Right now investor focus is on SaaS companies that can deliver hyper growth in customer numbers. And revenues. Profits and cash are secondary considerations. Look at the giant of the SaaS world. Salesforce.com doesn’t yet turn a profit. This makes sense as a land grab in a growing industry. Which is the exact place we are today. It is not sustainable as a long term investment strategy.
SaaS is going to be real. A major sector of the technology industry for many years to come. With good earnings and high (ish) margins.
What Happens When SaaS Goes Mainstream?
As we approach this phase we can see what type of SaaS business will be attractive to mainstream investors. The type of institutions and funds that drive the NYSE, Nasdaq, London Stock Exchange and other global bourses. There will be different sizes and specialisms. But the companies the main markets will love are going to have:
SaaS Is Not Just About Startups
Right now SaaS is seen as near pure startup play. It is all about exposure to explosive growth and high risk/ high return dynamics. That is fine. Startups like this will always exist. And the fashion (or asset allocation in the jargon) for this investment class will rise and fall.
SaaS is going to create a big sector of companies that are a solid and secure investment base. Far removed from the startup world of VCs and Angels. We are talking pension funds, income funds and hedge funds here. Revenues will range from $100 Million to $100 Billion. The common factors will be cash flows, margins and predictability.
One day we will be able to read the story of how SaaS led the Tech sector into the established world. Away from the wild fringes of the market. Into the ranks of cyclicals, defensives, growth stocks and the rest.
Unicorns and valuations in the stratosphere are wonderful. Building sustainable business that changes the world will be much more fun. Look out for the companies that transition to the next phase of SaaS. Excitement will be lower but achievement will be much more widespread.
We will see more IPOs. Indices that look at performance over a quarter, then a month and even real time. Specialist funds will emerge that invest in portfolios of SaaS businesses. Market analysts will develop expectations of margins and cash flow. Investment ratios. Churn analytics. Drama will be replaced by strong regular income.
SaaS will be a vital part of the long term, established economy. Integral to technology but also an element of almost all sectors. And of course new startups will emerge to disrupt the SaaS model!
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Software is changing the world of business. SaaS startups are offering great products with real tangible benefits in every business sector. But persuading business top adopt new technology is tough. Often the benefits of SaaS are sold in terms of time. But turning time into money is not easy. SaaS for SMBs needs to find ways to help their customers realise these benefits.
Many things have changed in the world of enterprise software. Yet there is one apparent constant. Almost every product claims that it will save the customer time. Sometimes the word used is efficiency. Often the marketing team will jump straight to advertising cost savings. A quick look will confirm that the real benefit is time reduction. Tasks, routines or processes carried out faster or with less pairs of hands.
Tech Does Not Turn Time Into Money
This is a problem. There is a management principle that work expands to fill the time available. It is even older than than the computer industry. IT projects have a long and undistinguished history of failing. They don't deliver any real benefits from all those time savings.
Unless you do something about it, saving time does not turn into saving money.
This matters because enterprise software buyers are all sceptics. The benefits of new IT are in doubt throughout the business world. Executives in companies large and small all bear scars. Memories of expensive projects with zero benefits.
The traditional solution to this problem is change management. In the last 10 years the enterprise software industry has become dominated by services. A large part of the revenue in this area comes from change projects. Designed to extract concrete business benefits from high priced software implementations.
How Can SaaS Tackle This Paradox?
So if your SaaS is designed to save your SME customers time, how can you tackle this paradox?
First you need to be clear how time converts into money. Your customer has three basic options:
Business leaders in any company hate number 1. Don’t believe what you read about executives who love taking the hatchet to payroll. It is a sad and painful business in any organisation.
Number 2 is more popular among leaders. But it means change. And there is always a solid group of employees who fear change. It is discomfort rather than outright pain. That is enough to create resistance. Resistance eats benefits. It is relentless and invisible. But it is horribly effective.
SaaS For SMEs - Use Content And Onboarding
Selling SaaS to SMEs you don’t have the time or resources to deliver change for your customers. That does not stop you from helping customers understand the benefits of your product. The two best opportunities are through content marketing and onboarding.
Your content marketing is a great opportunity to promote the upside of your product. Turn the time benefits into language a customer will understand. I am on the board of Appointedd. A time and scheduling app for SMEs. I love their simple way of expressing the benefits to a small business owner. Do More Of What You Love.
