SaaS is ripe for disruptionWritten by Justin on August 12, 2016
Should you start a Software as a Service company this year? If you have a SaaS, what are the possible threats? What other, potentially disruptive, models exist?
I was born in the 1980s. First computer: Commodore Vic-20. Second computer: Tandy 1000. Third computer: 386 PC clone. Fourth: Pentium clone.
My first software purchase was sending $44 to Apogee Software for a game called Commander Keen. In 1991 you could download Keen from a BBS, or buy it in a box from a retailer.
For most of the ’90s, most software was distributed this way. You’d buy it, and install it on your desktop. The popular business applications were Microsoft Office and Adobe Photoshop. Companies would spend hundreds of dollars to license software like Office for each employee’s machine.
In 1999 a software company called Salesforce launched. They were using a new licensing and distribution model: Software as a Service (SaaS). Instead of buying individual licenses, you paid a monthly fee for each user. The software wasn’t installed on employees’ machines; it was hosted centrally on a web server.
Five years later 37signals famously launched Basecamp. Their launch was different for a number of reasons. First: they had built their web application with no funding. Second: they’d created a framework on top of the Ruby language that made web app development faster. They called it “Ruby on Rails.” They open-sourced it in 2004, which allowed anyone in the world to build web apps on the framework.
This is where the pendulum began to swing.
If you were a software developer pre-2004 you were likely building applications for desktops or servers. Post-2004, this began to change. Developers loved the flexibility and philosophy behind Rails. And business people saw the potential for building revenue generating products on the SaaS model. The other convergence was the increase in internet speeds. High-speed internet became more common, making web-based software more realistic.
The SaaS gold rush
Seeing the success of products like Basecamp, there was a rapid increase in the number of web applications. And, for distribution and pricing, they used the SaaS model. Users paid a recurring fee (usually monthly) to access the application via their web browser.
In 2007, Ryan Carson started doing the Future of Web Apps conferences. Thousands of developers and aspiring founders flocked to these events in the USA and Europe.
Many of the SaaS companies we recognize today were launched during this time. Freshbooks was launched in 2006. Zendesk was founded in 2007. Wufoo started in 2006. Xero Accounting was created in 2006 as well.
Now? The number of SaaS-based companies has grown from a few hundred to tens of thousands. AngelList alone lists 10,000 SaaS startups.
Like any gold rush, there’s been winners and losers.
Are we at peak SaaS?
I don’t know. My friend Ruben Gamez says there is tons of upside left. He’s way smarter than I am, and he’s probably right.
If you look at the research by Bessemer, the enterprise is spending more on SaaS:
The enterprise market is tricky, though. They’ve increased spending on SaaS 17.6% since 2013, but only decreased spending on traditional software by 2.8%. Are they replacing on-premise solutions with SaaS? Or are they paying for new services they weren’t using before? Will the trend continue? Hard to know for sure.
The other question when looking at stats from the enterprise space is who is benefiting from all that growth. Is it the small five-person SaaS company? Or is Salesforce, who have about 20% of the CRM market, and keep growing by about 21% each year.
The small business market is even harder to discern. In Intuit’s study, the average SMB spent $630 / year on software. In the old days, that might have meant upgrading to a new version of Microsoft Office. Now? $52.50 per month is a very small pie for dozens of different SaaS companies to compete for.
Nobody really knows when the market for SaaS will become saturated:
“The question remains — at what point does web-based software stop taking market share? Most forecasters agree that it will become the majority at some point. Will that be 51%, 67% or 85%? Only time will tell.”
In some categories, like CRM, we’re already past 51% market share for SaaS. Will it keep growing?
Is it harder to start a SaaS now?
Using something like Amazon Web Services, you can get started for pennies, and scale your usage as your business grows. Web development frameworks have gotten better. UI frameworks have made good design more accessible. Services like Stripe make accepting payments easier.
Starting is easy, growth is hard
So yes, it’s cheaper to start a SaaS. My buddy Marty and I recently did this. We bought a domain, got a free hosting credit on Digital Ocean, and fired up a web app in a day. Cheap and easy.
However, growing a business has always been hard. And there are certain times in history where growing a particular type of business is harder (just ask Microsoft).
Mattermark’s update from June 2016 proclaimed:
It’s getting more expensive to build SaaS companies and exits are weak.
I think Rob Walling articulates the challenge well:
We’re not building these basic CRUD apps like we used to be able to. The stuff’s too competitive now.
