Venture Capitalist at Theory

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3 minute read / Jul 11, 2016 /

The Next Big Shift in SaaS

The next big shift in SaaS is an evolution from software as a service as a displacer to a disruptor. Displacement technologies compete with incumbents on the same buying parameters. Disruptive companies change the way a buyer thinks about solving their need. Most SaaS products today are displacers.

SaaS products initially were viewed as a cheaper, often inferior product to their client/server peers. Five or ten years ago, that may have been true. But today, SaaS companies generate upwards of 15% of all the software revenue and are consistently ousting their older competitors.

Most of that revenue, though, is displacement revenue. Whether it is displacing an existing CRM system or pen and paper, modern software companies still compete on the same buying parameters. For example, a CRM’s ability to be customized and its integrations characterize its attractiveness to a buyer.

A simple way of dividing the software world is system of record vs workflow application. Systems of record are the single source of truth about a particular department or company. A CRM is the canonical source of sales information; the ERP system is the canonical source of a company’s financial information. Systems of record are valued for their ability to generate reports and insight to the company’s management team, but not renowned for their user-friendliness.

On the other hand, workflow applications enable workers to do work. The products that appeal to salespeople, sales development reps, marketing associates, customers support reps are the most successful.

Most SaaS companies leverage the distribution advantage of the web browser to pursue bottoms up customer acquisition. In order to win a user using this bottoms up strategy, these software companies pursued workflow value proposition. There are exceptions: Salesforce, NetSuite, Workday.

Some make the transition from workflow application to system of record. Zendesk is a good example of this as it moves up the market from serving small to medium businesses to midmarket to enterprise system of record for customer service requests.

But all of these examples are still about displacement. The parameters of decision-making remain the same.

The next shift in SaaS will see startups leverage their workflow roots into disrupting systems of record by changing the buying process. The data they will aggregate from this usage will provide unique insight that preceding systems of record cannot furnish.

For example: can today’s CRM technology tell a CEO exactly how much time a company is spending to close an account and support that account over time? And ultimately whether or not the client is a profitable client?

Being a workflow product is a fundamental strategic advantage for a SaaS company, because it provides the business a vantage point invisible to incumbents. We haven’t yet seen many workflow applications unseat system of record incumbents, but by leveraging this strategic advantage and changing the buying process, new SaaS companies will evolve from displacement to disruption.

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