As we’ve seen in the previous two posts the unbundling and democratization of Systems of Record (SORs in the rest of the post) lead to an explosion of new SORs players but also of Workflow apps which are flourishing in bigger and bigger software ecosystems.
We’ve transitioned from a world where the choices that a business had in term of software was rather limited to an age of software abundance and even overabundance is some categories.
This trend from scarcity to overabundance is not a new phenomenon specific to the B2B software world. In fact this transition happened many times throughout human history (ex: invention of the printing press) and seems to be accelerating with digital platforms: overabundance of music (on Spotify, Soundcloud, iTunes…), of video games (on Steam), of mobile apps (on iOS and Android), of video content (Youtube), of goods (Amazon) etc…
And when you look at this transition, three sets of challenges seem to emerge with it:
- The distribution & discovery challenges: How can users discover the best products / content when there’s too much choice?
- The “usage” challenge: How can users manage / access / consume the products and content they accumulate?
- The commoditization challenge: How does the value chain change (from production to business model) and how do content / product creators adapt to these changes?
In the first part of this post we’ll first analyze what these challenges imply for the SaaS world and what solutions are emerging to solve them.
Then in a second part we’ll try to guess how the software landscape could evolve by exploring two distinct scenarios.
Are we really entering an era of B2B software overabundance or is it just an industry hype?
My current take on this topic is that the situation is not evenly distributed for every software category and vertical.
In many horizontal categories it’s true that businesses have now the choice between plenty of software with little differentiation. Just check at the 159 email marketing tools or the 172 sales management tools on GetApp and you’ll understand what I mean.
But not all horizontal categories are that crowded and horizontal software is not the answer for every problem. Some needs are better handled by specialized vertical tools which are still too few.
To answer the question: no the whole SaaS market is not saturated yet but the major horizontal categories are (or start to be) and in many non saturated verticals or niches the trend is going toward more and more competition.
The distribution & discovery challenges
The distribution & discovery challenges are probably the most obvious pain points that arise when a product or a content becomes overabundant: How can users discover the particular products / content they need or want when they have hundreds or thousands of choices before their eyes?
What makes this problem very difficult to solve at scale is that each user as its own definition of what he needs that generally depends on many different factors.
This situation is no different in the B2B software world. As we’ve seen above, in some categories, businesses have access to hundreds of software that are doing the same things with very little differentiation. And what makes software recommendation complicated are the hundreds of factors than need to be considered: business size, budget, requirements in terms of product, of SLAs, of security, of devices supported, of integration with other software and platforms…
When you look at the other industries that went from scarcity to overabundance such as the music, the video game or the mobile app industries you’ll notice that the same pattern emerges when it comes to solutions to the discovery & distribution problems:
- Internalized discovery on distribution platforms: via recommendation algorithms, search, tops & rankings, social / friend feeds, curation etc. All of these discovery features are available on Spotify or iTunes (music), Steam, Playstation Network (video games), iOS (mobile apps) or Amazon (goods).
- Stand alone aggregators: these websites are specialized in the discovery aspect and don’t provide to the end users the same features as the distribution platforms where people can buy and consume the product / content. They generally aggregate data and offer filtering options so users can find what they need. One of their advantages is that they can be “distribution platforms” agnostic (e.g: Techmeme as a news aggregator or Metacritic for video games).
- Media & press: media and press also play a big role in content and product curation. You also very often see specialized media emerge if an industry becomes big enough.
- Curators, influencers and community of interest: via blog, social media, forum, wiki etc.
When you look at what is happening in the software world the same pattern seems to take shape:
- Internalized discovery on distribution platforms: the SORs which have reached critical mass and are becoming software platforms (Microsoft, SalesForce, Hubspot, Workdays, Slack, Google…) also offer the same discovery features I’ve mentioned.
- Stand alone aggregators: there’s no shortage of stand alone aggregators when it comes to B2B software (GetApp, G2Crowd, Capterra, Product Hunt…).
- Media & press + curators and influencers: plenty of media and blogs do software testing and provide recommendations.
What’s coming next
When you look at the situation in the other industries I’ve mentioned you notice that the players which are dominating discovery are very often the distribution platforms themselves (from Spotify to Amazon which is threatening Google on product search) followed by the aggregators, curators and media which tend to have less power.