There are plenty of other examples. The key is to use content to help your customer think about real business questions:
For onboarding the trick is to broaden your thinking. Most onboarding processes focus on the SaaS product. This is important your customer needs to know how to get up and running.
But don’t stop there. Provide help which enables your customer to use the product as well as just installing it. Give illustrations of the product working in practice. How have other customers delivered the benefits? Show them through case studies and war stories.
B2B SaaS is about building products which provide real business benefit. That is the promise you are selling to customers. It is the mechanism that will allow software to disrupt and transform industries everywhere. Startup founders need to understand how their product delivers benefit need to end.
Just showing how to save time is not enough. Think through the real wins from your product. And build content and onboarding services that help your customers get there.
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SaaS is the growth sector in the software industry. It has grown through a subscription based recurring revenue model. There is nothing wrong with this model. But explosive growth cannot last forever. And once SaaS is dominant in the industry pricing and revenue models will be just another way to compete. SaaS businesses should be more creative. Startups can look to alternative revenue models for competitive differentiation.
Many years ago I worked in Johannesburg. I was a manager at the time and I learned a lot from the experience. My mind was broadened by the cultural experience. The fascination of watching a wonderful country emerge from a dark time. I also worked with some great people.
One partner in particular taught me much. He had a trick when approaching a new client. He would arrive for the first visit, get out of his car and sniff the air in the car park for a few moments. Based on his impressions of the head office and the feel of the place, he would estimate the fee potential. Weeks later our proposal would be accepted. Only after much poring over spreadsheets and agonising about margins. He would turn out to be spot on.
Experience and Experiments
Pricing is all about experience. Which creates a challenge for many startups. I fear that SaaS has become narrow minded and predictable when tackling this issue.
Right now it feels like we have adopted the wrong definition for the acronym SaaS. It is supposed to stand for software as a service. In almost every business it has become software as a subscription. You pay a fixed amount per month for using the software. With slight variations based on premium features, number of users or similar. The only discussions are about the monthly cost. And how to present the best option on the pricing page.
Services Are Not Based On Subscriptions
There is nothing wrong with subscription. It works well for magazines or insurance companies. The closest it gets to software in the old days is cable TV. Or access based products like broadband or mobile.
Yet in the pure services industry it is almost unknown. I worked in professional services for 30 years. Over that time we had exactly zero revenue from subscriptions. The same is true of many other services. A hairdresser, a plumber, a freelance developer or a copywriter. None charge subscriptions.
Look To Service Industries For Alternatives
SaaS companies need to start considering the alternatives. In my career, the main revenue models we used were:
SaaS Startups Can Differentiate On Pricing
There are many other variations and combinations. Yet the SaaS industry is offering only one billing model. The variety and specialism of products is bewildering and awesome. When you get to pricing, all of a sudden everything looks the same. This is nowhere more true than in SaaS aimed at SMEs when prices are displayed on the company website.
It does not make sense. Pricing is a key differentiator in any competitive market. It is not just about the sticker price. SaaS companies are closing off a whole range of opportunities. You can use pricing and offers to appeal to customers in many more ways.
Some Ideas For SaaS
I hope that in future we will see different models emerging. Slack has started the trend with its usage based model. Benefits and others are free to use because of an advertising/ marketplace approach. What else might we see? Here are some ideas to think about:
SaaS is already a competitive industry. The pressure will increase as margins fall and the industry consolidates. For many B2B functions, buyers will take a commodity approach. Things like finance systems, CRM and procurement will be hard to differentiate on function.
Cost becomes a big factor in the buying decision. Different revenue models will offer more flexibility to compete. Get creative with pricing structures to offer better value and stand out from the crowd.
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Despite the pace of change in recent years, the growth potential of SaaS is still enormous. One reason growth will continue is the speed with which SaaS functionality is increasing. It is like there is a new Moore’s Law. The functional capability of SaaS products you can buy for $1 will double every 12 months. This means value and quality are growing in tandem.
Since I started to focus on the SaaS world I have been amazed. Almost every week I discover a product that I believe offers unbeatable value. Then I click a link and see something even better. Apps seem old fashioned and limited almost overnight. We all know that SaaS is only taking a small part of the legacy software market.
