This article was originally published in The HotLine Magazine in October of 2008. It is one of the early discussions of the changing competitive landscape for SaaS vendors and of the importance of using all available income conduits. It is now part of The HotLine Magazine Archive.
There is no question about the darkness of the economic clouds looming on the horizon. The only unknown is how long the recession is likely to last this time, and how deep the losses will go. While the portents are ominous, and CEOs are right to be concerned about their companies, the good news is that SaaS vendors have some clear competitive advantages. That’s no guarantee of success; the downturn will have a profound impact on everyone. But for those who are wise enough to understand the nature of the problem and sharp enough to make use of the situation — and are willing to assume the risks of leadership, there’s a definite gleam of silver in the gathering gloom.
All across the economic landscape, budgets are being cut, expenditures are being closely scrutinized, layoffs are spreading and belts are being tightened throughout the corporate and consumer worlds. Companies that have received infusions from their investor groups or had built up a healthy reserve are holding the purse strings closely — that cash may have to last a long time, and there is no guarantee that any more will be forthcoming when it finally runs dry. Allocations and previously approved commitments are being withdrawn, requisitions are getting canceled and even those IT projects that remain in play are being closely monitored and delayed. The overall climate is rapidly becoming one of careful, even fearful — restraint.
Facing the Competition
In this new and very conservative market, SaaS vendors have a built-in competitive advantage over traditional perpetual-license software manufacturers. Given today’s financial sensitivity, the absence of a bulk up-front commitment of limited cash resources is a powerful argument in favor of a SaaS deal. That doesn’t mean, however, that every SaaS vendor is guaranteed to win. Making an easier on-ramp to attract customers is only the beginning of the story. To close the deal, Marketing and Sales will have to be much closer to the customer in order to present a strong and clearly defined value proposition that will distinguish your offering from the rest.
Competitive pressure is likely to force changes in what has been assumed to be standard practices in the SaaS ecosystem. It may be that the typical 12-24 month initial subscription commitment for some applications will end up being reduced or modified. Customers are becoming wiser about the dangers of getting locked-in or held hostage by their data, and are beginning to insist on guarantees of smooth off-ramps as well. Some savvy SaaS players are already offering easy data and customization migrations as part of their competitive arsenals, and the probability is high that more will follow.
Running on Lean
With the tightening of investor funding, the time-frame for achieving and maintaining profitability is rapidly shrinking. Customer acquisition costs, retention rates and profitability analyses will require close and regular attention from senior management teams. Employee utilization levels will be a key factor. There is no longer any room for excess or inefficiency.
As the headcount levels of your customers shrink significantly or even drastically from layoffs and/or closures, they will no longer need as many seats/licenses. Faced with the resulting loss, the pressure will be on SaaS vendors to find additional services and sources of income and profitability beyond the subscription model. If you haven’t taken a serious look into augmenting your product mix, and into the organization you’ll need to have in order to produce and deliver an extended range; now is the time.
Doing more with less is going to be the overriding theme for the foreseeable future. Survival and the future will belong to those who learn the skills of increasing profitability despite the lean times. To increase your chances for success, begin with a thorough reassessment of business model, marketing strategy, monetization options and opportunities for strategic alliances. It’s a whole new contest; what was done before will no longer serve. If you’re ready to play to win, I’m here to help.