Defending Against the Coming Attack on SaaS
Opposing forces seem to be lining up along the Maginot Line of the B2B SaaS business model. Firmly entrenched for so many years, the subscription software framework may be facing a blitzkrieg by both customers concerned about the total cost of all the subscriptions they have amassed, and by start-ups who hope to capture some of those revenues with alternate product and pricing models. With such forces converging, a potentially critical inflection point for SaaS may be at hand. Some proactive battle planning is in order.
SaaS Supremacy
For B2B SaaS product providers the primary focus for many years has been on growth- continuously adding features to expand the functional footprint and to further differentiate. Of course, the SaaS formula has been a great battle plan to date. 95% of organizations have implemented SaaS technology with more than 70% of all software now utilized by companies being SaaS. The average number of individual SaaS applications used within an organization is now over 130, (Source: DevSquad) and the average business spends around $3,500 per employee on SaaS tools. (Source: Forbes) What’s more, the proliferation of SaaS solutions is continuing apace. In 2023, 47% of venture capital was invested in SaaS startups (Source: Dealroom, Software Suggest), with a total of $73B invested in enterprise SaaS startups. (Source: TechCrunch) Finally, SaaS companies typically enjoy astounding gross margins in the neighborhood of 70%, whereas gross margins for other product types typically run closer to 40% (dependent upon industry and scale).
So, by just what measure is SaaS losing any battles in the marketplace? None so far. But that success and those margins have painted a huge target on SaaS, and the attack is on the way- from two fronts:
Attacking from the Forward Front – Customers
On one front there are the customers themselves. Enterprises often spend hundreds of thousands to millions of dollars on a broad variety of SaaS applications. They do so because those tools have added tremendous efficiency and effectiveness to their businesses, not to mention reducing capital outlays, staff, and maintenance costs. All those benefits still prevail, but like the consumer who takes a break from re-watching The Sopranos to add up the cost of all their streaming services, many CIOs are pausing to consider the total fees going out the door to fund their ecosystem of SaaS applications. They aim to rationalize their SaaS spend across a few, key dimensions:
1. Reduce license levels for applications that are underutilized at the current license level being paid.
2. Eliminate redundant applications.
3. Downgrade over-featured applications that provide more capabilities than are really needed for their firm’s purpose and thus cost more than the value being realized.
Particularly when things tighten, SaaS must prove that its steady-state value justifies the steady state flow of subscription fees that customers pay. Strong MRR (Monthly Recurring Revenue) for the SaaS provider requires proof of strong MRV (Monthly Recurring Value) for the customer.
Over-Featured Vulnerability
Of these three, the third represents the greatest threat to SaaS providers who have too often become feature factories, endlessly working to build advanced new features that are often designed to serve the needs of their largest and most sophisticated customers. Such innovation can differentiate and justify premium positioning but too often ignores the fact that most customers don’t actually need all the fancy features and, in fact, frequently find that the increased complexity that those features bring simply gets in their way. When the cost-conscious CIO finally realizes that his/her company really needs only 60-80% of the features present in a SaaS application, they start to long for a more right-sized feature set at a more right-sized cost.
This assault on over-featured applications is coming at the forward front from DIY oriented customers, and as we’ll see later, from competitors on the flank.
The DIY Incursion
CIO’s know that one approach to getting a “right-sized” application is to build it yourself. Of course, SaaS was invented largely to relieve organizations from having to do that and of the attendant need for infrastructure and ever-increasing staff costs. But when an organization begins to see they are paying for functionality they don’t need, a question arises in the General-like mind of the strategic CIO: “Could we build what we need internally and manage it ourselves for less money in the long term?”
Encouraging the asking of this question today is the existence of low-code development tools, AI assistants and code generators, open-source code, cloud services, and other resources which are enabling internal development teams to do more than they ever could previously. So, when CIO’s now consider alternative options for expensive, over-featured SaaS applications, internal development of a “just what’s needed” application seems more in reach. They can target building just 60-80% of the target SaaS product’s features, that is, the features they actually need, and do so while also tuning their application to better accommodate the peculiarities of their business.
Of course, the Generals must consider the full set of expenses that attend the DIY approach including compute, maintenance, staff, and some level of software upgrading, all of which would simply be included in a SaaS license. Yet the math in favor of the internal option is getting better all the time, turning allies into foes.
Attacking from the Flank - Competitors
On a different front are competitors who are anxious to take their pound of flesh out of those hefty SaaS margins. For them too, more efficient development capabilities are facilitating their own creation of “60-80% solutions” which can attack over-featured/ over-priced SaaS applications. That attack can be made either by selling at lower SaaS subscription rates to the market segment for which the simpler solutions would appeal, or by flanking competition completely by instituting a one-time purchase model instead. That purchase model may sound like the echo of a long past battle cry, but it can sound quite good to the CIO suffering from subscription fatigue, (sometimes also itching to get back in the software management trenches again.)
The One-and-Done Brigade
Such competitors are increasingly appearing. For example, the company: Once has begun to offer a line of software sold on a one-time purchase model. Its first offering: Campfire, is a simplified Slack competitor. Their model is to sell you the code which you then host as you see fit, only paying for the next version if and when you feel you need it. Sounds old-school because it is. By the way, the price for Campfire is a one-time charge of $299 with unlimited users and usage. Can it compete with Slack’s features? Undoubtedly not. But will it be good enough for many? We’ll see.
