however agree with you that, you should always try to offer something unique (as this is the USP and where you can make higher profit margins) and that it can sometimes take time to achieve this. However, SaaS is not revolutionary and it can be copied by anyone and some of them may have a nice user interface and/or great product functionality but it is not revolutionary aka a commodity - which as I mentioned in the post is a death spiral as it focuses on competing on price.
> Chances are that your company or your industry will be commoditized especially when you don’t think it can happen because, in reality commoditization always happens
Everything else in the post rests on this, and I'm not sure that its true. Do you have research or statistics to support this claim?
I'm curious what these industries are. Oil? Investment funds? Pharmaceuticals?
I'm thinking that there are a few industries where commoditization has not happened over the last few hundred years. Of these, I'm curious how many of the industries commoditization could happen in, but has not, and how many (for some reason) are strongly resistant to commoditization.
Everything else in the post rests on this, and I'm not sure that its true. Do you have research or statistics to support this claim?
I'm curious what these industries are. Oil? Investment funds? Pharmaceuticals?
I'm thinking that there are a few industries where commoditization has not happened over the last few hundred years. Of these, I'm curious how many of the industries commoditization could happen in, but has not, and how many (for some reason) are strongly resistant to commoditization.
In regards to the commoditization point & to you examples of Oil, Investment Funds and Pharmaceuticals there has been consolidation within these. For instance, OPEC has effectively brought all the oil-producing nations under one rule so to speak which has established uniform pricing throughout the world.
Moreover, commoditization doesn't happen immediately as there may be industries who disrupt existing solutions (as SaaS has done to Enterprise Software) but aren't yet fully established themselves (or in particular verticals of the new industry) and these can have time to evolve before commoditizing. Having said that, it's always better to commoditize yourself before customers (and potential customers) perceive you as a commodity. The reason for is that it becomes much harder to evolve into a preferred partner/problem service where you can make much higher profit margins during this stage as you are being compared on price & not your defensible value add.
Moreover, commoditization doesn't happen immediately as there may be industries who disrupt existing solutions (as SaaS has done to Enterprise Software) but aren't yet fully established themselves (or in particular verticals of the new industry) and these can have time to evolve before commoditizing. Having said that, it's always better to commoditize yourself before customers (and potential customers) perceive you as a commodity. The reason for is that it becomes much harder to evolve into a preferred partner/problem service where you can make much higher profit margins during this stage as you are being compared on price & not your defensible value add.
Pharma is a great example of what happens in commoditization. Patents allow the Pharma Co. to charge a large amount in the beginning of a product, then, when the patent expires (and the Pharma Co. has finally given up fighting it), the generic manufactures step in and take the price to the bottom.
Huh? Oil the perfect example of a commoditized market? You go buy oil on a commodities exchange and take delivery from whoever bothered to fill your contract (you don't really care who).
This is the tradeoff... SaaS gets great margins because it's not custom. There's a high fixed cost, then each incremental addition has benefit. Even with a low marginal cost this is true. The #1 SaaS can also add lot of features and increase reliability and spend more on Marketing.
You could argue that Wal-mart is a commodity too. It's just stores and the same stuff as K-mart and 7-11. But it crushes them. There's room for both Wal-mart and Tiffany's just like there's room for a SaaS for your billing system, and Accenture to build a custom one.
You could argue that Wal-mart is a commodity too. It's just stores and the same stuff as K-mart and 7-11. But it crushes them. There's room for both Wal-mart and Tiffany's just like there's room for a SaaS for your billing system, and Accenture to build a custom one.
I wasn't arguing about adding more features (since a competitor can also do that) but rather create an additional value-add that meets your customers or potential customers needs.
Whereas SaaS currently tries to say "this is the solution" it needs to be flipped to focusing on actual customer pain points (since the current solution may not actually meet their needs) which you can the re-create a slightly new solution which becomes your unique selling point and defensible base (which is why it's important to go beyond competing on features). The reason I'm arguing this point is because, SaaS is becoming commodified in that they they winning SaaS in the SMB space start getting pulled upstream to the enterprise market where their margins become much greater and SaaS becomes their method to provide you with the product than their actual business model.
Your examples actually reaffirm my point - Walmart has added value by offering "everything under one roof" so instead of going to 10-20 store you just go to the 1. Their value is convenience alongside this they also compete on price to protect their market from disruption and ensure they're the dominant player (its a 3 pronged attack which Amazon is replicating on the web). On the other hand Tiffany's offers you a more personal experience than a Walmart does (in my opinion) which is their comparitve value-add alongside their actual products.
Whereas SaaS currently tries to say "this is the solution" it needs to be flipped to focusing on actual customer pain points (since the current solution may not actually meet their needs) which you can the re-create a slightly new solution which becomes your unique selling point and defensible base (which is why it's important to go beyond competing on features). The reason I'm arguing this point is because, SaaS is becoming commodified in that they they winning SaaS in the SMB space start getting pulled upstream to the enterprise market where their margins become much greater and SaaS becomes their method to provide you with the product than their actual business model.