The increase in quality means the growth potential of SaaS is even more enormous. There is a major market shift taking place in the software industry. But legacy, licence based revenues are still dominant. This will not last, regardless of market and economic conditions. We will see the amount of technology bought as a service rise in the next few years.
How Much SaaS For A Dollar?
But the market is not the only source of growth. SaaS is fuelling a massive increase in software functionality and business intelligence. This leads to a new form of Moore’s Law:
“The functional capability of SaaS products available for $1 doubles every 12 months (or less?)"
I have no idea how to measure this but I can see and feel that it is happening. There are three solid reasons for tis trend:
In the short term it is also true that investment fuels this growth. Investment will not always be there. The current boom will end one day. But software will keep getting better even without the waves of cash.
The business world is not yet taking full advantage of this trend. I suspect we are approaching a tipping point. Lots of enterprises have made small investments in SaaS. Transferred non core functions. Or used SaaS for a new project. Replacement cycles and tight capital budgets will soon lead to a major acceleration. SaaS is about to go mainstream.
Once SaaS is established the ability of business to take advantage will be much greater. Conservatism and inertia will weigh less heavy. Rapid improvements in functionality. And much better information to support decisions. These will lead to immense benefits for the wider economy. Everyone will win.
Speed of change and adoption is still a challenge for every customer. For SaaS companies the objective is to win loyalty now. And stay in the game long enough to take advantage of broad growth when it arrives. Of course, also keep offering better software and more features.
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I have written this blog after being inspired by an infographic sent me by a reader. The subject is the growth of eCommerce. Retail and marketplace models dominate this space right now. But there is a big opportunity for SaaS innovation. Rent v Buy models are already emerging. Advertising style subscription models are also possible. Yet another source of value will lie with data and analytics. Time for SaaS to disrupt another industry.
eCommerce - A SaaS Opportunity
This blog is a little different. It was inspired by an infographic sent to me by a regular reader - Max from Tracking Courier. Part of his work is in the header and you can download the full version below. I loved it and took the challenge to look into the subject matter and write about it.
eCommerce is the theme of Max’s infographic. We all know the general story of explosive growth. The 5 minute guide highlights the statistics and trends which every startup should understand. Despite the expansion, a huge opportunity remains. But there is a lot of competition out there. Plenty of smart people and large amounts of investment are focused on eCommerce. Yet almost everything goes into two business models. Standard retail eCommerce and Marketplaces.
Some of these businesses will achieve wild success. This will be a hard and expensive road. Why not try a more innovative approach? I think eCommerce is a great opportunity for SaaS which is not being exploited today. With some creative thought, SaaS could also open up many new opportunities.
Rent v Buy
One SaaS route for eCommerce is to apply the rent v buy model from software to other goods and services. This is the essence of SaaS. eCommerce today is a sales business. Turning it into rental can offer better value for consumers. And a better business model for startups.
This model would work well for digital goods. There are already companies experimenting. The most prominent example is Amazon’s Kindle Unlimited service. Subscribers (note the SaaS term!) to the service or to Amazon Prime can rent 5 books for a month. At no extra cost.
Subscription Based Advertising
Another option is to adopt a B2C2B model. Great eCommerce sites are not just a platform for the retailer. They provide a massive audience for brands and channels. This lies at the heart of the marketplace model. But it also works for traditional sales models. The eCommerce business can build a SaaS revenue stream. By offering subscription based advertising services. Brand owners pay to place their goods or services in the shop window provided by the eCommerce site.
SaaS Data And Analytics
Not every eCommerce site is a channel for other brands. Many are the shopfront for a product or service. Even here a SaaS revenue stream is possible. Customers who visit your site will be attracted by many different things. Some will be buyers, some browsers others just visitors. Data about who comes and how they behave could have real value to many others. Imagine you run a travel site which specialises in trips to golf destinations in Scotland. Your visitors are also a possible audience for golf equipment and clothing brands. A regular feed of that data could provide a nice SaaS business.
Time For Disruption
So have a look at the infographic. And use it to inspire some creative thinking. eCommerce may be stuck in a bit of a rut. SaaS can be a vehicle to disrupt new industries as well as old. Let’s open up that opportunity. Thanks Max!
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Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.