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SaaS Economics 101c | SaaS adoption and switching costs : The double edged sword of data

The earlier posts in this series discussed the economics of SaaS from the vendor’s perspective. But, there are costs associated with choosing SaaS over software that the vendor never sees: the costs of adoption and switching.

If you have built your software-as-a-service business well, following all of the SaaS Top Ten Do’s and Don’ts, then you have made it easy for your customer to find it, buy it and use it online. And, you have a solid, scalable architecture with massive economies of scale. But, your product is unusable without your customer’s data. Even if you are strictly a content provider, you must at least get registration and purchase data. Most business SaaS offerings require a lot more than that.

Once a prospect is sold on the value of the product, data becomes the most significant barrier to adoption. Getting data in and getting data out. If the primary users of your application are people,
then getting data in amounts to mouse clicks, typing, spreadsheet uploads, etc. and getting data out (and into the heads of your customers) amounts to learning how to use the application, both individually and organizationally. There may also be a need for other systems to get data in and out of your SaaS, then the adoption cost is integration.

The unusual thing about data is that what starts as a barrier to adoption over time, becomes the cost of switching. As a for-profit business, your goal is to lower the costs of adoption by providing a super easy, yet valuable initial offering, i.e., easy to buy, easy to learn and easy to add data. And, to raise the cost of switching, by making it easy to learn more and more features, add more and more data, and get more and more value over time. This is a process I call application discovery.

Application discovery can be illustrated well by comparing a consumer oriented SaaS, like or Google to enterprise software. There is actually quite a lot you can do at other than buy a book. You can create wish lists, write reviews, manage your one-click account, you can sell books, or music, or videos, and you can have your books printed on-demand. But, you don’t get it in your face all at once. You discover it as you use the service. In contrast, enterprise software is notoriously difficult to use and integrate. Why? Because, it is purchased up front. The license cost is sunk and the audience is captive. So, strap the users to their chairs and make them sit through two weeks of training. Kick off that middleware project. Get the data in. Get the data out. Now we can really start realizing that ROI the sales guy promised us.

The enterprise model of adoption is still available to SaaS vendors. There is nothing about the Internet that takes this option away. And, some applications may be so inherently complex that it is required. But, this labor intensive approach provides no competitive advantage. In truth, it is possible to build application discovery into enterprise software, however, license pricing and revenue from high-touch services remove any incentive to do it. SaaS on the other hand is sold on-demand over the Web, and if done well has data-driven mass customization built in. So, managing the process of application discovery is simply another example of mass customization, except customer needs vary over time instead of varying over market segments. By fully automating initial adoption and enabling easy application discovery, adoption costs can be reduced to the lowest possible point and switching costs increased naturally over time as the customer discovers and invests in more advanced capabilities of the product—giving the SaaS vendor another powerful competitive advantage.

This is the fourth (and last!) post in a series on competitive advantage in SaaS entitled SaaS Model Economics 101.  Going on hiatus for the holidays, but there is a surprise fifth post coming in the new year.  Stay tuned. Enjoy.  JY

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