The Commoditization Of SaaS

When a product becomes indistinguishable from others like it, consumers will buy on the price and as a result, the product becomes a commodity. However the most dangerous part of commoditization is when a companies or even an entire industry does not believe that commoditization will happen to them as they believe they are “protected” and that their differentiation is strong enough to be sustainable.

Commoditization Always Happens

Chances are that your company or your industry will be commoditized especially when you don’t think it can happen because, in reality commoditization always happens. If commoditization did not happen, the majority of SaaS companies could not exist today; after all the majority of SaaS solutions are commoditizing Enterprise Software.

Even looking beyond SaaS for a moment have a look around at certain companies and industries – you know the ones,  the ones who rarely really refresh their product roadmaps (apart from for analysts, press etc) because they don’t have something new as, they’re basing their future on the past and their only differentiator is price.

It’s A Death Spiral

Look at what happened to Enterprise Software or even hardware/laptops – the majority of laptop manufacturers make money from stickers on the laptops or pre-installed software (unless of course you’re Apple). As a result, it’s simply not enough to align a SaaS solution with the core processes because, that is almost certainly the path to commoditization in and of itself and when price becomes the only differentiator; it’s a death spiral.

The fact is, the majority of SaaS is already on a collision course with commoditization and whilst some of these SaaS solutions are “emerging markets” which have companies saying they cannot be commoditized, it’s simply not true – commoditization always happens.

For instance, let’s pretend you are in a SaaS market and there are just 2 of you, you are both charging $100,000 per user/contract, you’re both getting “loads” of sales and the market is growing at an incredible pace. That’s amazing, right?!

Well what happens when, a new competitor comes along in this growing market cloning both of your SaaS offerings but instead of just cloning you, they also start selling for $20,000 per user/contract? Is that so amazing now?!

What happens when several more competitors enter the market (each of whom lowers the price) or someone even offers it for free by creating an open source version etc?

Suddenly your $100,000 per user/contract margins are rapidly falling as each new competitor enters because, you’re not a monopoly (the market is still growing at an incredible pace) and there are numerous offerings of a similar product at much cheaper price – and once price becomes the only differentiator; it’s a death spiral.

After all, you are offering a Software-as-a-Service solution; you are not revolutionizing an industry or doing something which cannot be copied by anyone else. Sure, you may have a nice user interface and great product functionality but it is not revolutionary and because it is not revolutionary, you are creating a commodity.

Commoditizing Yourself To Survive

Ironically the only way to survive is to commoditize yourself before the industry sees commoditization so, that you provide your customers (and potential customers) something different from what the competition can offer – and more importantly that something different (your unique selling point) has to be a key problem that your customers (and potential customers) need to solve and is of course defensible.

Create Added Value

One way of doing this is asking the question, “Why should a potential buy from me instead of my competitors?” 

If you answered “We have a better product/results/service/market knowledge” you are not answering the question because, those answers can be commoditized; they do not distinguish you from your competition or create added value for your customers (or potential customers).

Similarly, a new brochure may be “cool” but does it really add value to your customers (or potential customers)?!

Evolve From A Solution Service To A Problem Service

Before commoditization happens in your industry, you should look outside of your company and industry and look to your customers and potential customers to understand the unique problems they are facing. By doing so you will evolve your SaaS from a “solution” service to a “problem” service which follows the traditional sales process of working with your customers and potential customers to diagnose, collaborate and provide the solution which completely adds end-user value and distinguishes you from your competition.

As a result, by commoditizing yourself and creating a new unique selling point which is unique to you, your customer(s) (or potential customers) and is defensible against your competition and is built on top of your SaaS you can increase demand and give yourself the opportunity for highly profitable growth.

This is where your SaaS should be battling and where you should be marketing your SaaS because, this is where you go from being seen as a commodity to a preferred partner who is solving a key problem which is critical to the success of your customers (or potential customers).

After all, SaaS should be the method to provide users with the product rather than the business model.

Update: There’s also a discussion going on about this over on Hacker News

Bitcoin Is Fundamentally Flawed

Bitcoin[1] which is limited in supply, can be exchanged anonymously and has been around since 2009 has started to receive an increased look at the decentralized and cryptographic currency. For instance, Chris Dixon[2] posted about the Three Eras of Currency[3], recent price spikes saw the Bitcoin economy reach the billion dollar mark[4] and companies such as Reddit[5], Expensify[6] and 9flats[7] amongst numerous others have started to accept Bitcoin which, has left people wondering if Bitcoin can become a real, functioning currency.

However, Bitcoin is fundamentally flawed.

There has been a lot of talk and analysis[8] with regards to how Bitcoin is not inherently anonymous[9] and that it’s possible to identify users and their transactions which, can be seen as an important issue especially, as that is one of Bitcoin’s prominent design goal. Likewise, there has also been talk about Bitcoin thefts[10][11] and hackings[12] including, Instawallet shutting down their service indefinitely[13] after a recent attack but, none of these are looking at Bitcoin’s fundamental flaw.

Bitcoin is designed to increase the money supply as a geometric series until the number of Bitcoin reaches 21 Million and in order to generate Bitcoin, users “mine” for coins by running software on their computer. However, the Bitcoin algorithm states that the rate of growth will slow down so that the supply of Bitcoin is essentially fixed. At the current rate, 25 Bitcoin are generated every 10 minutes although; this will be continuously halved every four years starting in 2017 until 21 Million Bitcois have been mined by 2140. As a result of the fixed and capped supply, Bitcoin has had a considerable amount of price fluctuations and despite the fluctuations; on the whole the cryptographic currency has soared. The results speak for themselves, after all the Bitcoin economy has reached the billion dollar mark[4] so you can say that Bitcoin has been a good investment.

However, Bitcoin is not meant to be an investment it’s meant to be a currency.

Monetary systems are not designed to make the people who are hoarding the money (or in this case Bitcoin) rich and this issue is perfectly highlighted by the Swiss who ended up pegging their currency[14]. Currencies are supposed to be used as a medium of exchange to facilitate transactions which, allows the multiplier effect kick in and increase the economies wealth. An example of this, is fiscal stimulus used by the Obama Administration with the American Recovery and Reinvestment Act of 2009[15] something which, is not happening with Bitcoin.

Eventually the Bitcoin economy is going to run into the problem of its algorithm and the Bitcoin-hoarding because; there will not be enough currency. As a result, this will lead to a recession and because the money supply does not expand it will evolve into a depression.

Some people may argue with this highlighting that, Bitcoin can be infinitely divided into components ensuring the growth of the money supply. However, they are wrong because converting $100 into 10 x $10 bills or even 100 x $1 bills does not make you feel richer.

Update: There’s also an interesting Hacker News Discussion about this post.