We Haven’t Hit Peak SaaS

Mixpanel started the year with five sales reps and aimed to have 33 by the end of the year. If Mixpanel stayed on track, it would have had 100 sales reps by 2016. Instead, the company laid-off 18 people at the beginning of 2016—mostly from sales—and they’re not alone. Soon after, fellow high-growth SaaS startup Optimizely had layoffs, too.

Part of this has to do with reducing costs and tightening budgets, but it also reflects a much larger trend across SaaS.

Optimizely CEO Dan Siroker wrote in this Quora post:

“This was a journey we committed to back in August 2015 to put us on a path to sustained growth and profitability without additional venture capital. In March 2016, it ultimately became clear that we were over-invested in some parts of the business and as a result let go of 10% of our employees.”

In the last wave of SaaS, companies like HubSpot and New Relic shared the same three-step formula for rapid growth:

1. Start early in a market without much competition.
2. Use venture capital to scale an inside sales team and dial for dollars to gain market share.
3. Expand on product and acquire other companies to fill out any holes in your strategy.

Today, this model isn’t working for up-and-comers like Mixpanel and Optimizely. To put it bluntly, we’ve had it easy in SaaS. It’s not so easy anymore.

Have we hit peak SaaS?

In 2016, venture capital investment in SaaS is up to $7B, from $1.5B in 2010. With Amazon Web Services, startups can build software much faster and cheaper without needing to have their own physical servers. The large number of tools available today and the rise of self-service SaaS means that companies can quickly drive distribution and grow.

It’s resulted in a hyper-competitive landscape. Attention is a scarce resource and SaaS products have to be much more polished to grab customers’ attention, get them to pay, and keep them retained.

The logical conclusion many are coming to is that because it’s a more efficient market, there’s less room for profit:

• Churn is higher because low switching costs make it easier for customers to leave.
• Customer lifetime value is lower because there’s now less differentiation between products, which means that customers are more likely to buy the cheapest options.
• Customer acquisition costs are higher because there are lots of tools that make marketing and sales more efficient, adding to the competition.

A couple months ago I tweeted what I thought:

We’ve haven’t hit peak SaaS. We’re at the start of SaaS commoditization. Bar is getting higher for hitting product/market fit in #SaaS

— Hiten Shah (@hnshah) November 17, 2016

Forget the naysayers. SaaS isn’t dying, it’s changing. Companies that want to survive have to change, too.

The Next Wave of SaaS

The most popular consumer-facing apps like Facebook, Snapchat, and Instagram are all free to users and monetize attention to make money. SaaS products are converging around a similar trend.

You can still succeed with SaaS, but it means operating through a different set of constraints than what existed in the past.

To win attention from the competition you need a better, faster, and cheaper product. To hold onto attention, you need to build your brand by constantly proving value to your customers.

If you want to build SaaS, great! You have a bunch of options—they just don’t look like the previous generation’s SaaS businesses. Let’s walk through them.

1. Build SaaS—but Not for Other SaaS

The BVP Cloudscape

Many SaaS companies have started by selling their products to other tech companies. That doesn’t work as easily as it used to because there are already many SaaS companies focused on serving other SaaS companies. One solution is to build SaaS for niche markets that don’t have a lot of software available to them yet. Just like HubSpot and New Relic, you can build attention by being early to the market.

ATI, a physical therapy company with 600 different clinics around the U.S., is also a SaaS company. Take a look at the company’s marketing site:

Right off the bat, you see:

• Request an Appointment (self-serve sign-up)
• Complimentary screening (free trial)
• A customer service team (customer success)
• Business solutions (or enterprise plan)

ATI uses software to make the business of physical therapy more efficient and easier for this niche of small business owners. Customers can book appointments online, find therapists, and even figure out their health insurance policies. For now, the company is doing really well because it operates within an underserved niche. Over time, competition will increase and ATI will have to evolve in order to survive.

