This is the tradeoff... SaaS gets great margins because it's not custom. There's a high fixed cost, then each incremental addition has benefit. Even with a low marginal cost this is true. The #1 SaaS can also add lot of features and increase reliability and spend more on Marketing.
You could argue that Wal-mart is a commodity too. It's just stores and the same stuff as K-mart and 7-11. But it crushes them. There's room for both Wal-mart and Tiffany's just like there's room for a SaaS for your billing system, and Accenture to build a custom one.
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.
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.
Comments
This is the tradeoff... SaaS gets great margins because it's not custom. There's a high fixed cost, then each incremental addition has benefit. Even with a low marginal cost this is true. The #1 SaaS can also add lot of features and increase reliability and spend more on Marketing.
You could argue that Wal-mart is a commodity too. It's just stores and the same stuff as K-mart and 7-11. But it crushes them. There's room for both Wal-mart and Tiffany's just like there's room for a SaaS for your billing system, and Accenture to build a custom one.
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.
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