Think of a project management tool, time tracking, or invoicing software. There’s a lot that goes into building the product; but on the back-end the performance implications of it are really small compared to something that is sending a lot of email, or doing a lot of analytics, tracking opens, tracking clicks.
Both of our apps do that. I can’t even imagine what apps, like Mixpanel and Kissmetrics have to do on the back-end because they are the next level. Now I understand why those types of businesses had to raise funding. You just couldn’t get enough boxes and enough people to scale that up without having a big outlay in advance, even with a tool like Amazon EC2 or Rackspace Cloud.
In many ways, those first CRUD-based SaaS products (address books, time tracking, invoicing) were the low hanging fruit. The opportunity to be first in those segments has passed.
“Technology markets tend to be winner-take-all, the leaders in any given category will get an unfair share of the overall economic pie.”
Should you start a SaaS in 2016?
Just remember: “SaaS” isn’t a destination. It’s just a licensing and delivery model. Don’t treat it like a religion!
Founders have different goals. If you’re venture-backed, you want a big exit or great dividends. If you’re a self-funded solo-founder you might just want a $100,000 / year paycheque.
My warning is that regardless of your goal, the SaaS model has weaknesses and threats. Many founders choose SaaS just because you want the recurring revenue. Or they might like the simplicity of being able to deploy to one server (as opposed to issuing an update for thousands of clients).
But just because you like the model as a founder, doesn’t mean it’s the right model for your customers, your product, your niche, or the current market conditions!
Also: SaaS might not be a good fit for you as a founder. The idea of being a “solopreneur” and running a SaaS is mostly a myth (there’s an exception, see the bottom of this post). Almost all the SaaS companies I know with more 7 figures in revenue have a team . Most SaaS companies need a lot of cash at the beginning to sustain them through the first 24 months. If you don’t want to run a team, and you don’t want to invest a bunch of cash up-front, SaaS probably isn’t for you.
In the old days, the mantra from bootstrappers was: “we won’t sell our companies!” But in recent years, we’ve seen many self-funded SaaS companies sell (Drip, Simply Accounting, Campaign Monitor taking PE). It seems like the payoff for most founders (regardless of funding) is the exit:
“I don’t say, ‘You should always bootstrap. You should never take funding. You should never sell your company.’ People get the vision of this founder who just goes and starts this and they’re just all about not selling their company. They look at Mark Zuckerberg and Basecamp. There are very few companies like that.”
Business models are fallible. They can be disrupted. Customers buy SaaS as long as it suits them. If there’s a model that saves them more time and money, they’ll use that instead.
Opportunities for disruption. Threats for incumbents.
When the pendulum swings too far to one side, there’s opportunity to do something in the other direction.
Every model has threats:
- Changing customer buying patterns and taste.
- An increase in infrastructure costs.
- An increase in acquisition costs.
- New, disruptive delivery models.
If everyone else is focused on the SaaS model, they might be missing an opportunity. There could be alternatives to SaaS that customers want right now!
“Businesses don’t care about SaaS vs desktop. It’s just cost and value” – Michael Buckbee
Here are some opportunities I’m seeing.
1. The return to desktop apps
In 2013, Adobe changed their entire business model. Instead of selling boxed version of their Creative Suite, they moved everything to the cloud. Now, if you want the newest version of Photoshop, you have to pay monthly for it.
There were a lot of users who didn’t like this model. They wanted to pay once for a version of the software. If a new version came out, they could decide to upgrade, or just keep using the old version.
This became an opportunity for the makers of Sketch, a $99 design application. Users pay once, and get free updates for a year. If they wish to continue getting updates, they can renew.
I feel like there are a lot of desktop apps masquerading as SaaS products. What I mean is they’ve fit their software into a SaaS model but really it would be better served by a traditional application model. Adobe Photoshop, in my mind, is a good example.
In certain customer segments, particularly SMBs, I’m seeing “SaaS payment fatigue.” There’s an opportunity to give these customers what they want: pay up-front, and only upgrade when they need it.
2. Self-hosted cloud applications
A lot of the value in SaaS has traditionally been in the centralized web hosting they provide customers.
But what if customers were able to buy the web application and host it on Amazon Web Services themselves? They could buy the software once, and deploy it to servers they control.
In most web apps the application layer and the database layer are separate. If the creator of the software released a new version, the customer could then purchase that upgrade, and deploy it themselves.
If you’ve ever used the “Deploy to Heroku” button on GitHub, you know how much easier these types of deployments have become.
