SaaS Network Effect – Get it or get left behind

Sep 24, 2010 by Jesse Kliza

A little over 3 years ago, there was a great series of posts (here and here) around how SaaS companies make money that led to input from Sinclair here on SaaSBlogs, and myself on my own personal blog at the time.  The discussion ended up with examples highlighting that a pure SaaS delivery approach provides far more benefit and strategic advantage to an ISV, than just what’s seen on the surface.  It’s not just the MRR, the ability to address the longtail of a market, etc, etc.

SaaS provides an opportunity for ISVs to create something far more valuable than just software functionality that’s delivered online.  It provides them an opportunity to become the center of their industry by leveraging the “SaaS network effect” – but it takes creativity, scale, and the right architecture to support it. (both business and literal software architecture)

Just yesterday, Max Bleyleben of Kennet Partners blogged about the aquisition of one of their portfolio companies FRSGlobal to Wolters Kluwer.  He made a great statement about this notion that leveraging the SaaS network effect is something that ISVs should be doing, as it provides much more value to the ISV above and beyond the surface level benefits of SaaS that everyone talks about:

“The first wave of SaaS companies moved traditional enterprise applications (eg CRM) onto a hosted platform. The next generation combines delivery of software functions with proprietary content — eg domain databases, analytics, benchmarking data. Without unique content, most SaaS businesses will be commoditised away. FRS had worked out how to codify statutory regulations in 40+ countries into useable, actionable templates that banks could use to manage compliance. Most important, however, FRS’s domain experts around the world continually maintain this content, effectively providing ongoing ‘compliance insurance’ to customers.”

My favorite part of his statement? – “Without unique content, most SaaS businesses will be commoditised away.”

Who Gets It?

Companies like Salesforce.com with their purchase of Jigsaw, and Freshbooks with their quarterly report cards are two examples of companies that get it.  The great news is, there’s still so much innovation to come in this area!

How are YOU leveraging the value of your userbase/domain specific data, to differentiate and deliver added value?  What other SaaS companies do you think are doing this well?

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How Can a SaaS ISV Drive Down Marketing & Sales Costs?

Aug 30, 2007 by Sinclair Schuller

A little over a month ago, there was a good post over at UnreasonableMen.net (with a follow up over a SmoothSpan) which highlighted egregious sales & marketing costs incurred by SaaS companies. The concerning thing is that SaaS pundits and ISVs state that subscriptions are easier to sell than perpetual licenses, yet we see these massive expenses. The two posts stated (as did I in the comments) that part of the expense is that SaaS and its ISVs need to spend to get big fast and counter the relative immaturity of the model to spearhead market penetration. While this posit is still entirely valid, I’d also propose that many SaaS ISVs are not marketing and selling as well as they could. Moreover, many ISVs are not exploiting the SaaS delivery model but instead use it as a new way to deliver Regular Old Functionality (ROF).

Think of ROF as “I have software that solves business problem X and is sold on-premise. Now I want to solve problem X, but centralize it via SaaS and offer it cheaper to my customer.” ROF is X, and now X is delivered over the web. While that’s necessary and is a good start, plenty fun of stuff can be offered as a consequence of centralization. Furthermore, this ‘fun stuff’ can drive marketing and sales costs down significantly for an ISV. This is where we can take lessons from our Web 2.0, uber social media dork, flashy JavaScript brethren. Let’s look at my favorite example: del.icio.us

del.icio.us, on the surface, offers a whole bunch of ROF. It took the functionality of bookmarking and brought it online, abstracting it away from your browser and computer. In itself, this offers a good amount of value to you, a single user, and if you like it enough, you’d probably recommend it to your friends. As ROF, the only incentive you have to refer someone to del.icio.us is that you’re a nice gal/guy and you get pleasure from helping others out. Okay, that ‘incentive’ is bound to make any sort of word of mouth (i.e. cheap marketing) campaign a relative failure. But wait, is that the only incentive? Absolutely not! The folks at del.icio.us were smart enough to ask themselves “what if we can exploit the fact that we know what all people on our system like?” And like magic, they moved from ROF online to ROF + a whole lot of value (social bookmarking). They could now show bookmarks of like minded individuals via tags, trends and recent popularity growth, giving users an edge in their browsing and discovery experience. But the part that is relevant to this post is that they drastically increased referral incentive. You now have much reason to tell people about it: the more people using it, the higher the value to you. This provides a platform for a powerful word of mouth campaign and a massive reduction in marketing and sales expense. Basically, as the number of users in a system such as del.icio.us increases, the value moves from the ROF-delivered value to one that is a property of the number of users, increasing value for each individual as well as referral propensity (of course, there is a limit somewhere). The concept is summarized in the graph below.

