Jan 11, 2007 by Sinclair Schuller
At first glance, the concept of a SaaS ecosystem seems to provide value only for the end user, giving SaaS customers a map benevolently drawn by the divine cartographers of their SaaS/ecosystem providers to navigate the ever growing jungle of offerings and value propositions. But as the age old saying “Never judge a book by its cover” implies, take a look below the surface.
First, do ecosystems provide value to the end user? Absolutely. SaaS ecosystems, by nature, create a synergistic effect and positive sum game for the end user. The concept of the ecosystem allows for the exploitation of its participants to the benefit of the end user. For example, as an end user buying into a SaaS service with a budding ecosystem, I can take advantage of the tight integrations I’ll likely find between the ecosystem’s members, making for a smoother ride. Conversely, if I were to buy into a SaaS service A and a disparate SaaS service B, odds are that I won’t be able to exploit a relationship or integration between them as easily as I would in finding a reasonable B substitute within A’s ecosystem. Extrapolate this to all of your software purchases, and you can see that synergy unfold or disappear, depending on which poison you chose. There is definitely value in buying into an ecosystem, but is the ecosystem really a result of provider benevolence? Probably not.
Before I get into why providers extract value from ecosystems as well, let’s think about what SaaS has done to the end user’s ability to find substitute providers for a given service type. Prior to the advent of SaaS, an end user would purchase and implement an on-premise solution for an exorbitant amount of money, time, and effort. This placed the customer in a precarious strategic “stuck between a rock and a hard place” situation: if the software product proved to be worth less than what its cost was, finding a substitute was generally unreasonable since they would have to re-incur all of those exorbitant costs for the replacement. In essence, the on-premise model greatly reduced a customer’s replacement mobility which would generally correlate to a reduced customer flight risk for the vendor. Think of replacement mobility as the product of having substitute options coupled with your ability to leave your current software choice and flight risk as the risk of a SaaS provider losing a customer due to the customers replacement mobility. A reduced flight risk meant that even though the customer disliked the product, they would probably continue to invest in it by purchasing small upgrades, support, and customizations from the vendor. Obviously, the vendor liked this. SaaS, however, turned this model on its head. Assuming a customer can access their data, the cost of switching from one vendor to a substitute is much less pronounced than the on-premise model. This difference created a value gain (in green) for the customer and a value loss (in red) for the vendor when contrasting with the on-premise model.
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SaaS vendors are aware of this, forcing them to place a large amount of focus on delivering quality functionality and service to reduce attrition rather than rely on the artificial retention dam created by the high cost of implementing on-premise. Although customers view this as fair, vendors (particularly those who used to sell on-premise) view this as sour grapes. The ecosystem, however, helps reallocate some of the customers large value gain back to the vendor. When a vendor deploys an ecosystem and populates it with value-added partners, it is providing the customer more value while also making it more difficult for the customer to leave in events of teetering dissatisfaction. A customer acting as an ecosystem consumer now has to ask “Can I find a substitute for the SaaS service and the value I’m deriving from the ecosystem.” Being a more difficult replacement proposition might force the customer to overlook some levels of dissatisfaction they may not have overlooked if they were not consuming from the ecosystem, thereby placing less onus on the vendor.
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Does the ecosystem provide value to the vendor? Absolutely. The ecosystem can generally be considered a win-win, as long as the customer is aware that it will affect their replacement mobility. So how do you feel about ecosystems? Do you think they’re all hype, or actually add value to a SaaS offering or platform? If you’re a provider, do you see value in reducing attrition rates through a tactic like this?
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