SaaS Economics 101

SaaS Economics Overview

There are no shortcuts for business success. For a business to succeed, it must have a solid grasp of customers’ needs, have the ability to analyze the value of its services and possess a sound business judgment. If the success of your business is tied to the success of SaaS or the success of SaaS sector in general, then an understanding of SaaS Economics will be of great help to you.

There are many issues surrounding a business. Most business owners ask questions and try to find answers to the same questions with a view of enhancing the productivity of their business. What could be reason for your SaaS business losing money? Are there ways you can grow your SaaS business? What techniques do SaaS vendors use to create competitive advantages? What is the best time to make a hybrid approach? These are questions many people ask when it comes to discussions about software-as-a-service business type.

One must have the understanding of how SaaS creates an economic value over other in-house, homegrown and licensed software. Of course, if the service enables the growth of an economic value, its model will prevail. If SaaS does not lead to an economic growth, on-premise software remains the best choice for businesses. For SaaS vendors, this will be a huge setback. This is because if SaaS will not lead to an economic growth as expected, the vendors will not have any economic advantages.

While SaaS is moving from cutting-edge to mainstream, there is a huge disparity in the performance of SaaS enterprises. It is hard to imagine that a SaaS enterprise can actually move from a rapidly growing business to unexpected unprofitability. SaaS could therefore be an overrated fad. It looks like its future is not clear. The current predictions show that SaaS could be displaced and another group of person believes that there is a hybrid model for SaaS, which is a better solution. Generally, there are good and bad thoughts about this issue out there. If SaaS sole proprietors can focus on business fundamentals, it should be easy for them to make sense of this chaos and eventually create innovative and successful SaaS enterprises or companies.

Your business can achieve its financial objective only by establishing a suitable competitive advantage. The financial objectives include rapid growth, unusual profit and long-term business success. Do you have any idea about the fundamentals of SaaS Economics that can help you establish a competitive advantage? The best way to achieve this is to use a generic business strategy. There are two generic strategies. These are lowest cost strategy and differentiation strategy. Whatever the method you choose, consider the variation of either by focusing on the needs of a specific market segment. To beat the competition, build a cheaper mousetrap, a better mousetrap or you could choose to build a better gerbil trap.

Low Cost Competitive Advantages: 

SaaS is a commodity business. Your success in SAAS business will depend on your level of motivation and differentiation. Unbelievably, one can easily achieve a strong differentiation in SAAS. You must commoditize your SAAS business to achieve a desired differentiation. If you fail in this, you will not be profitable. In addition, the available cost structure will not support your pricing at all.

The competitive advantages in software-as-a-service business arise from aggregating clients onto a single infrastructure that can help achieve a new level of economic of scale. Aggregating customers onto a single platform not only lower cost but also influences the entire application infrastructure. It is all about engaging customers to a single platform – a common purchase channel, a similar communication portal, the same support process and similar pricing.

The process of aggregating customers onto a single platform is not an easy one. There are instances where cost equation, customer support and acquisition make SaaS agencies to lose focus. Finding your way into a long-term unprofitability is not a good thing, to say the least. It simply means being unable to realize the objective of your business establishment and could lead to closure.

Because you do not want to wallow in long-term unprofitability, you must do what it takes to streamline your complexity without losing your clients. It may even mean walking from customers who have special needs that you can barely service. If you can customize your infrastructure to accommodate a larger percentage of clients, it should be easy to enhance your cost advantages.

Differentiation Competitive Advantages:

It is important to note that competing through differentiation is the essence of any software business. If you are smart enough, you can win good deals and charge premiums. The concept of differentiation comes second to cost efficiency. However, if your business can put its cost efficiency in order and have a solid economic of scale, differentiation will automatically become your ultimate competitive advantage. If your cost efficiency is not in order, other competitors in the market will have price parity.

If low cost advantage is a good taste for SaaS, stick to it. On the other hand, internet-based differentiation is somewhat a huge icing. Everything you see happening online follow the inherent nature of the internet. The problem is that that software companies seem to have little idea about the potential benefits of the internet as a network. They are the slowest adopters of the internet network. If a SaaS business can take a full advantage of the internet network, it should be easy for the business to enjoy the competitive advantages through the potential of the internet network, something you would commonly refer to as the internet technology.

Most people out there see SaaS as a business application delivered through an internet browser. That is it. However, this is a wrong approach. In fact, such is an approach that abdicates the core benefit of being on the internet. This is such an approach, which does not give an exact value of the birthright of SaaS.

Instead of viewing SaaS as a business application offered through the browser, begin to see it in a different way. It is a solution, which has given many businesses value and today, SaaS is not just a service online, it part of the internet and understanding SaaS Economics is key.



Omri is the Head of Demand Generation, as well as the Lead Author & Editor of the SaaSAddict Blog. Omri established the SaaSAddict blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to SaaS and cloud migration.