Your examples actually reaffirm my point - Walmart has added value by offering "everything under one roof" so instead of going to 10-20 store you just go to the 1. Their value is convenience alongside this they also compete on price to protect their market from disruption and ensure they're the dominant player (its a 3 pronged attack which Amazon is replicating on the web). On the other hand Tiffany's offers you a more personal experience than a Walmart does (in my opinion) which is their comparitve value-add alongside their actual products.
The problem I see is that you have a lot of new SaaS startups where their is not a low marginal cost to add people. This is particularly true in the developer space where there are any number of startups that will record events from websites and mobile apps for anything from performance monitoring to analytics. Each free customer they add has a cost in terms of data, infrastructure and building code to scale massively. Thus, they are forced to raise ever bigger amounts of money from VCs to keep going. Contrast this with 37signals - where adding another free client really did have very little cost.
And at the same time, all these services are, as the article points out, becoming commodified. Thus, recognizing that they really can't make money in the SMB market with such low switching costs, they decide to move to the enterprise market and thus the whole economics of SaaS are blown up, and they look very much like a traditional enterprise software business - and SaaS becomes a delivery methodology rather than business model.
My own article on this issue (shameless plug): https://medium.com/i-m-h-o/a2cc0d5ba431
And at the same time, all these services are, as the article points out, becoming commodified. Thus, recognizing that they really can't make money in the SMB market with such low switching costs, they decide to move to the enterprise market and thus the whole economics of SaaS are blown up, and they look very much like a traditional enterprise software business - and SaaS becomes a delivery methodology rather than business model.
My own article on this issue (shameless plug): https://medium.com/i-m-h-o/a2cc0d5ba431
As a result, by commoditizing yourself and creating a new unique selling point which is, unique to you, important to your customer (or potential customers) and is defensible against your competition, on top of your SaaS you can increase demand and give yourself the opportunity for highly profitable growth.
I don't follow. Okay so I find a selling point but what exactly makes it defensible or 'unique'?
I don't follow. Okay so I find a selling point but what exactly makes it defensible or 'unique'?
What I mean by this is don't make your selling point about having more features (since a competitor can copy them) but rather create an additional value-add that meets your customers or potential customers needs.
SaaS currently tries to say "this is the solution" and as I was saying in the post it needs to be flipped to focus on actual customer pain points (since the current solution may not actually meet their needs) which you can the re-create a slightly new solution which becomes your unique selling point and defensible base (which is why it's important to go beyond competing on features). Essentially SaaS is becoming the method to provide the customer with the product rather than the actual business model and if your SaaS works with your customers & solves a key problem for them beyond "hey pay us X for these features" you will become a preferred partner who is solving a key problem which is critical to the success of your customers
SaaS currently tries to say "this is the solution" and as I was saying in the post it needs to be flipped to focus on actual customer pain points (since the current solution may not actually meet their needs) which you can the re-create a slightly new solution which becomes your unique selling point and defensible base (which is why it's important to go beyond competing on features). Essentially SaaS is becoming the method to provide the customer with the product rather than the actual business model and if your SaaS works with your customers & solves a key problem for them beyond "hey pay us X for these features" you will become a preferred partner who is solving a key problem which is critical to the success of your customers
you can the re-create a slightly new solution which becomes your unique selling point and defensible base
Are you basically saying that in addition to features, you need to provide service because that is what makes you defensible? It is just not very clear how a slightly new solution is inherently defensible. You could make your product offer a slightly new solution by improving a feature. I'm guessing you'd argue that isn't defensible. So what concrete characteristics make it defensible? May be you are hinting at marketing/branding - once you have a brand/mindshare, people are less likely to switch to commoditized alternatives(ie. Tylenol).
Are you basically saying that in addition to features, you need to provide service because that is what makes you defensible? It is just not very clear how a slightly new solution is inherently defensible. You could make your product offer a slightly new solution by improving a feature. I'm guessing you'd argue that isn't defensible. So what concrete characteristics make it defensible? May be you are hinting at marketing/branding - once you have a brand/mindshare, people are less likely to switch to commoditized alternatives(ie. Tylenol).
The simpler the Saas service, and the lower cost of switching, the more competition and commoditization that may go on. But this article is talking specifically about Saas replacing enterprise software. Software is sticky, and some software is very sticky because it is mission critical, highly integrated into the business workflows, and/or there is significant user interaction.
For example, if a company has 500 sales people all happily using salesforce.com, why would a CIO disrupt everyone's work to switch to a cheaper but different product? The cost of salesforce.com is not a significant cost to the business, but the cost of disrupting people's productivity swamps any savings you might from switching to a cheaper service.
This is similar to someone telling a company to drop MS Office because OpenOffice or GoogleDocs have equivalent "good enough" functionality and are free. There is no 'commodity' version of MS Office which looks and behaves exactly like MS Office but just with a lower price.