I’m a SaaS evangelist – not because it’s a better delivery mechanism per se, but because it opens up lots of possibilities which simply aren’t attainable with traditional installed software. The current economic climate and the cost cutting measures we’re seeing have made me think about different strategies SaaS vendors can use to create compelling offerings.
It seems then an opportune time to revisit a notion that I wrote about way back in the dark ages (2007 to be precise). The way I figure it, there are two distinct types of SaaS business model
- SaaS for substitution (SaaS/s)
- SaaS with added value (SaaS/v)
SaaS/s
SaaS/s is a situation where a software or manual product is an extremely expensive acquisition or requires significant maintenance. The SaaS methodology of pay as you use on a month by month basis makes substitution of the original product with the SaaS product attractive. Generally in a SaaS/s situation, the functionality being offered is, generally speaking, at a similar level of functionality as solutions offered by non SaaS delivery models.
I would class Salesforce as a SaaS/s business model.
SaaS/v
SaaS/v however is a different beast. In this model we create a business that, due to the fundamental opportunities of the SaaS delivery model, creates a situation whereby all that is good about Web 2.0 (the ability to build networks, to user generate content and to collaborate) is added to the original service proposition to create something that is much more functional than the original offerings.
So why are these two models different, which one should investors look to invest in and what are some core requirements of each?
SaaS/s depends on large uptake to gain a critical mass. This critical mass results in user lock in and the offering being seen as the incumbent. To use a bricks and mortar analogy (and a fairly loose one but humour me here), SaaS/s is a WalMart offering – high volume, low margin. It’s a risky proposition, just waiting for a new business to offer the same product at a lower price, or with some new feature. For an investor it’s a short term play.
SaaS/v is different. The Unique selling proposition of the product is such that businesses will feel a real need to jump on board – not because they can save some money or hassle – but because the value the product adds to their business is significant. It’s fundamentally a more secure investment because (that old adage again) it is a non price differentiated product. Higher margin, lower volume and with a customer base that tends to be more loyal. For an investor it’s a sure bet.
So how do we know which of these two models a SaaS startup will turn into? Read between the lines of their product description – if words such as added value, integration, collaboration, network get bandied around then it’s a safe bet they’re thinking along the added value line.
And where does this place recent SaaS startups? That all depends on whether or not we believe that the business has the knowledge, the understanding, the networks and the skills to leverage what they have to create the added value product. Watch this space…
Another big difference between between SaaS/s and SaaS/v is that SaaS/v solves problems that add the most value when centralized between all users.
You can draw the line between the two by looking at internally focused problems, such as a CRM, which tend to be SaaS/s and communication that must cross the company wall, such as extranets, which tend to be SaaS/v.
SaaS/v in its best form provides a new way to interact with people or data outside your organization. SaaS/v should allow you to accomplish something that would have been impossible with an internal application.
I would agree that SaaS is a fantastic delivery model. However, I have to disagree with the attempts to position SaaS as a BUSINESS model (and consequently develop some business model taxonomy based on SaaS/s, SaaS/v etc.)
While there may be a few commonalities in the business models that use SaaS (eg application rental vs licence on perpetuity), the actual business model will be driven by the dynamics of the market for a given application.
I’m also not sure whether we should attempt to apply definitions based on Least Cost versus Added Value, which are good for classes in Competitive Advantage 101, but are both coarse and ambiguous at a business unit level, to businesses that happen to use SaaS to deliver their applications
Hi Chris – thanks for your comment. I guess if your contention is that all SaaS is is a new way of delivering software then your comment would be valid.
My perspective however is that SaaS is a shift – in terms of delivery, mindset, technology and a host of other directions – as such I believe a taxonomy (however coarse) is appropriate
Cheers!
Hi Ben, a great article. We have been highly focused on SaaS/v, as we have been building myworkspace.com over the last 8 years. It is really starting to pay dividends for our customers. Effectively using SaaS to redefine part the business services industry, creating business service utilities delivering virtualised business services (like bookkeeping, website/online presence developmnet, virual assistances..) – interesting times!
I strongly agree with you Ben.
In our line of business (SaaS ERP for SOHO/SME) we could either focus on cost of scale, fighting against decreasing ARPU.
Or take the expanded look on how this delivery model can add value. We have actually trademarket this concept as “the e-conomic way” !
Within the concept of “the e-conomic way” we focus on strenghtening online corporation between customer, bookkeepers and accountants. How knowledge regarding bookkeeping can be availiable, how support can be conducted e.g.. This instead of fighting a feature war against features inside the on premise systems to be replaced.
In the long run the value of the actual Software – that we are replacing – the so called core functionality will turn towards zero, the actual application it self will be a qualifier. Customers in our segment will pay for the surrounding benefits – thereby no longer being additional values – but the new core !
Close to 10% of Danish SoHo/SME’s in Denmark now run SaaS ERP ! – This week we worked with collecting positive statements for our web-page. Luckily, none of the 25 statements that I have seen so fare, argued their shift towards this delivery model with price !
Anders K. Hansen
VP
e-conomic international
[email protected]