SaaS isn’t a Panacea for Success

No one has ever accused entrepreneurs of being stupid which is why almost every new B2B software company emerging today is SaaS-based.

This is good because trying to build a software company using the traditional enterprise software model is just too difficult and expensive. Over the past 15 years, enterprise IT has developed a gauntlet (e.g. internal architectural standards, purchasing processes, etc.) that prevents all but the largest brands (e.g. IBM, Microsoft, Oracle, SAP, etc.) from selling to them.

So, the only way to sell to these companies is to bypass IT — at least as much as possible — and go directly to line of business owners. And, since the SaaS business model obviates the need for IT and is success-based (customers can cancel any time) business leaders in these companies are becoming more open to using these solutions for non-mission critical functions. This is primarily why SaaS holds such promise for new and innovative start ups and their investors.

That said, SaaS isn’t a panacea for success for these new companies.

The fact is that SaaS companies are subject all the sames rules as their enterprise software predecessors. They must create awareness and interest in their products. They must clearly differentiate themselves in the market and they must operate more cost-effectively than their competitors.

And, since SaaS companies tend to generate far less cash per account (of the 27 public SaaS companies, the median Annual Recurring Revenue -ARR per account is only $25,000) they consume approximately 3.65x more paid in capital before reaching profitability. All the more reason that a SaaS company must be even better at marketing than their enterprise predecessors.

Unfortunately, most of the SaaS start ups I’ve seen seem to treat the fact that they are SaaS makes them immune to the issues of a traditional software startup. There is virtually no discussion of how the company plans to achieve global market leadership, cost-effectively. Sure, the presenentation has the prerequisite slides on product and Total Addressable Market (TAM) but there is virtually no discussion about the strategy or the cost of reaching this TAM.

Read my blog entry regarding Global Market Leadership and and spend some time developing your strategy to create your unfair share of voice in the industry you’re attacking. Then, update your operating plan to truly reflect the cost of achieving these objectives.

The fact you’re building a SaaS company is great but you still must do a stellar job of marketing if you have any hope of making your company successful.

  • http://www.eVapt.com Landon Hoover

    There is a great deal of truth to this article. There are a tremendous number of SaaS providers emerging, making the competitive landscape dense. This fact will make the success of individual SaaS providers difficult. Furthermore, the SaaS model is difficult to monetization. There are significant challenges facing SaaS companies…there are, however, resources available to help them and specific models that are more successful than others. One resource that I have heard about is eVapt (www.eVapt.com). They are a company that helps SaaS providers monetize their solutions. An interesting topic for the future could be to discuss eVapt and other companies helping SaaS providers succeed. Or, all the resources available to SaaS providers.

    Thanks for the great article.

  • http://www.philsimonsystems.com Phil Simon

    Very interesting post. While my experience with SaaS is relatively limited, I have been working with enterprise systems for a long time. From an implementation standpoint, SaaS is no silver bullet. Bad data, poorly-defined business processes, lack of training, and the like will haunt any IT project, SaaS-based or not.

    I completely agree with your assessment of the business challenges facing SaaS companies. I also read (and really enjoyed) your article “The Death of Enterprise Software.” I wonder if many of the major ERP vendors will attempt to do something in-house (as SAP did) or attempt to buy or integrate another company.