Other current examples of products being offered at a one-time purchase price include:
Affinity Suite’s: Affinity Photo, Designer, and Publisher as alternatives to Adobe’s Photoshop, Illustrator, and InDesign (that are part of Adobe’s SaaS Creative suite)
Scrivener: a word processor with robust writing tools, and Final Draft: a screenwriting software
Sketch: A vector graphics editor used primarily for web, mobile, UI/UX design, (which also offers a subscription for updates)
CorelDRAW: An alternative to Adobe Illustrator
Tableau Desktop: The data visualization software available for outright purchase (though it also has subscription options)
Additionally, some software applications are beginning to offer a “fallback license" that provides a backstop to the SaaS subscription. When invoked, the fallback license allows users to continue using a specific version of the software without ongoing payments. This option is made available once a certain period of subscription payment has been surpassed, (example: JetBrain.)
Price Platoon
Meanwhile, founder of the venture investment firm: Social Capital, Chamath Palihapitiya recently launched a fully funded incubator called: 8090 to support enterprise software startups. Its strategy is a direct assault on over-featured and overpriced SaaS enterprise products. According to Palihapitiya: "Tell us what enterprise software you use and my team and I will build you an 80% feature complete version at a 90% discount." The organization effectively crowdsources to identify SaaS applications to target, then funds a team to build an 80% version of an application which, when complete, will be sold at 10% of the existing, full-featured product’s price. That new application will then compete directly with the established SaaS product.
A SaaS Battle Plan
So, what’s a SaaS company to do?
First, know that the barricades have not yet been breached and there is no reason for panic. But by the same token, you can no longer assume that building ever more robust versions of your product will defend your price point. Instead, you must realize that the driving factor behind the coming attack on SaaS is customers’ desire that the value of their applications closely matches their practical needs at competitive rates. Which means that the applications they license shouldn’t replicate functions provided by other applications they use, must be highly utilized by the staff given access to them, and should not include unnecessary nice-to-have features that increase the price.
In response to the attack, here are a several actions that SaaS companies can take to defend or even counterattack. Consider:
Quantify Value: More effectively quantify just how you create value for customers. Develop ROI models that explicitly measure the value your solution delivers per the KPIs that customers really care about, EG: time and cost savings, error reduction, quality measures, customer success metrics, etc.
Cultivate Deep Understanding: Refine your understanding of customers by clarifying segments, personas, and the use cases that support each. Carefully categorize customer feature requests and internal innovative ideas in this way to make it explicit just who will be served by any new features you are considering. (Think: are we over-featuring or over-complicating?)
Bolster Feedback Loops: Make it easier for customers to provide feedback, so long as you are truly able to be responsive to it.
Dashboard User Telemetry: Measure and track product utilization and usage patterns in granular detail within your application to learn which patterns signal when a customer is receiving a high level of value from the product VS a low level of value. Monitor this dashboard across the customer base so that when the usage patterns of a customer or user type slip into a lower value zone you may take immediate action to improve their experience. Optimizing value requires data.
Accommodate Customer Cycles: Study customer’s utilization cycles to understand seasonality, the impact of changing economic conditions, and other factors. Then consider allowing customers to suspend their fees during cycles when they have less need for your product. Better to retain the customer by making such accommodations than to watch customers churn only to resurface as the customer of a competitor.
Offer a Safety Valve: Consider offering a safety valve for subscription customers that would allow them to freeze the version of your application they use in exchange for a freeze on payments. By acting with sympathy for the financial pressures a customer is under, you earn a lot of goodwill. Then, when pressures subside, that customer may be more comfortable resuming payments in return for continued updates.
Build Stronger Customer Success Programs: Consider making your customer success program more robust by providing additional customer touches, engagement, and systems. Customer success team interactions make it easier for customers to extract all the value they can from your application, to build utilization, and for you to identify and fix product shortfalls. [See our comprehensive piece on Customer Success by MSP Partner, Duane Kotsen: https://www.marlboroughst.com/think
Establish Community: Create vehicles by which customers can learn from each other by asking questions of peers and sharing insights and tips. Such interchanges can help customers realize more value from your product. Listen-in on these exchanges to learn from them.
Monetize More Creatively: Of course, as SaaS companies we’ve long leveraged a broad range of monetization models from flat per-seat licensing, to tiered offerings, unbundling. add-ons, usage-based models, integration fees and services, API fees, data licensing, and even ad-supported versions. Now would be a good time to look for new options for monetization, but with a focus that is less about gaining new revenue than it is about defending current revenue levels by adding revenue sources to help balance customer fees.
Build 60-80% Versions of Your Own: If competitors and customers are intent on creating more bare-bones versions of your solution to limit expense, beat them to the punch. Create tiers of product that more closely match just the core needs of each customer segment at an appropriate price. The use of release tagging and feature flags can enable the flexible creation of such tiers. And to spawn more innovative approaches to building 60-80% solutions, consider creating a separate team whose express mission is to undercut your core offering for a segment of customers. Instead of waiting for others to do so, you can be the company that effectively launches a start-up designed to cut your legs off.
Reduce Price: Sorry, but it had to be said. When every other defense has been exhausted- when the Huns are overwhelming your defenses, and when the kingdom is about to be lost, you can always reduce that 70% gross margin by cutting the price. Don’t kill the messenger.
Once More Unto the Breach
It's not like you haven’t met the challenge of competitive battle before. But today the opposition is starting to look a bit different, driven by economic pressures and by robust, new development and hosting options. Now is the time to concentrate a bit less on pure growth and quite a bit more on product value growth as measured by what customers most centrally need your solution to accomplish for them. Closely matching value to essential customer needs secures both your importance to the customer’s business and your irreplaceability.
To achieve the MRR (Monthly Recurring Revenue) that SaaS business is famous for requires a new focus on generating MRV (Monthly Recurring Value) for customers. When the smoke clears, only that will let you withstand the coming attacks.
Bill Haines, Partner