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Archive for the category: SaaS Model

Software-as-a-Service (SaaS) is all about the Product

Building a successful software-as-a-service business requires an extreme cultural focus on the product that has more in common with consumer packaged goods than enterprise software.  In my last post, I provided a summary contrast between SaaS and enterprise software business models.  If you look down the SaaS side quickly enough, you should see a tight correlation of ideas around the product itself.  In fact, if you can get your head around two fundamental assumptions about SaaS products, pretty much everything else follows.

1)    There is only one instance of the product…it is a commodity
2)    The product is tightly coupled to operations, because EVERYTHING happens online (ideally).

I believe almost all significant SaaS failures can be attributed to violating one or both of these product fundamentals.  Here are some absolutely deadly mistakes that are a direct result of failing to adhere to these tenets.

Business plan failure – Insufficient demand
Typical Cause
Designing the product for a niche market that is too small and too demanding

Launch failure – High cost per lead and low conversion
Typical Cause
Failure to master online marketing and to build it into the product, e.g., ignoring SEO because it is some kind of black art and prioritizing advanced product features over the ability to provision a trial account and buy online
Read more »

Contrasting the SaaS Model and Enterprise Software Business Models

In many ways, marketing a software-as-a-service (SaaS) application is more like marketing packaged software, computer hardware or consumer electronics than enterprise software.  Failure to make this paradigm shift has meant the death of many a SaaS startup.  The reasons are simple.  First and foremost, enterprise software is usually delivered in an unfinished state.  The so-called product is delivered and then configured, customized, integrated and QA-ed onsite to deliver a unique solution–a product of one.  This is more akin to the artisan products of a cottage industry than to manufactured commodities.

The fact that SaaS is a commodity delivered via the Web entails a shift in business model that affects everything from product design to organization design.  Below is a summary of characteristics that contrast the traditional enterprise software business model to the new SaaS business model.

Enterprise Software vs Software-as-a-Service

In the world of SaaS multi-tenant architectures and bargain basement prices, the entire business model hinges on having a single commodity sold at high volumes.  Moreover, SaaS is marketed and delivered primarily within a single channel, the Internet.  This creates incredibly tight coupling between the product, business strategy and operations.  In particular, there is an unusual itermingling of the product itself with the other 3P’s of marketing:  price, promotion and place.  For example, a change in pricing model will usually entail simultaneous changes to both your Web ordering code and your license management code.  And, search engine optimization (SEO) is likely to impact how your product is designed and delivered over the Web, not just your marketing website and landing pages.

Sofware-as-a-service Cost Structure Vision

I was recently asked the question of what is the ideal cost structure for an on-demand software business.  There are very few benchmarks out there of successful mature SaaS companies, so I’d like to propose the following as the cost structure to which on-demand software companies should aspire.  Whether you can actually achieve it in your business is likely to be a result of market demands, technology and sadly enough company culture (as many SaaS business are still saddled with enterprise habits)

Below is what I would characterize as the typical enterprise software company cost structure.  This model is no accident, and it has proved to be immensely profitable over the last 20 years (just ask Oracle and Microsoft).  It is characterized by drivers that work synergistically to create the whole: perpetual license pricing, feature competition, solution selling and customization.  All of these characteristics (and their ensuing complexity and costs) derive from the underlying buyer belief that the system will deliver some level of competitive advantage.  While this may have been true 20 years ago, and may still be true for some fundamental business processes, it is patently untrue for 90% of most IT infrastructure today.  Hence the rise of SaaS and Open Source.

enterprise software cost structure

Unfortunately, the preceding paradigm is a self-reinforcing business model that naturally evolves toward this equilibrium.  It is incredibly difficult to break out of economically and culturally.  Below is what I am proposing to be the natural equilibrium cost structure of a well run on-demand software business.

on-demand software cost structure

This SaaS business model is equally self-reinforcing and composed of a number of drivers that work together synergistically:  subscription-based pricing, product simplicity, and the continuous automation and integration of marketing, sales and service processes throughout the product and the company’s overall Web presence based on catalytic learning. By catalytic learning, I mean Read more »

Mass Customization and On Demand Software

Henry Ford once said: “Any customer can have a car painted any colour that he wants so long as it is black.” Then, in 1923 Alfred Sloan of General Motors came along and changed the rules of the game by offering a tremendous variety in colors and models. But, GM didn’t do it one customer at a time. GM redesigned its manufacturing line with the required flexibility to produce a multitude of models and colors without compromising the inherent economies of scale of Ford’s assembly line innovation—a practice that has evolved into the concepts of flexible manufacturing and mass customization.

