SaaS Economics

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.

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