2. Come at the Incumbents Sideways

In a saturated market with a lot of similar products, it’s virtually impossible to outdo the competition with an aggressive marketing strategy, a 100-person sales team, and venture capital. The established players are already entrenched in the market, with all-in-one products and massive feature sets. It would take a lot of time and money for you to enter and compete.

The game is to find a lever into the market that you can use to snatch attention from the competition. Giving your software away for free is often the best marketing solution for winning attention. While paid acquisition and content marketing delivers value by educating customers, free tools deliver direct value by helping customers with their jobs.

Clearbit, a company that helps you generate and enrich leads through APIs, does this by giving away free tools that show off the power of their paid APIs. These include:

• A free Company Logo API and Company Autocomplete APIs designed to help developers improve their products
• A Google Sheets Add-On that lets you enrich leads directly in your spreadsheets
• A Gmail extension called Clearbit Connect, which enriches your Gmail contacts

As Matt Sornson, Clearbit’s Head of Growth, writes in this post:

“There’s no better marketing than building an incredibly useful and valuable tool that people use every day, and then giving it away for free. That generates an insane amount of brand awareness, which makes your company the most visible provider of the underlying data.”

Clearbit’s free product is so good that the founder of Rapportive—who had built and sold a now defunct competing product—endorses it.

By baking distribution into its product, Clearbit drove over 100k inbound leads—that’s not just marketing qualified leads who signed up for a newsletter. They’re product-qualified leads who have a validated need for the free tool and are much more likely to see the value of the paid product.

3. Innovate on the Business Model

We often associate SaaS with the standard 30-day trial feeding into a recurring subscription. But this model can be a crude form of monetization because it forces prospective customers to make a decision to pay, even when they aren’t necessarily getting value out of the product. Customers are tolerating this less and less, because people don’t want to pay just to use software.

Consumer products monetize by targeting specific moments in the user experience where users are receiving value. B2B SaaS products like Dotloop are taking this more targeted, value-focused approach to monetization.

Dotloop is SaaS for the real estate industry—with a network built on top. Each real estate transaction in Dotloop is organized in a “loop,” an online workspace where brokers, real estate agents, clients, and service providers can collaboratively share and sign documents, organize tasks, and message one another. You add new people to a loop like you add friends on Facebook.

A sample loop in Dotloop

While Dotloop offers a monthly subscription plan for premium services, free users have access to the same core functionality as paid users. More users end up joining the network, creating a higher transaction volume across the network. This, in turn, incentivizes users to spend even more time on Dotloop.

With enough people on the network, Dotloop can begin to monetize attention. It might take a cut per transaction, or even sell advertising space to real estate service providers, making it look more like Facebook than a traditional SaaS company.

Everything as SaaS

Today, it’s harder to start a SaaS company than ever before. You can’t just be good at one or two areas of the business. You have to be good at them all.

In every single area of execution you have to think differently to think about the future:

• Product and Engineering: You have to work harder to keep people’s attention in order to keep them paying for your product. You have to flirt with new technologies like machine learning to see how they might apply to your business. You have to know the competition because if there’s a company with a stronger product and better positioning, your customers will flock away.

• Sales: It’s possible to succeed with inside sales today, just not with a 100-person sales team—especially if you’re targeting SMBs and mid-market businesses. Enterprise is a different animal. Scale your sales team by increasing sales efficiency rather than adding more sales people.

• Marketing: Today, getting distribution through marketing is easier than before, in part thanks to channels like content marketing. The challenge for marketers is to produce high-quality content at a high frequency to keep a strong signal-to-noise ratio.

More competition doesn’t mean we’ve hit peak SaaS; it means we’ve hit an inflection point in the space. Over the next decade, we’ll see many more different types of SaaS emerge, from market network companies to products built entirely on APIs. The companies that win big over the next decade won’t look anything like Salesforce or HubSpot—and they might not even look like SaaS.