I’ve been thinking about SaaS and what makes it defensible. SaaS is an extremely broad term. Evernote, Linkedin’s recruiter product is SaaS, Basecamp, Salesforce, etc. are all SaaS and are all very different. But I think many of these products share a common challenge. If someone comes up with a new SaaS product and it starts to gain market traction, these products can be and often are copied.
Let’s look at the HR software market as one example. HR and the associated “Human Capital Management” software space is a massive segment with billions of dollars of annual spend by companies large and small. Any company small to large in size has some potential need for HR software. Inside the HR software suite, there are lots and lots of different types of products. Applicant tracking software for recruiting. Performance review and tracking software. Time sheet management. Org design tools. Benefits administration software. Employee on boarding and off boarding software. Etc etc.
Many times these components are bundled together into a single suite of SaaS products, which is what you find from the bigger players like Taleo (now part of Oracle), SuccessFactors (now part of SAP), SilkRoad, Workday, and others. Other times they are separate point solutions. For instance, there are literally dozens of providers of point solutions for Applicant Tracking (ATS). Why? Because it’s fairly easy for even a single good developer to copy the design and functionality of existing ATS products in order to put together their own serviceable SaaS offering.
The result may not be as feature rich or stable as more established products, but can be enough to gain some market share, albeit often small. When you have a large enough market, there’s enough spend to support several large players offering variations on essentially the same SaaS product. And that same large market can support a very long tail of smaller copycats. The latter may not be large, VC-supportable growth companies, but they can be very nice, profitable enterprises for their owners.
Another example of this is in the customer service management software space. Zendesk created a “next gen” SaaS product for customer service agents to better manage customer service tickets through multiple channels (email, phone, social media, etc.) from anywhere. Freshdesk, an India-based company, started in 2010. While I’m not a user and I haven’t looked at either company in detail, best as I can tell there is limited differentiation between the two companies. And there is a whole host of smaller companies with similar general product offerings. Google it.
Like the HR and ATS examples above, the customer service management space is very large. It can support more than one large player and long-tail of smaller providers who compete with the bigger guys through cheaper pricing, a specific vertical focus, or simply taking a tiny bit of market share in a very large market. Often times it’s the latter and customers and some portion of customers just don’t know better that there’s a potentially better, more established product out there.
I could go through other examples with similar characteristics. CRM, accounting software, social media management for marketers, email marketing, you name it.
An important point to make here is that these typically aren’t winner-take-all situations. These usually aren’t marketplace businesses where there’s a network effect where increase scale creates a bigger and bigger moat around your business until the point where it makes no sense for either side of the marketplace to use any service but yours. So how do you differentiate yourself?
A few ideas:
- Scale allows you to invest in a better product, and there’s not better business advantage than a better product. I think the real benefit to scale is the ability to create a better product. When you have more dollars to invest and you can attract better tech talent, you can build a better product. More stability, more core features, more integrations, etc. The more this happens, the harder it is for someone to simply copy what you’re doing. It’s also hard to engineer for scale, so being able to create an awesome, reliable product that works at scale (think Evernote, Dropbox, etc.) is an advantage in and of itself.
- Try to create platforms, which in turn generate network effects. Salesforce’s Force.com is a great example of this. Salesforce essentially has thousands of developers doing R&D for free on their platform. Salesforce can’t possibly think of every potential feature or customer need, and they don’t have to. Others can experiment and do this for them. This is very hard for competitors to replicate.
- Similarly, creating some type of network and then placing a SaaS service on top creates defensibility. Linkedin is a cardinal example of this. The core software tools Linkedin provides to recruiters aren’t anything special in and of themselves. But they are incredibly powerful and proprietary given the network they’re built on top of.
- Having a unique angle and/or world class capability in Sales & Marketing is huge. Selling to large, enterprise grade customers requires sophisticated sales teams and strategy. Building this isn’t easy or quick, nor is it the realm of “copycats.” Similarly, for people selling into consumers or SMBs, creating a great online marketing capability, perhaps supplemented with some inside sales, is tough. It requires talent, full-time effort, the ability to experiment with multiple channels, etc. If you can build this, you’ve created a big moat for yourself in terms of sales and distribution.
If you can nail 2 out of 4 of these, I think you’re on your way to building a SaaS business with a chance to occupy market share at the head of your market rather than the tail. What other concepts would people add to this list?