A huge advantage of distribution platforms is that they collect plenty of data about each user and can hence offer more personalized recommendations compared to stand alone aggregators.
The B2B software market is probably less structured and less mature on the distribution and discovery side but the current trend is clearly going toward the emergence of big software platforms (the SORs) where users increasingly search and consume other software.
Whether it’s on SalesForce, Slack, Google Apps or Hubspot I think users will increasingly use these platforms not only for the core software they provide but also to find other tools that integrate well with them.
Stand alone aggregators will continue to exist but I doubt they’ll take over the SORs in terms of size and power. They’ll stay good complimentary places where to search for software but unless they move up the stack and offer more than just discovery they’ll stay relatively small.
So far I’ve spoken about the players which are providing these discovery and distribution features but what about the players which are appearing in the results? The SaaS and workflow apps which are not platforms and want to be discovered by the users.
The main observation is that, in general, in a crowded environment the biggest players also end up dominating discovery results while smaller players are limited to the long tail.
Facebook, Google, Microsoft, Apple, Snapchat are dominating the various iOS and Android rankings. Rihanna, Justin Bieber or Drake are the most streamed artists on Spotify. The biggest video game editors are dominating Steam 2016 best selling list.
The same situation can be expected in the SaaS world. The more SaaS and SORs will be available on the market the more likely only a few big players will dominate the discovery results and the more difficult for new software it will be to break through.
The “usage” challenge
The second common set of challenges that emerges when you’re transitioning from a situation of scarcity to overabundance is linked to usage. The more you accumulate content and products the more you’ll feel:
- Access problems: how do you access and share them.
- Management problems: how and where do you store them, how do you find them, how do you maintain them / keep them up to date…
For the software world it means:
- Access problems: How does a business create accounts for his employees (e.g: single sign on and onboarding), how does it set up privileges, how does it remove access to employees who leave…
- Management problems: How does a business manage scattered data across apps, how does it manage different SLAs, different subscriptions & payments, security, data quota etc…
Again if we look at what is happening in the other industries the major distribution platforms seem to play a big role when it comes to answering the usage problems. To access, search and use your library of songs you will directly use Spotify or iTunes. Same for your library of video games whether it’s on Steam, the Playstation Network or else. The mobile app stores also offer plenty of features that are the equivalent to the single sign on, that enable you to update all your apps from a single place or even to share access to your purchased apps and content with your family.
The B2B software market is evolving on two parallel tracks when it comes to solving these problems:
- The big SORs / software platforms are offering more and more features to help their customers solve these usage challenges.
- Dedicated stand alone API platforms are also emerging to help businesses manage their growing portfolio of software.
When you look at the evolution of major SORs it’s clear that they increasingly tackle the usage challenges. On their way to becoming platforms many of them not only offer an internal “appstore” (for discovery) but also features that help you manage the third party apps of their ecosystem.
For instance on SalesForce Appexchange once you chose a third party software you can define who at your company will have access to the tool. In terms of security SalesForce guarantees a certain level of security by checking that each app “meets a set of security standards and best practices thanks to qualitative and quantitative reviews”. Of course you can plug / unplug each 3P tool anytime you want and you have migration features that help you move from one app to the other.
The majority of current SORs are not as advanced as SalesForce when it comes to these features but more and more of them are going toward that direction. Slack is a good example as it is increasingly used as a hub for 3rd party apps.
Stand alone API platforms
The “usage” pain is actually so common and big in the SaaS world that a whole category of tools has emerged to tackle it. In the past 5–6 years many API platforms have been launched to enable businesses to connect the SaaS they use and automate workflows (Zapier), centralize scattered customer data (mParticle, Segment), move data around (Hull.io), monitor costs and manage usage (cloudability, Cloudyn) or control user identity (Okta).
APIs have become a crucial piece of the software ecosystem and are especially useful for solving the different usage problems.
My personal opinion is that these “usage” challenges have a higher potential to give birth to huge companies compared to the discovery one.
What’s coming next
When it comes to solving these usage problems I don’t see major new approaches emerging in the next months / years. I think what we’ll see is an acceleration of both trends:
- As more SORs are evolving to software platforms they’ll increasingly offer features that help businesses manage their portfolio of third party tools.