The primary enabler of mass customization is the elimination of setup costs. Setup costs occur from the labor, time and tooling it takes to switch a production line from one product to the other. High setup costs encourage long production runs to cover the expense incurred in switching over. By reducing them, production runs can be shortened. If they are eliminated, production runs can be reduced to a single unit. That is you can make the variations A, A1, A2, … An of a product (think GM models) for the same costs as making n units of A (think Ford Model Ts). If you apply this idea to enterprise software, taking each customer installation as a “unit” and the associated, customer-specific implementation, configuration, customization, and ongoing maintenance time and effort as the setup costs, then the roadblocks to mass customization in the SaaS model become clear: eliminate, automate and generally squeeze the cost out of your ability to handle unique customer requirements.

This business need entails an architectural requirement that is as essential to an SaaS vendor’s success as system security and the scalable, single-instance, multi-tenant architectural imperative. It requires automated deployment that consumes minimal resources, extensive, easy-to-use, self-service configuration and complete interoperability built on open, standards-based APIs. It cannot be off-loaded to VARS or customers. This shifts the costs downstream and undermines competitive advantage, because from the customer’s perspective, total cost of ownership is not reduced relative to installed software.

Creating competitive advantage in on-demand software

If you buy into the idea that on-demand software is the next evolution of software into an industry characterized by mass commodity markets and interchangeable parts. Then, your next concern must be “How can I make money in a commodity market? How can I create a sustainable competitive advantage?” This post is the first in a series that attempt to address this question.

In a nutshell, competitive advantage for vendors choosing the SaaS model will not come as easily as it has in the past for enterprise licensed software vendors and it will not come from traditional methods such as creating wiz-bang features, protecting source code, obfuscating product information, or arbitrarily locking in customers with unique customizations. The main reason B2B SaaS providers are struggling today—while their B2C counterparts are thriving—is that as commodity suppliers, B2C SaaS vendors are much more in tune with the traditional sources of competitive advantage. B2B SaaS has as much in common with computer hardware, telecommunications, financial services, and consumer packaged goods as it does with the old craft world of enterprise software. Maintaining a cost advantage, cultivating brand loyalty, network effects, service quality, mass customization, reduced time-to-market and continuous disruptive innovation are the keys business success. And, they are much harder to achieve.

Simplicity and cost efficiency come first in SaaS

A word of warning before you attempt to be different, make sure you have your cost structure in line. If you are competing against traditional licensed software, lower cost is your competitive advantage. If you are competing against another SaaS player, product complexity and higher cost will eventually kill any other advantage you try to achieve. Why? Because there are (or will soon be) many other choices just like you. Change happens, consumers are fickle and expect their software for free, and business buyers have even less loyalty when it comes down to price.

Software on-demand is a commodity business

There, I said it. Difficult customers with highly specific requirements who expect to derive competitive advantage from your offering need not apply. If your target market consists of a list of fewer than 500 control-freak customers with sophisticated IT organizations, and lots of unique requirements, then you are wasting your time thinking of the SaaS model as the underlying approach to your business model. At best, you are a “managed service” where the underlying cost structure is identical to customized, licensed software, i.e., it really doesn’t matter if you run it or they run it, it will take the same number of people, the same number of servers, and the same number of lines of code.

It is important to note that the term “commodity” refers to the fact that the SaaS model is a mass market, high volume business where by and large “one size (read code base) fits all.” We don’t have to look any further than Google search to demonstrate this. How much more “one size fits all” does it get! Type in what you want to find, push button. Also, I am not precluding the possibility that you can attempt to overlay another competitive advantage on top of the inherent cost advantage SaaS entails (see below). But, your efforts will be visible to all your competitors and often short-lived. The proposed idea is that cost efficiency trumps product differentiation, and you deviate from this principle at your own risk.

Fundamentally, the SaaS model is the further commodifation of software achieved by freeing it of physical distribution and increasing interoperability through interchangeable parts (services) to create a disruptive software delivery model with new economies-of-scale and business models that achieve a significant cost advantage—not a functional advantage—over traditional licensed, installed software. It is typicially characterized by Read more »

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