SaaS products will lose out, yet thrive

Despite fallacies, infinite opportunities and ease of market entry will keep Cloud alive

Every passionate computer engineer aspires to start-up one day, thanks to the evolution of cloud technology, least barrier to entry, less investment upfront and the inspiration from rags-to-riches stories of global start ups and successful entrepreneurs. The growth of business is driven by passion and skill set, rather than money and thus the staggering number of startups don’t attribute to a bubble yet. At the same time, scaling on SaaS is becoming a challenge due to competition and numerous choices in hand for buyers.

Volume — Mother of all challenges:

For someone skillful, getting the basic development infrastructure in place is not pricey and that makes the whole product-building idea easy to aspire. No other industry has this advantage. Also there are accelerator programs and startup incubators to help out, when required. You need to pour in money only after your idea/product is validated real-time. The ease of development lets many developers to try out similar ideas with minor positioning twist and that makes the space more competitive than ever.

Here is the list of other challenges to face when scaling with SaaS

1. Once the product is validated you need to make sure you are present at every relevant avenue for buyers to recognize you easily. This involves huge SEO, content, PR and Ad costs.
2. SaaS being a volume business, developers continue to add customers at exponential pace and that stresses the bandwidth of allied teams leading to flawed services.
3. Personalization of products becomes a challenge and buyers are more individualistic than ever owing to custom business processes and needs.
4. Scaling the platform on cloud might cost more compared to an on-premise infrastructure depending upon the pricing of your hosted servers.

For all the above reasons it is not possible for a business to grow beyond a threshold. Exponential growth is a short term phenomenon and beyond a point churn rate is bound to go up.

Take for example the case of cloud help-desk market. The leader in cloud help desk space, Zendesk, currently has above 30000 customers, making a revenue of about $100 million a year. Considering the industry average monthly churn rate for SAAS businesses at 2-3%, we can expect at least 600-1000 customers moving out every month. An early stage startup could potentially survive with about 100 paying customers at $200 per month revenue from each customer. Just focusing on customers churning out from Zendesk would give enough space for a handful of startups every month.

Now why would Zendesk allow so many customers move out? That’s the curse of software industry. Trying to satisfy majority of customers and market would bloat the product to the dislike of a niche market that wants a simple product with minimal features. Ease of switch in cloud does not hold back buyers from moving out to another provider. Also, ease of entry allows new players to come in and fill every gap that the market offers. Thus leaders like Zendesk would see their growth stagnate at a point while customers continue to churn.

SaaS will Thrive:

I still think Cloud products will be built at a booming rate and the hunger of thousands of developers will be fed by revenue and customer adoption. That is because of the strength derived from underlying Cloud advantages, including:

1. Less upfront investment required for software subscription
2. Buyers do not need to commit to a service for years and the switch is easy as there are products and services to assist with data migration
3. Avoid millions of money that would go into failed IT project costs
4. Data Security concerns are being addressed through technology like Private-Cloud

All the above reasons are fundamental to the bottom line of buyers and success of the IT projects, and for these reasons cloud is a tremendous boon to users.There are more enterprises and SMEs adopting cloud products for their businesses everyday and the trend is poised to continue.

A buyer moving out of one SaaS product would most probably choose another and least probably go on-premise. This is simply why I think SaaS products are destined to lose, yet thrive.

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