SaaS Economics

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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  • Thanks for another highly insightful post.

    Forgive me, but the devil’s advocate within asks:
    Plausible as this application discovery concept may sound, it seems tenuous and difficult to quantify. As a result, is it perhaps wishful thinking?

    Are there other factors which might more realistically comprise switching costs, i.e., the factors which prevent, or conversely, keep customers from switching to other providers?

  • I’d like to add a few thoughts on one of the main points mentioned; the idea that customer acquisition is one of the biggest challenges of SaaS businesses. I couldn’t agree more with both the problem and the proposed panacea – network automation.

    An important facet of network automation is billing and subscriber management automation. As more and more companies realize that displaying advertising simply isn’t going to work in a depressed economy (it was barely a monetization solution in a good economy), they begin to charge for their product. However, as companies begin to see the opportunities, they also see the difficulties in capturing those opportunities.

    Your billing should reflect what your business objectives are; if you want to reduce barriers to entry then variable pricing can make it easier for your customers to get started. Sometimes it doesn’t make sense for a customer to use your service if they are paying the same as a heavy user – resource based pricing helps alleviate that concern. Module based pricing allows you to target different segments and lets customers who want to pay more for increased services and functionality do so.

    While the variety of pricing models are endless, just as endless are the back-end difficulties for the company doing it themselves.

    Integrating with a subscription billing and management provider makes a lot of sense for SaaS providers. Here at IP Applications, our paramount concern is to take care of your billing and subscription management automation so your team can spend their time working on your core competency.

  • Great post Joel – at Xignite you tout integration so easy a sales guy could do it. We have a similar philosophy at Intuit. We’re building the Intuit Partner Platform ( to allow SaaS vendors to build apps that automatically integrate with a Small Businesses QuickBooks data. One click integration of all your back-office info. It doesn’t get easier than that – but makes a huge different to adoption and attrition reduction.

  • Excellent insight Joel, data is a barrier to entry and cost of switching. The good news for the customer is that those barriers are much lower than they ever were with on-premises systems, and inversely it forces the marketer to extend the product out into the business process in ways that have not been done before to maintain loyalty – which is covered in your other posts. Thanks for this resource.

    Best regards,


  • Great post! I have enjoyed reading your latest post in regards to properly engineering and distributing SaaS solutions. We are starting to use them as guideposts to our company. I do hope there is more then just 5!…keep em coming.

  • This is a wonderful resource, Joel! You are correct that there are important things that need to be done before attaining that goal of adoption especially for established companies.

    Here’s hoping that 2009 be a reflection of SaaS accomplishment and adoption thanks to your inputs.

    Happy Holidays!


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