- As solving these problems is actually very complicated from a tech point of view there’s still plenty of space for dedicated API platforms to offer better experiences that the ones provided in-house by the SORs. Another advantage of these API pure players is that they are platform agnostic (ex: being able to monitor costs for AWS, Microsoft Azur and Google Cloud at the same time).
The big question is how these different pieces will fit together as these different platforms grow. Will major SORs acquire some of these API platforms to lock even more the market? Are the usage challenges big enough to gives birth to multi-billion $ API platforms? Do these API platforms have the potential to move up the stack and disrupt current SORs?
The commoditization challenge
What causes a market to transition from scarcity (of product / good / content) to overabundance? (here I’m speaking in the context of a digital world)
At the core of this transition is the sudden enlargement of a market that can be caused by its maturation or / and by the emergence of new distribution channels. As this available market is growing, it attracts more and more content / product providers which in turn attracts more and more pick and shovel sellers (= the services that help providers to create their product / content).
And once critical mass is reached, these loops often lead to the commoditization of the content / products sold on this market: the costs to produce a piece of content or a product drops, the quantity of available items explodes, leading to an increasing competition which drives the prices down. And on digital platforms it very often means the commoditization of these products / content.
This is what is currently happening to the music industry: the costs to produce a song have dropped significantly, large distribution channels are available (Spotify, Youtube, iTunes, Soundcloud…) for free or cheap, the offer keeps increasing and on the demand side it costs me only 10$ per month (my Spotify account) to access an almost unlimited number of songs, including the new releases. And the dynamics are the same for the video games or mobile apps industries (yes, people are offended to see Nintendo selling its Mario game 10$ on the appstore, they are not used to it anymore).
On the software side we’re far from cheap or free unlimited SaaS everywhere but we can notice:
- An ever growing market as more and more businesses use software and are educated about the “as a service” model (market maturation).
- More and more established distribution channels are available — which we covered in the “discovery & distribution challenges” section above.
- Plenty of pick and shovel sellers (infrastructure services, APIs, frameworks and open source libraries) make creating software easier and less expensive (production costs going down).
- An explosion of SaaS in the most popular categories like marketing or sales (increasing competition).
But commoditization doesn’t happen overnight and doesn’t affect every category and customer segment at the same time and at the same pace. What we can notice is that for an increasing number of use cases you can find cheap SaaS or very generous freemium versions that are enough for the majority of users (and the big customers will pay premium versions).
For example there’s no shortage of good free project management tools, you can send every month thousands of emails for free via Mailgun, Mailjet or else, you have access to numerous cheap and very good 10$ / month marketing tools, a lot of developer APIs offer very generous freemium version (e.g: Algolia) etc…
So I’m not saying that the B2B software market is already commoditized as a whole but the movement has certainly started in some categories and for specific customer segments. What’s still uncertain is whether this trend will continue to widespread (and how fast) or if it will stay limited to some areas.
In that perspective there’s a growing discussion in our industry about the commoditization of Workflow apps. As a quick reminder SORs are the tools that serve as “the single source of truth about a particular department or company” (e.g SalesForce for your customer data) while workflow apps are the SaaS that enable people to work and collaborate (e.g: video conference tools and most project management tools are workflow apps).
At the heart of this discussion is the belief that the main barriers to entry of pure Workflow apps, which are UX/UI and infrastructure, were enough a couple years ago when the market was not as crowded and when customers were still stuck with ugly products. But the situation has evolved and UX/UI as well as infrastructure are not moats anymore because customers are much more educated and because copying UX/UI and scaling infrastructure can be achieved more easily thanks to the myriad of shovel sellers available nowadays.
What increasingly counts are the moats such as data or network effects and this is why SORs currently don’t face the same danger as workflow SaaS. Business data cannot easily be “copied” by a competitor and the more critical data you have about a business the harder it is for the business to migrate to another solution. And that still stands, for now at least.
What’s coming next
Again to try to guess what could come next let’s have a quick look at what is happening in other industries.
Whether it’s the music, the video games, the entertainment content or the mobile apps industry, what’s common to them is that the commoditization process completely shakes up the value chain from production to business model.
In the music industry the business model for an artist is slowly shifting from revenue generated by album sales to making most of his money on concert or merchandizing and music streaming. People consume music for very cheap / almost for free (Spotify, Youtube, Soundcloud…) but spend money on the “services” around what has become the commodity (songs).
