A lot of SaaS products are making money hand over fist yet they seem easily replicable. Furthermore, most SaaS companies don't seem to have network effects or any particularly large switching costs. Given these dynamics, why haven't we seen a race to rock bottom SaaS prices in and around $1 like we did with games and paid apps?
The main thing SaaS companies do is navigate the politics of selling into businesses. The software is an implementation detail. So you can replicate the product, but you still have to do the (much harder) work of selling.
Is that unique to SaaS? Doesn't a sprocket company have to do that? What about hand dryers in corporate office bathrooms? What about light fixtures? Or HVAC systems? Aren't all companies mostly just dealing with the meatspace dynamics of sales?
The older and more experienced I get at building things and solving hard problems, the more convinced I am that the "magic" part is in the selling, the convincing, the communicating, the getting someone to pay money for this stuff.
(and if anyone reading this now or in the future is good at that second half, email me, let's be friends and make money)
Other types of B2B companies also have to sell, but SaaS companies are pretty unique due to their zero marginal cost of sales. Physical product companies have to sell AND buy inventory in order to be able to sell more. Services companies have to sell AND hire and train more billable employees in order to sell more.
Sorry, I meant cost of goods sold, as the other commenter noted. We're in agreement: basically the entire cost to grow revenue is selling expenses because the main function of a B2B SaaS is sales.
Because business owners don't have the time and resources to keep changing vendors to save 10% costs. Time is money.
Switching cost is more than you think. For example, I don't like Zendesk it's expensive and over-engineered. But I stick to it because I know how hard it is to port my docs over and re-setup the live chat. It's half a day work. To save $50/mo, it's not worth my time. My focus is growing my company, not to save $50/mo.
> Because business owners don't have the time and resources to keep changing vendors to save 10% costs.
There is enough business churn that switching costs for a going concern alone don't explain a lack of competition if there are wide margins (and thus, lots of room for price conpetition.)
1) SaaS has a running cost; servers, support, devops, and so on
You generally have a minimum cost to run a SaaS business. It's significantly less than it used to be, but it's still there. You have to run servers, unlike iPhone Apps that run on the consumers device.
2) The iPhone and Android App Stores were one of the purest environments for Revenue Management experiments we've ever witnessed.
By way of my background, I worked for a while in the transport industry a few years back, and was responsible for the platforms that sold over 4 million tickets online per year. I worked with revenue management teams, so have some experience in this area. And at the time we would discuss the App Store and pricing trends.
My experience does not grant me authority, these are just my observations and opinions :-)
So back to Revenue Management:
The market for smartphones and customers for the App Stores kept growing and the distribution model of the App Stores meant it was easy to run global experiments on pricing.
App Developers quickly realised that their Revenue Management graphs showed increased Revenue and Profit when they lowered the price due to the never-before-seen size of the smartphone market. Suddenly software developers had access to millions of customers around the world who would pay 0.99c for an App.
You could entice new customer with low prices, and at the time it seemed like there was a limitless supply of new customers who would pay 0.99c. So as a business you kept on generating more and more revenue.
You could scale out your business to millions of customers at almost zero additional cost.
As long as you didnt care about providing any support of course.
Later everyone realised that Advertisers would pay more, and we ended up with trash Adware Apps.
Please enforce this rule on my dad. He recently told me I should take apart his garbage disposal to remove some kind of problem because it would only take about 5 minutes.
Software part is often the easy part. Take e.g. Spotify. The music player is easy to replicate, but it also isn't the company's moat. The record label deals are, and good luck replicating those.
Dunning-Kruger in action: people with little knowledge of how much effort it is to run even a trivial business think they can do it in a weekend.
I've been working solo on a SaaS of my own and I've been 1 month away from launch since December 2022. It looked so trivial when I had the brilliant idea, now I'm so deep I might as well take it to completion. Hopefully next month.
Never again will I forget that ideas in a vacuum are worthless compared to the blood, sweat and tears of running a business.
Go try and replicate one. Get the team and the capital, build all the features, get all the certificates, get an enterprise sales team, and do all of this to… build a clone of an existing product? And what’s to stop them from cutting their prices until you bleed to death?
Best way to do this is a pure commodity play. Like something totally replaceable where the cheapest possible option that works is good. I’ve seen many Indian and Eastern European teams try this. Just google “[Some SaaS] vs” and see the products pop up. It’s possible but it isn’t as easy as it sounds.
Furthermore there are a lot of edge cases and special features you don’t see. Special flags they turn on for customers with some special need, or in some industry. Closing enormous b2b enterprise deals often includes a good amount of custom logic and integration that no one else understands.
B2B and B2C are completely different games. With B2C, the only thing that matters is scale, because users are incredibly fickle and price sensitive. An individual can pick up and drop any particular app with zero friction. This is the environment where network effects are huge because social pressure is going to have a bigger effect than any marketing can in cases where it's applicable. Note also that there's not a huge number of profitable B2C SaaS companies, as they tend to be free or loss leaders, and get acquired by bigger companies who are paying for the eyeballs.
