The Challenges with SaaS Products
A lot has been said about SaaS companies. SaaS is usually Software as a Service. One of the first SaaS companies is SalesForce.com. They literally invented this model as far as I know. They even ran campaigns called "No Software".
Long back, software was a product. You pay upfront for the software, then get people to install it on your computer (and network of computers), if anything went wrong, you had to get people to fix it. It has a lot of bugs and disconnected parts and most importantly, it wouldn't keep updating itself on its own. Updates came once in a while, and in most cases, you had to pay again to get the new version of the software.
Software as a Service came along as the internet penetration across businesses became widespread. The software was hosted on the cloud of the company that created the software, and it was rented as a service. There was no need to pay huge money upfront and there was support and constant updates from the company providing the software.
The company that built the software gets cash flow every month from the customers. And since it is a piece of code, more customers doesn't necessarily mean more production costs. Code replicates itself (just like content) and is massive leverage.
With code, you are instructing computers what to do, and unlike employees, computers work 24/7, don't take breaks, and just need a very small amount of electricity to operate efficiently.
In the past decade, SaaS has become very sexy, but new challenges have emerged with the SaaS business models. Too much competition in a narrow space and it has become a race to the bottom.
Apart from a few very niche-specific use cases, SaaS is starting to get commoditized. More and more companies are building SaaS products and providing similar services for cheaper rates than the competition. Unless the software is very sticky (like difficult to move from a system due to interconnected dependencies), people will hop on to cheaper and more efficient services.
During this period of the SaaS gold rush, service businesses have become less sexy. Having to hire employees and get them to work, scaling employees, and managing them has become a necessary evil. If companies could avoid hiring people and build software instead, it looked like the right way to go, at least for a while.
SaaS in many cases, is a winner take all market. Because of the low cost of replication of code, and easy onboarding, anyone can sign up, from any location and start using the software. If a brand becomes the No.1 in a specific market, the brand can take 50% or more market share. Beyond a 50% market share, it can become 90% with time. At least that's what the narrative is.
What most people don't realize is that SaaS companies are not such great assets over a period of time because the cost of switching has become less than ever. And the cost of developing software is going down as we speak.
If a SaaS company doesn't build network effects into its system and doesn't become a platform, there is no moat in the business that would help them stay relevant for a long time.
SaaS companies usually have to raise funds, spend a lot on customer acquisition costs and make sure that they keep updating their software to keep it better than their competition.
A SaaS company has to build moats and moats are best built through network effects. A SaaS product that is combined with a platform that serves both the demand side and supply side of the business builds a moat.
If you want to learn more about platforms, I recommend the following books:
Many SaaS companies have combined their SaaS product with a platform, and they have built a service around it. You can build a new kind of SaaS (Service as a system) combined with a platform.
For example, Practo offers a SaaS product for doctors but also gets patients to the doctor through its search platform where anyone can search for specific doctors in a specific locality.
Swiggy is a platform for ordering food from local restaurants, but they also offer a service of pickup from the restaurant and dropping it at the customer's place. eCommerce stores do the same.
Apple makes software for iPhones, but its biggest moat for getting people to continue using iPhones is its app store. The app store has a long tail of software offerings, but most of the software is not made by Apple itself. It is made by third-party developers. The app store is the platform that connects app developers and consumers who will use the app (and Apple taxes 30% of the transaction).
All these brands are multi-sided platforms:
- Google (connecting advertisers and internet users)
- AppStore and PlayStore (connecting app developers and consumers)
- Amazon (connecting sellers and buyers)
- Tinder (connecting people, literally)
- Ola (connecting cab drivers and passengers)
- PayTM (connecting merchants and consumers who pay)
- Airbnb (connecting home renters and tenants)
There are more, but you get the idea.
People who used ZenDesk (a support desk software) moved to FreshDesk when they had a cheaper and better offering. ZenDesk had no moat to prevent people from switching (though there was some stickiness to the product).
Many SaaS companies have become extinct after a tech monopoly introduces a feature on their platform. Spending a long time understanding the market, and its needs and developing a product-market fit is not such a great investment as it used to be. Because the product can become extinct when a competitor offers a better and cheaper product. Price is still a major factor in purchase decisions across businesses and consumers.
As we are building LearnToday, our thoughts are aligned toward building a platform combined with a SaaS offering.
- LearnToday - A platform for people to search for courses that connect to digital mentors.
- TeachToday - A SaaS offering for digital mentors to host and serve students. But this SaaS product won't stand alone. People will be motivated to host their courses here because they will get a distribution from LearnToday.
We are still early in the game, but we do understand that developing a SaaS product with no moat is not going to be such a great investment. It has to be protected by a platform, else there is no incentive for people to use the SaaS product and pay monthly for it.
People wouldn't mind paying a premium for a SaaS product as long as they also get the distribution that reduces their customer acquisition costs. You can only offer distribution to your customers if you have a multisided platform that is also useful for the demand side of the business.
In our case, LearnToday has to serve students with clean interfaces and a way to track their course progress (even if they are enrolled in multiple courses at the same time). Usually, one side of a platform is free to use. And users get to experience great value for free because the revenue is made from the other side of the platform (digital mentors who publish the courses on LearnToday).
Google and other niche search engines (Practo for doctors, Zomato for restaurants, and so on) are free to use for internet users. The revenue is made from the merchants who would like to tap into the customers that are available on the platform. Usually, search engine platforms can make money from premium listings on the search engine.
To make LearnToday and TeachToday work, first LearnToday has to acquire a large number of users on the platform who will use the platform. Then TeachToday can be offered as a SaaS product to digital mentors with the benefit that they can advertise on the LearnToday platform in the search result pages.
Other mentors who do not use the TeachToday platform to host their courses can still list their courses on the platform, but they will not have premium listings. This would encourage them to move to TeachToday and that would become the moat for TeachToday.
We are still early and this is the understanding I have as of now about SaaS and platforms. This might evolve with time, and I would write about it here on this blog. Stay tuned!
Cheers,
Deepak Kanakaraju