By Nick Desmarais, Co-CEO, AppDirect
Rapid change has defined the software industry for the past two decades. The challenges facing SaaS companies today mostly stem from growing competitive pressure as a crowded market of vendors “disrupt” one another. It’s an exciting time, but there’s risk too. Digital service providers need to decide which SaaS offerings to recommend to customers. My advice? When vetting a new SaaS provider, take note of how the company is responding to these three seismic shifts.
The end of the land grab era: SaaS vendors see an opportunity to take advantage of the growing popularity and widespread adoption of cloud software. They’re moving fast and continually bring new, innovative solutions to market. For example, a quick search for “marketing apps” on the Salesforce AppExchange returns 284 results, while a search for “collaboration apps” provides 378 solutions. The huge number of business cloud apps currently available begs the important question: Are SaaS vendors that develop business software becoming victims of their own success?
I know one thing for sure: SaaS vendors can no longer expect to gain healthy market share simply by launching a new service and sending out some clever Tweets. Given the current competitive dynamics, I am officially calling the end of the cloud “land grab” era. Today, SaaS companies must seek new methods of differentiation within their market segments, whether through technology, services, support or some combination. However, when companies release new features and services, their competitors can easily copy them and follow suit.
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A better alternative is lowering customer acquisition costs. That offers a powerful way to achieve enduring differentiation by subsidizing competitive price offerings. Engaging in affiliate, referral, reseller, alliances and other types of partnerships helps vendors maintain a competitive advantage and gain market share by driving growth at lower customer acquisition costs. When evaluating a SaaS offering, ask about KPIs including customer churn, lifetime value and cost to serve.
Increasing costs of customer acquisition: The crowded market for business applications brings discovery challenges for SaaS vendors. There are hundreds of applications in dozens of different app stores. How do you find the right one? Software vendors not only need to ensure customers and partners can find their applications, but also educate them on what the apps do and what sets them apart from competitors. For this reason, the aforementioned cost of customer acquisition (CAC) is skyrocketing. Online advertising rarely succeeds at communicating the full SaaS value proposition; the landscape is just too saturated. Launching and managing full-scale thought leadership and content-marketing programs is more effective, but it requires a substantial investment of time and money.
Additionally, SaaS vendors find it difficult to raise capital in a highly competitive market, due to the slim chances of any one solution becoming a category-defining tool with large IPO potential. Software companies raising funding in this environment need strong CAC improvement as well as …