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Great SaaS Companies Need Great SaaS Ecosystems: 5 Ways to Build A Defensible Business In The Cloud

SaaS ecosystems went from being 6% of the enterprise software market in 2010 to 29% in 2018, a whopping $150 Billion.

The late 90s were a key turning point for the enterprise software market. NetSuite & VMWare began in 1998, followed by Sage Intacct and Salesforce in 1999. These companies, along with many others, helped create a brand new multi-Billion Dollar category where applications were provisioned, deployed, and managed in what we now call the Cloud.

You might still remember the cheeky marketing logo that Salesforce deployed so successfully, the one that said, “No Software”, even as they were selling software within the SaaS ecosystem.

Fast forward 20 years and today the Cloud is hardly a novelty.

The recent Flexera State of the Cloud 2020 report indicates that irrespective of the size of the enterprise, 96% percent of respondents utilize at least one public cloud, while 76 % have at least one private cloud. Even SMBs that have traditionally lagged in the adoption of new technology are now indicating that they will run as much as 70% of their workloads and data in the Cloud within the next 12 months, no doubt spurred in part by the COVID-19 crisis.

The Inevitable Commoditization

According to McKinsey, between 2001 and 2018, the market capitalization of the global software industry grew at 2x the rate of the general market. From a revenue perspective, SaaS ecosystems went from being 6% of the enterprise software market in 2010 to 29% in 2018, a whopping $150 Billion.

All that growth, however, hid a dirty little secret – profitability declined by half, and while the dominant platform-as-a-service providers (AWS, GCP, Azure) saw increased market share, the inevitable commoditization kicked in for the application guys. After all, if the major PaaS providers can now offer sophisticated platforms on which any customer can truly unlock the innovation they need (think AI, ML, IoT, Blockchain, whatever), why do they need to pay their application vendor a premium for doing the same thing?

How Does a Saas Provider Build A Defensible Business?

For cloud application providers, the existential question is how to build a sustainable business when the IaaS & PaaS players (on whose infrastructure and platform these SaaS providers deploy & run their business) are potentially encroaching upon their turf. As the IaaS & PaaS leaders invest ever increasing amounts of money in evolving their already sophisticated platforms that casts a long shadow on the downstream SaaS providers who know that their business can be potentially disrupted if the big guys decide to enter their markets.

After all, what stops an AWS from offering “ERP-as-a-service” on their own stack and making a dent in the revenues of a whole slew of ERP companies including SAP and Oracle?

Here are a few things that SaaS providers (especially those targeting the small and mid-market segment) can and should do to build a more resilient business. These include:

Building the Ecosystem

One of the biggest shifts in enterprise software in the past few years has been that customers don’t simply buy standalone applications anymore, instead they invest in solution ecosystems that have the breadth and depth to solve their problems both today and tomorrow.

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According to a 2020 report by Blissfully, the unique number of apps in usage per company is up about 30% year over year, with companies averaging 137 in 2019 vs. 2018. Not only that, but the overall spending on these apps is also increasing suggesting that the penetration of these SaaS solutions remains high within enterprises.

Think Integration First

It is not really possible to build modern ecosystems in the absence of a modern developer experience that prioritizes integration.

Simply put, a lack of expansive APIs and a self-enabled developer journey are the foundational building blocks that companies need to invest in to ensure that they can build the ecosystem of the future. And things just don’t end with the APIs, either. In order to successfully engage with developers, companies need to do other things that developers have to come to expect as par for the course i.e. automatically provisioned sandboxes, access to test dummy data (ideally based on the industry they are building for), requests for security audits, published guidelines for obtaining badges/certifications etc.

Create a Holistic SaaS Experience

If you are selling a SaaS application, make sure it comes wrapped in a SaaS experience as well. The customer’s experience of engaging with the provider across the entire value chain (from solution discovery to adoption, to support, to lifecycle management, etc) is as critical as the solution itself.

Here, some very simple rules can have a truly outsized impact on customer satisfaction & retention, for e.g. if you have multiple portals, don’t make the customer sign on more than once; provide usage & licensing dashboards so customers have complete transparency on what they are using and how much they are spending with you; run telemetry-based analytics and recommend things that a customer needs while identifying what they don’t. Being transparent is the best way to build the trust that is needed to retain customers for the long haul.

Embrace Your Deep Knowledge of Industry Verticals

The one thing that the larger IaaS and PaaS players will be hard-pressed to replicate is the intimacy SaaS providers have with their customer’s industry or sub-industry.

While the larger players may know the challenges confronting the industry overall, how those challenges translate at the small or mid-market level is what creates the differentiation. SaaS providers know the nitty-gritty details that, for e.g., a midsize distributor of consumer goods in the Pacific Northwest deals with, and continuing to build software capabilities that can help that customer win in their market, will create the barriers that can defend the SaaS provider itself.

Build a Destination Marketplace

Marketplaces are a crucial part of enterprise SaaS ecosystems today. They serve 2 very essential functions i.e. they enable ISVs to commercialize their offerings and at the same time allow customers to discover the depth of the ecosystem itself. Having a Marketplace that is commerce-enabled and serves the primary needs of both customers & ISVs is the way to go.

Think Salesforce’s AppExchange for e.g., for every $1.00 Salesforce makes, their ISV partners make $5.18. According to an IDC study, the Salesforce partner ecosystem will create $1.2 Trillion new revenue and generate 4.2 million new jobs during the 2019-2024 timeframe. That is the kind of economic impact that even established countries or economies would be hard-pressed to generate, and which creates a huge long-term competitive advantage for Salesforce.

In the software business, disruption and obsolescence are almost guaranteed. Silicon Valley is littered with the remains of innovative and/or market-leading companies of their time that have now ceased to exist (think Excite@Home, Yahoo, Palm, WebVan, Solyndra et al).

The trick is to be able to build a strategic moat that buys you the time you need to reinvent yourself and thrive. In this business, after all, you cannot fight the winds of change, you just need to make sure your business has the sails it needs to make the winds take you where you want to go.

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