And don’t discount the threat of open source here. There have always been open source alternatives to popular SaaS products. Up until now, there’s been barriers to use (mostly, installation, updates, and licensing) but those could be solved.
As an example, Apostello is open source software for churches. The homepage features one-click installation for Heroku or Digital Ocean. I’ve tried it. It’s simple to setup. The documentation is superb. Instead of paying $49 / month for a similar service, they could host for as little as $5 / month (plus Twilio costs).
Security, upgrades, maintenance and customer support have always been a concern with self-hosted setups. However, Infrastructure as a Service providers have a tremendous opportunity to step-up here. Heroku, for example, could come to me and say: “Justin, you’re paying $300 / month for these 5 SaaS products, why not just come over to our platform, and self-host similar apps for $100 / month?”
There have always been companies who have offered self-hosted options (JIRA and HelpSpot). What’s new is how easy these apps are to deploy and maintain, and how accessible and cheap the cloud has become.
3. Pay once web apps
Claire Lew is CEO of a two-person software company called Know Your Company. It’s a web application with an unusual pricing model. Claire outlines it here:
We charge $100 per employee, one-time, for life. That’s it. So if you’ve got 20 employees, it’s $2,000. You pay that once and that’s it. No recurring costs, maintenance fees, etc. The only time you ever pay again is if you hire someone new. Then it’s $100 for that new person.
Since they launched two years ago, they’ve been profitable. They have margins of 30%.
What I love about Claire’s strategy is she’s aligned her business model with her customer’s use case:
I believe that a business owner should get feedback from an employee for the entire time that she or he is at the company. Not just for a few weeks or months?—?but for how ever many years an employee is with you. A subscription model doesn’t encourage this. It’s easy to go for a few months using a product, paying, say, $50 a month, and then turn it off.
There’s been a fragmentation in software delivery. In the last 10 years, companies have increased the number of different software products they buy by 10x.
I have a one person company (it’s just me). Here are all the SaaS products I use:
- Slack for chat
- Google Apps for Documents, Sheets, etc..
- Mailchimp for some of my automation sequences
- ConvertKit for my main email newsletter
- Goodbits for a curated newsletter
- WPengine for WordPress hosting
- MediaTemple where I’m hosting some old static sites
- GitHub for project hosting (and new static sites)
- Digital Ocean for hosting some software projects
- Heroku for hosting others
- Highrise for CRM
- Gmail for email
- Buffer for social media posting
- Crowdbooster for Twitter analytics
- Gumroad for selling my books
- Coach for hosting my course
- Memberful as a payment gateway
- Recurly as a payment gateway
- Chargebee as a payment gateway
- Transistor to host my podcast
- Mightybell for hosting my forums
If you look at that list, you’ll see there’s opportunity for consolidation . Some applications could add new features, and become the one-stop-shop.
Nate Kontny, for example, just added bulk email sending to Highrise CRM. For some clients, that might mean not needing to spend money on MailChimp.
Basecamp just integrated group chat right into their project management software.
SMBs especially feel like they are using, and paying, for too many apps. You can only pay $29 per month for so many apps. Eventually small businesses will ask: what do I absolutely need, and what can I get rid of? Or, put another way, how can I save money and save time?
5. Micro SaaS built on bigger platforms
Earlier I said that building a SaaS as a solo-founder is mostly a myth. Eventually, you need to hire to build faster, compete, and support customers.
However, there is an outlier: solopreneurs who have built a profitable “micro SaaS” on top of bigger platforms. Here are some examples:
- Like2Have.It. This is a SaaS add-on that is mostly sold through the Shopify app store. They’re leveraging two big platforms: Shopify and Instagram.
- Expedited SSL. They were able to leverage the Heroku app store, and offer developers a quick way to add SSL to their web applications.
- DBinbox. This founder built on top of Dropbox’s platform, giving Dropbox users an easy way to receive files from their clients.
SaaS is just a model for licensing and delivering software. It’s not a business panacea.
Since 2008 I’ve worked exclusively for SaaS companies. I have equity in SaaS companies. I can tell you: it’s hard. It’s way harder than some other business models.
SaaS isn’t right for every product. It’s not the best solution for every customer.
The question I wanted to ask in this post is: “how could it be disrupted?”
PS: I’m just a curious jackass trying to figure shit out. If you like this kind of curious questioning you should follow me on Twitter: @mijustin or subscribe to my newsletter.
Also, I just released a book where apply the same kind of disruptive thinking, but to the way we market software product. It’s called Jolt, and you can get it here.
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