Most SaaS is B2B, where software is doing real work of some value, and needs are dramatically more complex, but the addressable market is much smaller. In this environment, contrary to your assertion, adoption and switching costs are significant. While there still may be some network effects, much more dominant is general inertia in business where people just want to get their work done and have little tolerance for change. SaaS takes advantage of these dynamics by handling operations and providing ever more features, capabilities and integrations that cement the software's position inside client companies. At some point it becomes almost impossible to change, even for a software that 80% of the users would prefer, because of some un-handled use cases, or minority of internal stakeholders that would stage a revolt.
I question the "making money hand over fist" notion. Aren't the vast majority of SaaS companies burning VC money to stay afloat?
Like others have also said, trust plays a key role. Companies usually like to stick with a tool that already works and where they know what they're going to get vs taking a risk on a copy-cat to save a few bucks.
> Aren't the vast majority of SaaS companies burning VC money to stay afloat?
Only if you're thinking of the HN/SV bubble. Many, many businesses exist that aren't startups and aren't VC funded, including many software SaaS businesses.
Because most Saas products are much harder to replicate than you think, and the market for Saas is 95% B2B where cost to acquire a customer is insanely high.
If your market is businesses with employees, the difference between $1/month and $100/month for a piece of software is a rounding error. This means even something that only saves the business an hour each month, is worth it for $100. Even if you buy 100 of these apps, it’s still cheaper than the all-in cost of a single employee.
Conversely, you could ask the same question about anything. For example:
A lot of [employees] are making money hand over fist yet they seem easily replaceable. Furthermore most [employees] don’t have network effects or large switching costs. Given these dynamics, why haven’t we seen a race to rock bottom in [employee] prices?
Either the market is persistently inefficient for some reason (usually isn’t the case) or there’s something you’re not accounting for in your assumptions.
If you’re one of the people who say things like "Intercom? Pffft! I could spin up a clone in a weekend!," I would say you're in the latter.
It is all about the upfront costs and maintenance.
It takes some serious capital and talent to build a high-availablility data center that SaaS run on.
The software is just icing on the cake. You did not include the cake, the plate the cake is on, the table the plate is on, the chair at the table, and the roof overhead. All of those other components are needed and they have costs which must be paid for everything else to work so well and be so easy to use.
>> No SaaS provider is building their own datacenter. They usually don't even run their own servers...
True, but SaaS still runs on cloud infrastructure so the costs are still there: you are either Amazon, Microsoft, etc. and build the infrastructure yourself or you pay them to rent time/space from them.
The base costs for the infrastructure do not go away which makes it unlikely for SaaS costs to race to the bottom.
> True, but SaaS still runs on cloud infrastructure so the costs are still there
You can bring the costs way down. Their margins include a pretty insane amount of features that not everyone needs. There is a lot of meat there if you have skills in the area.
Making/saving money via DIY compute is an area ripe for improvement via better vertical integration.
The big cloud providers simply do not have this market cornered even with this mind share that prevents perfectly good engineers from seeing the path plain before them.
When we are talking about medium to large enterprise customers, there is significant costs of switching a SaaS provider.
Vendor assessment, legal concerns, data privacy concerns, talks about SLA guarantees, talks about 24/7 support plans and much more. There will likely be several departments involved. Technical folks, legal people, data privacy experts etc.
That new deal could pass easily thru 50 peoples desk before getting signed eventually. For what? A 15% saving that could be wiped out with the next round of price adjustments from the new vendor? Simply not worth it. That is why SaaS revenue tends to be so sticky.
Curious what other people think but I’d bet it has more to do with the prices that the market will bear rather than competition between products, and there’s a huge difference between consumer and business prices generally for this reason. This is reflected in consumer vs business SaaS tools, e.g. compare pricing of Apple’s iCloud vs Box pricing. Another factor is that for many services, there isn’t a clear marketplace as there is for consumer apps, and SaaS tools often grow via outbound sales, so the market is less efficient essentially.
If an employee is paid (say) $8k/month, the difference between getting the best SaaS at $20/head or an almost-as-good SaaS at $4/month is $16, which is 0.2% of their salary. The $20/head SaaS seems 5x more expensive, but if it makes the employee even marginally more productive it’s the better value.
It's a similar dynamic to why professional athletes are paid well: they exist in a market where you can't substitute quantity for quality.
Not really. Paying Atlassian for jira cloud still saves our company tons of money compared to building and running in-house issue tracker. Even running and maintaining own instance of jira would cost us more when we did calculations.
B2B customers often value consistency and quality over price. Internal cost of switching is not zero, we have working systems on the old thing and if it’s making us super happy why would we spend money to switch to an unknown?
