The Commoditization Of SaaS

The only part I would disagree with you on is that SF.com isn't a significant cost - that's 500 x $100/month or $50,000 a month or around $600k a year. Now I know there would be significant discounts - but you get the idea.

But you are right that the switching costs trump the costs.

For the switch to make sense, I think you need to offer 4x the value to make up for the switching costs. So that can be some combination of cost savings and better functionality.

Salesforce.com is a perfect demonstration of the power of the network effect - the product, in my opinion, has really isn't that great. Yes, it's fairly flexible but feels very dated and the reporting is slow and cumbersome. In theory, their system should be relatively easy to disrupt, but none of the competitors can match the number and level of integrations out there.

A good article about the economics of SaaS: http://pandodaily.com/2013/06/15/what-the-data-reveals-about...

Your Salesforce example highlights a SaaS replacing Enterprise Software - Salesforce vs. Siebel. Regarding your point about software being sticky like some hardware offerings have been commoditized - software can also suffer this to some extent (especially in the SaaS space as noone is doing anything that revolutionary that a competitor or competitors cannot come along and literally clone them).

I do however agree with you about the switching costs, Salesforce actually use this as part of their lock-in & differentiator in that they have got their users to associate them with CRM - their stock ticker is it etc - this they become product evangelists for them. As a result, there is a network effect built around Salesforce which has helped them create a lock-in.

However, that sill does not mean users won't switch (look at the new http://www.moz.com it isn't a coincidence that the UI looks like Google Analytics - that is one such example of how to "break" the lock-in). Moreover if a customer is offered a Salesforce alternative for 20% of the cost & it does exactly what Salesforce can do (as well as having a similar UI) that becomes a serious incentive for a business to switch - after all most of the decisions are made by the CIO etc who doesn't necessarily use the product day-to-day.

Finally to address your point about there being no commodity version of MS Office the problem is, is that no alternative has actually managed to provide a product to a similar level - Excel is by far the most superior spreadsheet product on the marketplace.

I mentioned the uniqueness elements to highlight areas where SaaS services can evolve into from their "solution" service to a "problem" service.

I do however agree with you that, you should always try to offer something unique (as this is the USP and where you can make higher profit margins) and that it can sometimes take time to achieve this. However, SaaS is not revolutionary and it can be copied by anyone and some of them may have a nice user interface and/or great product functionality but it is not revolutionary aka a commodity - which as I mentioned in the post is a death spiral as it focuses on competing on price.

In regards to the commoditization point & to you examples of Oil, Investment Funds and Pharmaceuticals there has been consolidation within these. For instance, OPEC has effectively brought all the oil-producing nations under one rule so to speak which has established uniform pricing throughout the world.

Moreover, commoditization doesn't happen immediately as there may be industries who disrupt existing solutions (as SaaS has done to Enterprise Software) but aren't yet fully established themselves (or in particular verticals of the new industry) and these can have time to evolve before commoditizing. Having said that, it's always better to commoditize yourself before customers (and potential customers) perceive you as a commodity. The reason for is that it becomes much harder to evolve into a preferred partner/problem service where you can make much higher profit margins during this stage as you are being compared on price & not your defensible value add.

Huh? Oil the perfect example of a commoditized market? You go buy oil on a commodities exchange and take delivery from whoever bothered to fill your contract (you don't really care who).

Pharma is a great example of what happens in commoditization. Patents allow the Pharma Co. to charge a large amount in the beginning of a product, then, when the patent expires (and the Pharma Co. has finally given up fighting it), the generic manufactures step in and take the price to the bottom.

The problem I see is that you have a lot of new SaaS startups where their is not a low marginal cost to add people. This is particularly true in the developer space where there are any number of startups that will record events from websites and mobile apps for anything from performance monitoring to analytics. Each free customer they add has a cost in terms of data, infrastructure and building code to scale massively. Thus, they are forced to raise ever bigger amounts of money from VCs to keep going. Contrast this with 37signals - where adding another free client really did have very little cost.

And at the same time, all these services are, as the article points out, becoming commodified. Thus, recognizing that they really can't make money in the SMB market with such low switching costs, they decide to move to the enterprise market and thus the whole economics of SaaS are blown up, and they look very much like a traditional enterprise software business - and SaaS becomes a delivery methodology rather than business model.

My own article on this issue (shameless plug): https://medium.com/i-m-h-o/a2cc0d5ba431

I wasn't arguing about adding more features (since a competitor can also do that) but rather create an additional value-add that meets your customers or potential customers needs.

Whereas SaaS currently tries to say "this is the solution" it needs to be flipped to focusing on actual customer pain points (since the current solution may not actually meet their needs) which you can the re-create a slightly new solution which becomes your unique selling point and defensible base (which is why it's important to go beyond competing on features). The reason I'm arguing this point is because, SaaS is becoming commodified in that they they winning SaaS in the SMB space start getting pulled upstream to the enterprise market where their margins become much greater and SaaS becomes their method to provide you with the product than their actual business model.

Your examples actually reaffirm my point - Walmart has added value by offering "everything under one roof" so instead of going to 10-20 store you just go to the 1. Their value is convenience alongside this they also compete on price to protect their market from disruption and ensure they're the dominant player (its a 3 pronged attack which Amazon is replicating on the web). On the other hand Tiffany's offers you a more personal experience than a Walmart does (in my opinion) which is their comparitve value-add alongside their actual products.

What I mean by this is don't make your selling point about having more features (since a competitor can copy them) but rather create an additional value-add that meets your customers or potential customers needs.

SaaS currently tries to say "this is the solution" and as I was saying in the post it needs to be flipped to focus on actual customer pain points (since the current solution may not actually meet their needs) which you can the re-create a slightly new solution which becomes your unique selling point and defensible base (which is why it's important to go beyond competing on features). Essentially SaaS is becoming the method to provide the customer with the product rather than the actual business model and if your SaaS works with your customers & solves a key problem for them beyond "hey pay us X for these features" you will become a preferred partner who is solving a key problem which is critical to the success of your customers