Whether it’s on mobile on or desktop the trend is the same for the video game industry. More and more video games editors offer the core video game for very cheap / free and generate revenue through in apps purchases, addons (DLC), merchandizing and events (e-sport).
Same for mobile apps for which users are now very reluctant to pay more than a couple of dollars or for online entertainers which are offering their Youtube videos / podcasts for free and monetize their audience through merchandizing or websites such as Patreon.
In the context of B2B software the interesting trends worth keeping an eye on are:
- Moats are changing: as we explained UX/UI as a moat is disappearing while companies are increasingly turning to other moats such as AI / ML, network effects, proprietary data, deep tech.
- Business model is evolving: I think that we’re seeing more and more companies trying new twists to the traditional SaaS business model, hence the rise of SaaS enabled Marketplaces, of hybrid approaches such as Zenefits which takes a cut on the revenue they generate for insurance companies, or SORs which take a cut on the revenue their 3rd party ecosystem generates etc…
From a general perspective what we’re seeing is that the major SORs are transitioning to platforms and protect themselves from commoditization by:
- Moving away from a pure software player model to a platform model where they grow an ecosystem of third party tools around their core service (SalesForce, Hubspot, Slack…).
- Expanding their stack in terms of core offer: Salesforce beefed up its core CRM offer by acquiring tools such as ExactTarget for marketing, Quip for document collaboration, Heroku for cloud hosting etc. At a different scale Hubspot is doing the same by adding sales tools to its traditional core marketing product.
On the workflow SaaS side the ones which rely mainly on better UX/UI will increasingly be threatened (and I’m wondering if the sale of Trello to Atlassian is not a good illustration of this trend). This is why more Workflow apps try to add AI / ML to their mix to avoid being copied too easily.
Now that we have covered these 3 sets of problems in details let’s step back and see what it could imply for the B2B software industry in the next few years.
Scenario 1: we’re heading back toward SORs dominance like in the good old Microsoft, Oracle or SAP days
At a macro level it seems that more and more SORs are transitioning to platforms and could lock the major software categories by:
- Developing their third party ecosystems to benefit from network effects.
- Offering customers more features to solve the discovery problems (via SORs internal app stores) and the usage problems (SORs APIs, single sign on features etc.).
- Beefing up their own core product and diversifying their offer.
We’re still at the beginning of this movement and not all SORs are progressing at the same speed but if this trend continues it could result in a landscape similar to the Microsoft — SAP era where a bunch of major software providers (here the SORs) dominate the market making it extremely hard for newcomers to displace (until the next innovation cycle).
But it doesn’t mean it’s the end of other big software companies. A huge difference between the on-premise era and now is the platform aspect. For instance Veeva is a billion dollar company built on top of SalesForce platform, and as more SORs platforms are emerging and maturing we can expect to see more billion dollar companies like Veeva to get built on top of them.
Another consequence is the multiplication of very healthy and profitable SaaS businesses that will not reach the hundreds millions of dollars valuation but will be “successful and profitable companies that generate life-changing wealth for the founders and great returns for early investors” as Christoph writes it.
These “successful and profitable” companies need to be fuelled by alternative way of financing (than traditional equity based investors) this is why we’re witnessing the rise of revenue based, crowdfunding, debt and cash flow financing services such as Lighter Capital, SaaS Capital, Crowdcube etc.
Scenario 2: workflow SaaS & API platforms will disrupt SORs
In the second scenario workflow apps could actually threaten SORs and replace them in a near future.
The main argument here is that as UX/UI stopped being a major barrier to entry, data (which SORs control) could also take the same path due to the rise of AI/ML.
Successful SORs are very valuable because they managed to collect critical data from businesses and since collecting this data is a long and complicated process, businesses tend to stick with the same provider (lock in effect).
But what if collecting data thanks to automation, bots, AI, machine learning or other emerging tech becomes 100 times easier and automated? Would SORs be still that valuable? Could they lock users as efficiently as they do right now?
Another interesting bet can be made on the standalone API platforms. API platforms like Hull.io (disclaimer we’re investors in them) enable business data to flow between SaaS and it’s not far fetched to think that such tool could build unique data sets.