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3 minute read / Oct 1, 2013 /

The 3 Competitive Defenses of Enduring SaaS Companies

A technology advantage isn’t enough to build an enduring enterprise SaaS company because at the core, all SaaS software share the same architecture. A relational database stores data and a web site presents the data. This is true for CRM (Salesforce), marketing automation (Marketo), email (Exchange), content management systems (Sharepoint) and so on.

Because SaaS apps use standard databases, engineers can easily transfer the data from one database to another. I’m greatly simplifying here because differences in architecture may exist, but in principle it’s simple to extract, transform and load data from one relational database into another. It may take time to complete the process and users may suffer during the transition, but nevertheless roughly 15%+ of every SaaS company’s customers leave each year to a competitor in this way. From Pardot to Eloqua to Marketo to Silverpop.

For a few years, a technology differentiator, like SaaS or mobile, might generate sales for an upstart. But time erodes that edge. The first and only SaaS marketing automation company will only lay claim to that title for so long.

The three enduring types of competitive advantage for SaaS companies I’ve observed are network effects, data network effects and ecosystem creation.

Data Network Effects exist when the value of additional data is compounded with time. For example, Infer builds predictive scoring models that prioritize leads for sales teams. The more data Infer gathers about a sales team’s customers, the better their predictive ability. If a customer switched to a competitor after twelve months, the customer would destroy 12 months’ worth of machine learning, quite an expensive tradeoff.

Network Effects exist in enterprise social networks, jut not just any kind of network. Email and chat systems suffer from fungibility. GMail arguably serves an Outlook business just as well. Instead, data network effects exist when the SaaS company forges a new network with novel relationships like LinkedIn for recruiting, Axial and Angellist for finance, Doximity for doctors and so on. Those networks are proprietary and long-lasting competitive barriers to entry.

Ecosystem Creation: when a SaaS business surrounds itself with successful partners who serve many different types of customers, often not addressed by the SaaS company, and reinforce the value of the SaaS product, it has employed an ecosystem defense.

Salesforce fosters its ecosystem to further entrench use of its CRM. Veeva, a company building pharmaceutical sales software on Salesforce, filed for a $150M IPO last month, after growing revenues more than 100% y/y. Veeva customizes Salesforce for a particular industry which attracts and retains customers better than Salesforce could. More Veeva sales means more revenue to Salesforce. Similarly, Microsoft has a vibrant created vendor ecosystems that sells, customizes and services their products.

Not every SaaS business needs one of these three defensive strategies to succeed. In fact, many SaaS businesses never do create one. But I think the truly great ones do.

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