July 09, 2008

The dividing line between winners and losers in SaaS

Posted by Paul Giurata

Having worked with a significant number of organizations on SaaS strategy and design, I see a pretty clear picture emerging of factors that define the winners and the losers.

It is rare that a company comes up with a completely new and inventive SaaS product that drastically changes the market landscape.  On these rare occasions, the new SaaS product wins because the product or service is so revolutionary in an of itself.

For the rest of us, SaaS applications are primarily either an extension of existing products to the web or pure-play SaaS applications developed from the ground up for the web. For these clients, when I talk about winning, I am talking about profitability. (Note: for enterprises launching SaaS for internal use, usability and performance are key success metrics rather than profitability.)

Designing for profitability is related to, but not a requirement of, designing for good user experience.  Many of our SaaS portfolio clients choose Catalyst simply to design a SaaS application with the best possible user experience for the service. We do a workflow analysis to determine the functional requirements, we analyze user behavior to simplify workflows, we refine the visual appearance, and we develop an interaction design systems with reusable visual and UI components.  This is all well and good and these clients are very satisfied.

But our more sophisticated clients ask us to take things to the next level.  Not only do they want great user experience, they want to know how to make their SaaS have real business value.

So what makes a winning vs losing SaaS when it comes to profitability?

The basics are pretty simple: you need a stable cost structure that is below the subscription revenue stream.  You achieve this in two ways: 

1) Provide a set of services that can’t be duplicated using on-premise software so you can charge premium pricing and avoid commoditization.  This comes from the ability to use the internet to link together data, services, and people, all in real time and from the ability to monitor customer behavior in your application to rapidly adapt services.

2) Lower the cost of sales by automating the marketing, trial, purchasing, configuration, support and social referral processes and integrating it thoroughly into the product itself . This is the life cycle approach - taking all of the costs that are typically handled by people to support the core application, and building them as an integral part of the SaaS design.

The SaaS that is less likely to achieve profitability is the one that simply offers an on-line application as an alternative to on-premise software.  It may indeed be a good on-line alternative (presumably at least RIA-enhanced).  But offering an application on the web without offering a value-add that takes advantage of the real-time data/services integration or without using automation to lower cost structures, means it will be difficult to make substantial profit through a subscription revenue stream.