
The Commoditization Of SaaS - itsprofitbaron
http://profitbaron.tumblr.com/post/53228769794/the-commoditization-of-saas
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limejuice
There is intense competition in the Saas space, but competition is different
from commoditization imo.

The simpler the Saas service, and the lower cost of switching, the more
competition and commoditization that may go on. But this article is talking
specifically about Saas replacing enterprise software. Software is sticky, and
some software is very sticky because it is mission critical, highly integrated
into the business workflows, and/or there is significant user interaction.

For example, if a company has 500 sales people all happily using
salesforce.com, why would a CIO disrupt everyone's work to switch to a cheaper
but different product? The cost of salesforce.com is not a significant cost to
the business, but the cost of disrupting people's productivity swamps any
savings you might from switching to a cheaper service.

This is similar to someone telling a company to drop MS Office because
OpenOffice or GoogleDocs have equivalent "good enough" functionality and are
free. There is no 'commodity' version of MS Office which looks and behaves
exactly like MS Office but just with a lower price.

~~~
itsprofitbaron
Your Salesforce example highlights a SaaS replacing Enterprise Software -
Salesforce vs. Siebel. Regarding your point about software being sticky like
some hardware offerings have been commoditized - software can also suffer this
to some extent (especially in the SaaS space as noone is doing anything that
revolutionary that a competitor or competitors cannot come along and literally
clone them).

I do however agree with you about the switching costs, Salesforce actually use
this as part of their lock-in & differentiator in that they have got their
users to associate them with CRM - their stock ticker is it etc - this they
become product evangelists for them. As a result, there is a network effect
built around Salesforce which has helped them create a lock-in.

However, that sill does not mean users won't switch (look at the new
[http://www.moz.com](http://www.moz.com) it isn't a coincidence that the UI
looks like Google Analytics - that is one such example of how to "break" the
lock-in). Moreover if a customer is offered a Salesforce alternative for 20%
of the cost & it does exactly what Salesforce can do (as well as having a
similar UI) that becomes a serious incentive for a business to switch - after
all most of the decisions are made by the CIO etc who doesn't necessarily use
the product day-to-day.

Finally to address your point about there being no commodity version of MS
Office the problem is, is that no alternative has actually managed to provide
a product to a similar level - Excel is by far the most superior spreadsheet
product on the marketplace.

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programminggeek
I think there are two conflating ideas here, commoditization and uniqueness.
Commoditization will happen over time, especially with open source becoming a
bigger part of more industries, but that doesn't mean you need to rush to
become a commodity.

You should start with something unique and keep making unique things that
delight the people who are willing to pay for those things.

It's not a complicated idea, but it takes focus and time to really get to know
your customers and their needs.

~~~
itsprofitbaron
I mentioned the uniqueness elements to highlight areas where SaaS services can
evolve into from their "solution" service to a "problem" service.

I do however agree with you that, you should always try to offer something
unique (as this is the USP and where you can make higher profit margins) and
that it can sometimes take time to achieve this. However, SaaS is not
revolutionary and it can be copied by anyone and some of them may have a nice
user interface and/or great product functionality but it is not revolutionary
aka a commodity - which as I mentioned in the post is a death spiral as it
focuses on competing on price.

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oneye
> Chances are that your company or your industry will be commoditized
> especially when you don’t think it can happen because, in reality
> commoditization always happens

Everything else in the post rests on this, and I'm not sure that its true. Do
you have research or statistics to support this claim?

I'm curious what these industries are. Oil? Investment funds? Pharmaceuticals?

I'm thinking that there are a few industries where commoditization has not
happened over the last few hundred years. Of these, I'm curious how many of
the industries commoditization could happen in, but has not, and how many (for
some reason) are strongly resistant to commoditization.

~~~
itsprofitbaron
In regards to the commoditization point & to you examples of Oil, Investment
Funds and Pharmaceuticals there has been consolidation within these. For
instance, OPEC has effectively brought all the oil-producing nations under one
rule so to speak which has established uniform pricing throughout the world.

Moreover, commoditization doesn't happen immediately as there may be
industries who disrupt existing solutions (as SaaS has done to Enterprise
Software) but aren't yet fully established themselves (or in particular
verticals of the new industry) and these can have time to evolve before
commoditizing. Having said that, it's always better to commoditize yourself
before customers (and potential customers) perceive you as a commodity. The
reason for is that it becomes much harder to evolve into a preferred
partner/problem service where you can make much higher profit margins during
this stage as you are being compared on price & not your defensible value add.

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mathattack
This is the tradeoff... SaaS gets great margins because it's not custom.
There's a high fixed cost, then each incremental addition has benefit. Even
with a low marginal cost this is true. The #1 SaaS can also add lot of
features and increase reliability and spend more on Marketing.

You could argue that Wal-mart is a commodity too. It's just stores and the
same stuff as K-mart and 7-11. But it crushes them. There's room for both Wal-
mart and Tiffany's just like there's room for a SaaS for your billing system,
and Accenture to build a custom one.

~~~
itsprofitbaron
I wasn't arguing about adding more features (since a competitor can also do
that) but rather create an additional value-add that meets your customers or
potential customers needs.

Whereas SaaS currently tries to say "this is the solution" it needs to be
flipped to focusing on actual customer pain points (since the current solution
may not actually meet their needs) which you can the re-create a slightly new
solution which becomes your unique selling point and defensible base (which is
why it's important to go beyond competing on features). The reason I'm arguing
this point is because, SaaS is becoming commodified in that they they winning
SaaS in the SMB space start getting pulled upstream to the enterprise market
where their margins become much greater and SaaS becomes their method to
provide you with the product than their actual business model.

Your examples actually reaffirm my point - Walmart has added value by offering
"everything under one roof" so instead of going to 10-20 store you just go to
the 1. Their value is convenience alongside this they also compete on price to
protect their market from disruption and ensure they're the dominant player
(its a 3 pronged attack which Amazon is replicating on the web). On the other
hand Tiffany's offers you a more personal experience than a Walmart does (in
my opinion) which is their comparitve value-add alongside their actual
products.

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badclient
_As a result, by commoditizing yourself and creating a new unique selling
point which is, unique to you, important to your customer (or potential
customers) and is defensible against your competition, on top of your SaaS you
can increase demand and give yourself the opportunity for highly profitable
growth._

I don't follow. Okay so I find a selling point but what exactly makes it
defensible or 'unique'?

~~~
itsprofitbaron
What I mean by this is don't make your selling point about having more
features (since a competitor can copy them) but rather create an additional
value-add that meets your customers or potential customers needs.

SaaS currently tries to say "this is the solution" and as I was saying in the
post it needs to be flipped to focus on actual customer pain points (since the
current solution may not actually meet their needs) which you can the re-
create a slightly new solution which becomes your unique selling point and
defensible base (which is why it's important to go beyond competing on
features). Essentially SaaS is becoming the method to provide the customer
with the product rather than the actual business model and if your SaaS works
with your customers & solves a key problem for them beyond "hey pay us X for
these features" you will become a preferred partner who is solving a key
problem which is critical to the success of your customers

~~~
badclient
_you can the re-create a slightly new solution which becomes your unique
selling point and defensible base_

Are you basically saying that in addition to features, you need to provide
_service_ because that is what makes you defensible? It is just not very clear
how a slightly new solution is inherently defensible. You could make your
product offer a _slightly new solution_ by improving a feature. I'm guessing
you'd argue that isn't defensible. So what concrete characteristics make it
defensible? May be you are hinting at marketing/branding - once you have a
brand/mindshare, people are less likely to switch to commoditized
alternatives(ie. Tylenol).

