I meet with a lot of start-ups that are determined on disrupting industries with Software as a Service (SaaS) solutions. The business plans I see increasingly focus on niche markets, everything from food production through to legal and architectural, and not on businesses that already depend on the internet to survive.
To these entrepreneurs SaaS seems to be the obvious solution to entering and disrupting the market and in many ways I agree. However, these same entrepreneurs are generally so caught up over the advantages of SaaS that they fail to see that in their chosen target market dependence on the internet is a competitive disadvantage rather than an advantage.
This isn’t a problem in itself, but it is vital that the entrepreneurs recognise it and aren’t blinded to the problems their customers are going to face. These problems are rooted in three areas: infrastructure, culture and commitment.
The benefits of SaaS are well documented and include:
- No installation
- Low levels of investment required by the customer
- Universal availability
- Improved support because everyone is on the same version of the software
- No distribution costs
- Utility based pricing
- Recurring revenue for the vendor
These all seem like compelling business advantages, making SaaS solutions intrinsically sellable in any market. However, the very premise of SaaS is that it is built on the infrastructure of the internet, and if the internet isn’t reliably and effectively in place in a business already then a SaaS sale has some severe obstacles to overcome.
Infrastructure
SaaS depends on the internet. That’s why the first successful SaaS companies have focused on providing business solutions to businesses that already depend on having good internet connectivity.
Problems arise when entrepreneurs make the mistaken assumption that just because universal, fast and reliable internet connectivity is a priority for their own business that it is automatically a business priority of companies in their target niche.
The issue here is that when your SaaS solution fails for your customer it doesn’t matter why it failed – it’s your fault. If it is because their ISP got flooded and “the internet went down” then it is still your fault, just like if you pay a courier to deliver a parcel and they don’t because a bridge fell down, it’s still the courier’s fault.
The problem boils down to this – if you are selling to a business that doesn’t already have internet connectivity as a business priority then when something goes wrong (and it will) they won’t know how to get back online. Their regular staff members probably don’t know who provides their internet service, so they call you. You don’t know either so you call the business owner. They call their provider who says it isn’t their issue, and before you know it days pass before they are back online.
Unless you are building an application for the minority business where internet connectivity is already a business priority then you are going to be swimming upstream with your SaaS solution.
Culture
If you go to your mechanic to get your car fixed and they are busy and you have to wait a few hours, or even a day or two, then it’s usually no big deal. The chances are that the mechanic will retain you as a customer, but it’s a different story when something really has to be done and you are forced to find an alternative solution.
Say for instance you are leaving on a family driving holiday tomorrow and your normal mechanic can’t see you, forcing you to find an alternative solution. The chances are that you will never revert back to the original mechanic but stick with the new reliable solution.
The same thing applies when an employee uses your system and it fails for any reason. If what the employee is doing is critical and time sensitive, such as taking a payment, then the employee is going to revert back to the old solution. From this point on it is going to be very difficult to convince that employee to ever use your “unreliable” solution again.
Large companies realize this and put huge emphasis on change management. This is because when a large company implements a solution it typically represents a massive business commitment. Smaller companies often haven’t learned this yet but it applies just as much.
Commitment
The pricing model for SaaS solutions is typically a monthly subscription, which is great because it gives the customer a really low entry cost and provides the vendor with nice recurring revenue. In a lot of ways this seems like the perfect business model for software. However it has a serious problem – commitment or “buy in”.
When a business purchases a traditional software solution there are a lot of costs. The license may cost a couple of thousand, the server will be another grand and then there is the training which forms the backbone of a lot of software companies’ revenues. All in all it represents a serious commitment by the company.
What this means is that when the customer has a problem with the traditional software model then they are strongly incentivised to protect the investment the company has already made, and to persevere and overcome the issue. In the SaaS pricing model the upfront commitment is reduced and therefore the inclination is to give up and revert to the next best solution, even if it is pen and paper!
What to do
SaaS has so many compelling advantages that the last thing I would advocate is to abandon the approach. What needs to be done is to recognise the business challenges that a SaaS solution presents to a business and be prepared to face those challenges head on.
- Have a documented change management process that includes provisions for internet failure
- Explore the use of thin clients such as Google Gears or Adobe Air
- Make sure that you don’t just sign up customers, make sure they are committed customers.
- Provide for staff training (this should be a profit centre)
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