Ok, lets flip this on its head.

Enough with the problems, how about some solutions. 

Firstly, having re-read my last post I guess i gave off the opinion that SaaS is questionable. I apologise for that, i’m a very big fan. Its my personal belief that with this model Software companies may well finally deliver on the promise of IT. That is provide business benefit. It seems to me (and i get exposed to this every day at my currently employer) that every IT project comes with a significant cost, and that in its traditional sense, that delta isn’t that great. To quote Socrates

 “without evil there cannot be good”.

But in SaaS the downside equation (effort, resource contention, ongoing management, shelfware, missed business deliverable, components etc etc) is being marginalised.

SaaS revenue is easier to predict as its incremental (not lumpy) and due to its huge popularity amongst its users ( and the fact that its really hard to leave) there seems to be very low churn. It would seem to be that SaaS companies who ARE profitable would be very good investments because of this reason.

Having said that though, the concerns (not alarm) over the individual viability of SaaS companies is still real. I also think due to the immaturity of the segment, these companies are still searching for the optimum business model, be it channel, partner or differentiator as well as having to overcome the naivety of the market to the benefits of SaaS.

I think its worth looking into the different business model approaches and how they could impact on EBITDA.  EBITDA is to my mind the critical aspect as I still hold to the belief that it is the fuel that business use to innovate and grow regardless if it is a fell swoop or on an incremental  (cash burn ) basis.

 As a framework I liked Ben’s post which basically says that the value proposition (and hence its differentiator and long term financial viability) for SaaS companies seems to fall into either a “me too play – done differently/cheaper” or a “we’ve got true differentiation and scale here” play. I’d argue that the third play is the building of a product that so fits a market niche that they’re difficult to displace (imagine PlanNZ – who do mortgage lending CRM – done SaaS).

Lets look at each of these plays then

The me too play – done cheaper of differently. These guys are taking on established markets (like CRM) but are saying their way is different (and better {mosimage})or cheaper. At the moment the different part is pretty much SaaS. In this instance these guys are expending huge amounts of effort in Sales and marketing and CoGS, hence the lower EBITDA.  I would argue that they should be hell bent on a Get Big Fast plan, get scale no matter what it takes as this will have the benefit of bringing down the CoGS line as well as making the market. As Sinclair points out SaaS still has a mindshare problem so the Sales and marketing numbers should stay high until they achieve scale, then if you maintain expenditure and increase revenue the percentage naturally falls. If they don’t then they’ll end up looking like SunRocket who with its 200k customers didn’t get scale (as opposed to Skype with its 200 million). These guys could help bring down their costs by using SDP providers rather than build their own. They could then divert that CAPX spend to M&A activity or customer acquisition. To my mind SaaS companies should be better at merging because they are used to mashups, they just get it. Therefore they can get the joint proposition out faster, use the IP or the people better or get to the customer base they’ve just bought sooner (the rule of 78 applied to revenue).

Next we’ve got true differentiation play, this one is harder to identify as its quite rare. Given that I would argue that Facebook and Myspace when they were new did achieve this. Who’d heard of social networks 2 years ago?  These guys based on their differentiation attracted users in their hordes (scale) and are now sitting pretty. If I understood how they made money i’d comment more but i’m still perplexed on this apart from the rule of eyeballs. They obviously have a need for SDP’s to bring down
CAPX, but id bet that their Sales and marketing costs are were minimal as they had viral marketing going on for them (see my post below and reference to guerrilla marketing). If you are unique, fulfil a market need and have scale then it’s about as good as it gets. You should have massive EBITDA.

The final major strategy is nicheing where you don’t really get scale but your differentiation provides you with a safe position in the market. You can therefore keep your margins up (no price based competition) and can survive quite well. These guys can bring down there COGS using SDP’s to further increase their EBITDA.

Any else think of ways SaaS companies can increase their EBITDA?

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