Darwinism

My partner and I have been talking about Darwinism a lot with respect to our businesses.  We think  this recession represents a huge opportunity to well operated business.

Think about it, in really good times, just about anyone can survive, make money and stay in business. But when the environment becomes more difficult, only those businesses who are business who are best suited to the conditions will survive. Best suited can mean a lot of things, ability to adapt, better run, have a stockpile of resources etc.

An analogy describes this in natural terms. Two Lion’s share one hunting ground when times are good and there is plenty of game around. When drought hits, the weaker Lion falters and eventually starves. The stronger Lion survives because they’re better suited and now has the entire hunting ground to themselves. When the drought breaks, this Lion still has that entire patch.  

The point is, that if you play this right, you can not only ‘survive’, you can come out the other side in a much much stronger position.

Applying this theoretical approach to the real world, take Ben Kepes sarcastic post about SAP. If a competitor like Netsuite could prove to the market that they are by far a better proposition and actually put SAP out of business or so severely damage them that they retrench to a niche. The upside is huge, only one player in the field to win all the business. (I’m not suggesting this is likely BTW).

If you buy into the SaaS proposition, then this is the opportunity this ‘recession’ now affords you.  Check yourself out, do you have what it takes to not only survive, but to profit from this situation?

If you are in old world businesses like my partner and I, how does this apply? Are your nearest competitors struggling? If so, what can you do to make it even tougher so that when the tide turns you are the only game in town.

Some might view this as harsh, but survival of the fittest binary.  Which one are you going to be?

SaaS in nappies

 

Think people, think…

 

Ben Kepes posted on cloudave.com about how both Salesboom and Netsuite are both aggressively targeting Salesforce.com’s customer base. This is bad strategy people, you need to think this through. Here’s why.

Firstly, think about who your competitor is? SaaS accounts for only 14% of the total CRM market. To me that clearly states that the SaaS competitors are the on-premise crowd. The ones with 86% of the market…. or the other $9bn dollars.

Secondly, think about what you are doing to the collective profit pool. Both propositions are cost based. So not only are you not growing the total SaaS profit pool by growing the market, you are cutting your own throats in  a price war that doesn’t need to happen yet. There is enough growth potential left in SaaS CRM for you to happily maintain your margins! If you keep this up you are forever trashing the profit pool. 

Thirdly, think about the global economic climate. Think about the recent announcements from SAP and how they are hurting, think about how the SaaS market could benefit from this perfect storm (I said it, Gigaom said it, Zoli said it). You have a fantastic opportunity to win SaaS Greenfield customers here, don’t pass it up.

Business strategy is a lot more than figuring out what your customers want, especially in a growth market. Looking at your peer (as opposed to competitor) organisations pricing should be done, but not only with a view to competition. Also to a view as to what signals are they sending here. If they put out a price that is seems high, it can mean they are saying we reckon there is a load of profit here, lets keep it that way. 

To this end I am sometimes of the opinion that SaaS companies are in their infancy in terms of maturity of thinking, let alone market position. This just seems a like a beginners error to me…

How Do SaaS companies make money?

I’ve been spending quite a lot of time trying to work out the right model for my currently employer to make money out of SaaS. This hasn’t been an easy task, and i don’t think the answers going to be good, but what it has exposed me too is some really interesting analysis work done on the SaaS market in general.  Things like the announcement of the NetSuite IPO , and this post by Rod Drury on Software RnD really got me thinking.  How do SaaS companies make any profit?

 
This post points to some of the more alarming things about SaaS companies. This one is relates to Netsuite

 

the provider of on-demand enterprise-resource planning software reports solid revenue growth: from $17.7 million in 2004, to $36.4 million in 2005, and then $67.2 million last year. But up until last year, sales and marketing costs always exceeded revenue: $27 million in 2004, and $39.2 million in 2005. Last year, sales and marketing costs were $43.9 million, or 53% of revenue.”

 

The Sales and marketing costs exceeded revenue.  What about the RnD, infrastructure, support maintenance, datacentre etc etc…

 
According to this by McKinsey this is a little out of wack but you can see why i think there's an issue.

 {mosimage}

Clearly traditional software companies with incumbency are the cash cows. They’ve cut their code (the RnD mountain) and are leveraging their digital asset for all its worth.  From now on in its BAU enhancements, marginal based pricing (every unit sold only increases the cost of sales by the price of a CD) and stay abreast of what is going on in the market.

BUT the other thing i found interesting here is the parallels between the smaller software companies and SaaS companies (none of which are greater than $1.2b in revenue to the best of my knowledge). 

EBITDA  is quite frankly alarming. From this small percentage shareholders get a return. Hardly appealing. It’s worth noting that because of the licensing model (consumption) you can’t force the client to upgrade and pay more fees either. This EBITDA number is critical because also the money that companies use to reinvest in their product, infrastructure and delivery to help themselves grow.

The Marketing and sales spend is staggering. It makes sense that these companies are massively customer acquisition driven but the return is what?  Surely some clever guerrilla marketing or channel model could help out here? Given that each seat only pays a small about pa or per month you don’t see the massive revenue hikes year on year going head to head with traditional software companies isn’t ideal.

But users are very sticky (at present, but history would indicate that this will change. Imagine if you could export your CRM data (just like you do your feed reader file) and import it into the competition). But if you are a pure play vendor like Salesforce.com, your ability to cross and upsell to increase the ARPU is limited? Netsuite might be slightly different due to the breadth of their portfolio.

 The RnD line did surprise me. To me SaaS software is in constant beta, always being enhanced, optimised and revised in real time. Perhaps like all companies, RnD happens at the genesis of the company. The one cracking good idea and everything else is just evolution?

 The COGS line says to me scale problem. In comparison to large companies they haven’t achieved it.  It poses and interesting problem, one that Rod Drury has again mentioned. How do Kiwi organisations go global (or with my interpretation get Scale)?  It’s my view that the NZ market is too small in its own right to provide true scale benefits to a service provider, including SaaS. 

Xero seems to be targeting right from the get go at being a global enterprise. I think that’s important. But will that be enough? Can the loop of small EBITDA, incremental revenue (per user pricing) and borrowing (VC or IPO) continue on?

I’d be really interested to hear about others thoughts on this as it seems to me that if SaaS companies cannot solve this then the market as a whole is in question.