In contrast I think the race to the bottom that can be perceived as concerning. Will you still be there, or cause some critical outage?
When I'm shopping for a SaaS product one of the most important factors for me is trust.
Can I trust the product I'm using to stick around, to be secure, to not jack up prices?
If the product is clearly a clone of an existing product I'm much less likely to trust it - my very first introduction to them was through an action that doesn't inspire me to trust them!
Because my personal ethics are that I would not start a new online business by directly cloning someone else's. I think that's a poor sign of character.
You may well disagree with me on this, in which case you won't factor this into your own decisions as to whether a company is trustworthy or not.
I should clarify: I'm not talking about services in terms of "we built a new Git hosting service even though GitHub already exists" - I'm talking about direct copies, where it's clear that someone has tried to replicate the exact same feature set at a lower price.
This should 100% be encouraged. If your business is that easy to copy it should be commoditized out. This is better for consumers because it reduces price and forces you to improve.
“I won’t open a burger restaurant because there is another one up the street with margins I can beat.” Doesn’t make sense.
> A lot of SaaS products are making money hand over fist yet they seem easily replicable.
Most likely your impression is wrong, the easily reolicable ones are probably not making huge profit margins, the ones that are hugley profitable aren't easily replicable, whether for IP or other reasons.
Because they were already undercharging. During the low rate years, investors said they wanted growth, not profits. Now they want profits. Expect a lot of consolidation and rising prices over time. Unity was a harbinger.
It’s a race to the bottom until someone has a durable competitive advantage: it’s usually a market based advantage or a technical advantage. The best companies achieve and maintain both.
Marketing cost increase with competition. Usually a SaaS starts at loss, then when competition increase it make loss because higher cost per acquisition.
Even if it isn't sticky, the organization is sticky.
Take time tracking-payroll software, it's pretty simple right? Let people log in, input their time, manager reviews it, some business logic about the different kinds of leave and accrual and all that. Compared to a service like Browserstack, it seems trivial to develop and run. And maybe easier to switch for the customer, right?
But to switch you need to... decide a cutover date, make sure the new system supports all your current employee contracts, oh and payroll links to the health insurance as well, and the employee options scheme, and the pension scheme, and you need to input the org hierarchy, but people made tweaks in the old software that won't carry over... not so simple any more.
Tell me you have never run a SAAS business without telling me you have never run a SAAS business. Forget SAAS. RUnning a successful company is a lot more than building the product/writing code. You seem to suggest that it is "replicable" and I assume you mean the product/features. What you are not seeing is everything else that goes in running a company. Sales, Marketing, Customer Support, Team/Recruiting, Conflicts, Changing landscape, Competitors, Need to innovate with time, not running out of money and many more.
> A lot of SaaS products are making money hand over fist yet they seem easily replicable.
They aren't, though.
> Furthermore, most SaaS companies don't seem to have network effects or any particularly large switching costs.
On the contrary, switching costs is a big part of what they optimize for.
> Given these dynamics, why haven't we seen a race to rock bottom SaaS prices in and around $1 like we did with games and paid apps?
Games and paid apps that aren't shovelware shit don't cost $1 either (if they do, they're screwing you over with some combination of IAP, ads, and embedded surveillance frameworks).
My take: software resists commoditization. On top of that, SaaS is the ultimate attempt to ensure your software is not a commodity.
Think of it this way: is Netflix a competitor to Disney+? To HBO Max? To YouTube Premium? Only to the extend their catalogues overlap. Which, unsurprisingly, they don't. Since movies/shows aren't good substitutes - e.g. if I want to watch Star Trek, neither Star Wars nor Friends are actual alternatives - this means I have to pay for all of them[0].
It's obvious in case of video streaming, but you can extend this argument to any SaaS. Even for SaaS in ostensibly the same market, they tend to not have full feature overlap, and always find a way to make sure costs of switching are big. No common import/export format. Getting you used to a idiosyncratic workflow, or an interface. Unique integrations. Etc.
Think about a person working in Google's office suite collaborating with a person working in Microsoft Office. It's a painful, uphill battle unless both of them learn both systems and then pick either. But they still need to know both, because they're very much not equivalent and strongly non-overlapping in features.
In similar ways, they're protected from competition. Take Spotify. The streaming music player part is trivial to replicate these days[1] - but this fact doesn't spawn millions of competitors, because music player is not the valuable part of that SaaS. The deals with record labels are, and good luck getting those. Little competition -> not much pressure to lower prices.
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[0] - Which, in practice, means paying for one or two, and then sailing the high seas for the rest, because ain't anyone has time or patience to deal with half-assed enshittified webshit chrome around a semi-broken in-browser video player. But that's orthogonal to the topic at hand.
[1] - In fact, Spotify has been innovating hard over the last decade to make their player as annoying to use as possible - you really can't make something this anti-ergonomic on your first try.