And now you say “But Sinclair, its social media and given away for FREE. How does this have anything to do with my SaaS business where I CHARGE?” It has plenty to do with it. Small to medium business users talk to each other all the time. They recommend things to each other on a regular basis, whether it’s at a trade show or the local coffee shop. The ISV’s duty is to build referral incentive through non-ROF value that is based on centralization, exploiting the community. A trivial example is help desk and trouble ticket software for IT departments. While good ROF is powerful and valuable, imagine aggregating statistical data across customers trouble tickets to do things like provide ratings and stats for hardware (Dell Computer X experiences 7 issues per 90 days), giving your customers the ultimate buyers guide for the reliability conscious, or providing benchmarking so they can see how they compare to the industry/sector average. Community backed functionality such as this moves SaaS out of the ROF-space and gives customers A.) a reason to see SaaS as functionally better than on-premise and B.) incentive to recruit users thereby providing the ISV market reach that would be near impossible to buy.

It’s my opinion that we have a long way to go before we see SaaS marketing and sales costs go down, but that concepts such as referral incentive are key to making them drop drastically. Do you agree or disagree? Are there other strategies that might significantly help a SaaS ISV reduce marketing and sales costs?

 

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Does the SaaS Ecosystem Concept Lean Toward Natural Oligopoly?

Mar 2, 2007 by Sinclair Schuller

Rare is the day where using the phrase “SaaS Platform” doesn’t invoke the usage of “SaaS Ecosystem.” Heck, it even found its way to the title of the keynote panel I’m part of at April’s SaaSCon: Understanding SaaS Platforms and Ecosystems. The reason for this “two peas in a pod” syndrome is pretty easy to explain: SaaS platforms aggregate vendors, offerings, and end users in a pseudo-closed system which creates a huge amount of long-term value potential in exercising this network of relationships. This network is what we call an ecosystem and the value that can be created by commanding successful relationships is important to all parties involved.

I was discussing the future ecosystem landscape with someone, and inevitably the question of “How many ecosystems do you think will exist in a few years?” came up. Trying to quantify something like that this early definitely requires painting with broad strokes, but looking at the dynamics my answer is that a handful of ecosystems – a veritable oligopoly – will account for almost all ecosystem participants. In this scenario the oligopoly would not be forced or created through regulation, but would in fact be a natural oligopoly – the result of convergence due to economic factors. Why? Because ecosystems are networks.

A SaaS ecosystem’s value is very much defined by the size of its network, which is composed of three types of members: vendors, applications, and users. Looking at the trivial case, an ecosystem with zero participants of any type is valueless, as is the case of an ecosystem consisting only of suppliers and supply. As a mix of members from the three aforementioned groups start to enter a specific ecosystem, the value of the ecosystem increases. End users have the ability to gain value from relationships defined by participating vendors or deployed applications, vendors themselves can experience synergies by creating relationships with other vendors in the ecosystem. What this does is create a positive feedback loop.

If there are no costly or threatening barriers to joining an ecosystem, non-participants will measure the value of the ecosystem by the number of links it offers – the larger the network, the more valuable (i.e. Metcalfe’s Law). This is the reason why instant messaging, for example, is a natural oligopoly. If you had to choose a messaging service, what would you choose GTalk or AOL Instant Messenger? If you chose GTalk, you probably won’t be chatting with too many people. With AIM, you’re almost guaranteed to be able to chat with anyone you want. Any growth within the instant messaging realm generally gets absorbed by the few players that dominate the market because people want to join the networks that their friends are on. Ecosystems, by nature, are capable of harnessing the same network effect. A largely fragmented system with dozens or hundreds of ecosystems presents very little value to any participant. A few ecosystems that aggregate huge numbers of participants and value, however, benefits most everyone (as long as the oligopoly remains as such, offering market choice and fostering continued competition).

Right now, we’re very early in terms of the SaaS platform and ecosystem space, so I’ll be brave and attempt to be an oracle. In these early stages, value focus will not be on the value of the ecosystem; participants will choose platforms that offer the most immediate value in terms of technical merit, application offerings, etc. As the participant numbers of the early platforms and ecosystems grow, value focus will shift to the network value of each ecosystem. A market shake-out will most likely follow due to the rapid growth of some ecosystems, leaving that golden handful as clear leaders and many, many participants that can benefit from the huge amount of value that these networks can provide them.

Do you agree with this notion, or do you see a situation where many more ecosystems exist? If this was the scenario, do you think the aggregation of value is worth having an oligopoly?

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