A tale of 3 SaaS's

Autumn 2015

Back in 2010 we published a "quick and dirty" real world model to help you understand the relative efficiency of the SaaS Business Model vs. traditional sales models.

The model demonstrated how the average SaaS provider, by funding the customer's usage of the product, postpones the date when the provider breaks even with the COTS vendor on the Cost of Customer Acquisition.

Add to this the costs associated with funding the R&D required to minimise the churn created by new entrants and you discover that even the SaaS business model operating at optimal performance becomes something of a money pit. Rather than providing a "low cost of entry" for a new generation of disruptive software developers it requires deep pockets to fund growth. The reason being, as with all networked business models, discovery across the network is the most expensive part of the equation.

The model suggested that both Salesforce & Netsuite had taken too long to scale and that both would struggle to sustain their present rate of market growth moving forward.

The question being, some 5 years on, what does the data reveal about the accuracy of the model as a predictive model for sustain and decay?

At the moment the model is holding up pretty well. Salesforce appears to have peaked at the very moment the model broke even on annualizing its total cost of doing business with its customers. Competitive pressures are now squeezing the cost of growth (i.e. COCA & Return on COCA) and therefore the medium to long term sustainability of the model.

The same applies to Netsuite.

Within the frame of reference of the model the Netsuite business model didn't scale rapidly enough and has consequently has never managed to achieve a sustainable growth model.

The next question is what does this model tell us about about the new players in the SaaS space? Is being late to the market the new competitive edge?

To find out we scraped the historical data of the NZ SaaS start-up Xero and mapped it to the model.

To make it easier to follow here are the three key metrics broken down against the Netsuite and Salesforce data.

First the return on the cost of customer acquisition.

Now the return on the cost of customer acquisition + the investment in R&D.

Finally the return on the total cost of operations.

As you can see the data suggests there is no competitive advantage in arriving late if you cannot scale faster than the incumbents. The challenge being your cost of entry is going to be significantly higher than the incumbents

This translates into a significantly higher cash burn rate than the competition. With an ongoing requirement for capital injections if the company is to remain disruptive (i.e. competitive).

Building the billboard, book shop or spreadsheet in the desert is the easy part. The challenge is sharing that experience with others, driving traffic to your site, topping the App Store and getting the app downloaded, and that, alas, more often than not, means having deep pockets.

However this operational reality tends not to be reflected in the market valuation of the disruptor.

There is a tendency across the market to block "like with like" even though the underlying fundamentals suggest otherwise.

The underlying problem with the SaaS model appears to be, theoretically at least, these uber globally networked business models should be significantly more efficient than the "old school" desktop incumbents they are disrupting. Smart people using smart technology and intelligent networks to deliver data rich products and services should be a recipe for success. A licence to print money. Truth is, at least for now, they appear to be anything but...

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