10 minute read 7 Feb 2019
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Six lessons from leaders in building SaaS-based businesses

Authors

David Padmos

EY Global Technology and EY West Region Advisory Leader

Experienced consulting leader. Technology enthusiast excited about advances in robotics, AI, cognitive analytics, blockchain and automation and the potential to improve our client’s business models.

Ken Englund

Ernst & Young LLP US North America Technology Sector Advisory Services Principal

Focused on helping technology, consumer electronics, internet, social commerce and software companies solve critical business issues.

10 minute read 7 Feb 2019
Related topics TMT Technology Advisory

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Some of the most valuable companies in the world are using software as a service. Find out how they are harnessing it for growth.

In half a generation, SaaS-based companies have risen from startups to become some of the most valuable companies in the world. This includes over 60 “unicorns” valued at more than a quarter-trillion dollars. What are their secrets? What can traditional companies learn from these leaders to create their own unicorns?  In today’s fast-changing technology market, the apogee of achievement is to become a unicorn — a near-mythical enterprise that achieves a US$1 billion valuation in a few short years. These are companies that stand out for their rapid growth, agile business models and exceptionally promising futures.

But the other quality of the unicorns is their rarity. Less than one-half of 1% of venture funding rounds¹ result in the fabled unicorn status. This begs two questions: what has been learned by these highly successful companies, and what are the lessons for those that aspire to become unicorns themselves?

One of the best pieces of advice one could give to an aspiring unicorn leader is to “start by becoming a SaaS [software-as-a-service] company.” Of the 103 US companies that have achieved unicorn status, 60% operate primarily on a SaaS model. These SaaS companies, most of which did not exist 10 years ago, have achieved a total value of US$263 billion.²

Software as a service: a business or service in which customer services — including information, tools and applications — are hosted and delivered via the internet on proprietary software by a digital supplier.

This pattern is too large to ignore. What is it about the SaaS business model that creates such extraordinary value? What are the leading practices in SaaS that other enterprises — including traditional software companies and non-tech companies with online aspirations — can learn from?

  • In April and May 2018, EY conducted a survey of 200 executives with deep experience in SaaS-based operations. These are the decision-makers — all respondents are ranked director or above, and approximately one-fourth are from the C-suite. Forty percent identified themselves as serving retail customers (business-to-consumer, or B2C), and 60% are from business-to-business (B2B) enterprises.

    Geography: EMEIA 43%, Asia-Pacific 33%, Americas 24%
    Size of company by no. of employees: 10,000 or more (8%), 5,000 to 9,999 (12%), 2,500 to 4,999 (8%), 1,000 to 2,499 (22%), 500 to 999 (28%), 250 to 499 (22%), fewer than 250 (0%).
    Respondents by title: CEO (2%), Other C-level executive (2%), CMO (1%), COO (2%), CTO (6%), CIO (11%), CFO (3%), President (2%), Executive/Senior Vice-President (3%), Vice President (4%), Department head (24%), Director (40%).

The research data revealed a subset of 20% of SaaS companies that are leading their peers — in the state of deployment, customer engagement, profitability and other metrics. Their practices provide valuable lessons for emerging SaaS companies that aspire to build their own companies to billion-dollar valuations.

SaaS providers in operation

20%

of respondents rate themselves as clear leaders as a SaaS provider as compared to their peers.

Every industry has its leaders and those that follow behind. After confirming their experience in SaaS operations and their level of expertise, the survey probed respondents on the positioning of their company against its peers. The data identified a subset of about one in five companies that are classified as “clear leaders” or as “one of the best SaaS providers in operation,” compared with their peers. This segment was then analyzed on over 20 metrics.

The experience of this segment of SaaS leaders can be distilled into six key lessons for companies that are beginning their own SaaS journey. Case examples are presented to bring these lessons to life.

Motorbike speeding country road
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1

Chapter 1

Lesson No. 1: speed equals success

What SaaS executives would have done differently

The executives we surveyed were asked about the one thing that, looking back, they would have done differently. Their foremost answer: they would have moved more quickly into SaaS. At the same time, many wish that they had pivoted and innovated more quickly (No. 3). Another factor (tied for No. 4) was to have accelerated their entry into the market with an acquisition.

If you could do one thing differently to improve SaaS

All of these priorities speak to a need for speed within the SaaS market. Many emerging industries have only just been opened by digital technologies — creating a land-rush dynamic for customers. In others, there is a race to establish the dominant technology standard for the industry.

But most important is the network effect — where the first to build a small critical mass of users attracts more users and then swells to an unassailable position of market dominance.

Arvind Ramakrishnan is a senior manager in the Strategy practice of Ernst & Young LLP (EY US) who focuses on the technology industry. According to him, “Speed is of the essence … taking the leap in the short run provides the platform for the long run. Acquire the right talent and work closely with your pilot customers throughout the process to develop the SaaS model that works for your company and customers.”

Case example — residential real estate: A half generation ago, real estate sales were managed with signboards and newspaper classifieds. But by 2010, six prominent contestants sprang up to bring a SaaS model to the business. The winner of this hard-fought contest focused on quickly gaining the critical mass of sellers — thereby creating the largest catalog of homes. This inventory attracted buyers, who attracted real estate agents, who attracted more listings — and the company is now a unicorn with annual revenue of US$1.1 billion and a valuation approaching US$10 billion.

People working out jumping gym
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2

Chapter 2

Lesson No. 2: keep nimble, agile and prepared to pivot

Why companies decide to launch a SaaS business

The best management can’t foresee how customer tastes will change. Furthermore, most SaaS businesses are by definition navigating uncharted territory. Unicorn histories consistently show multiple resets forced by technology change or customer demand.

Many senior executives are rethinking the role of SaaS business models in their companies.  

This is to be expected — but the special quality of SaaS is that it enables the company to pivot quickly. Its central administration, digital asset base and configurable customer experience provide an agile platform for responding to changing markets. Our leaders agree — when asked to name their primary motivation behind developing a SaaS business, the foremost reason was that “SaaS [products are] easier to design and develop,” followed by an “ability to quickly modify existing products.”

please rank the following as motivations

EY US’ Ramakrishnan comments: “Markets are accelerating. For example, recently, one of my tech clients quickly modified a majority of their consumer business to the SaaS model through the cloud to customize the customer experience and scale for future growth.”

Friends huddled talking basketball tactics
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3

Chapter 3

Lesson No. 3: keep it close to the customer

How paying attention to customers pays off

“Listen to your customer” has been a mantra of business for decades. But there is a special case to be made for SaaS companies to keep it close to their customers.

Traditional companies have “sticky” customer relationships that can mask customer experience (CX) problems. But the SaaS companies’ competitors are truly just a click away — a volatility that is accelerated by the power of online reviews and the velocity of social media in the digital world.  

Leading SaaS companies know this — they pay deep attention to the customer, from product design through feedback analytics. When asked to rate the most important factor in their product development process, the No. 1 response was customer beta testing.

Please rate the importance SaaS development

The composition of the market-leading SaaS business team also reflects this customer focus. While the CIO or CTO ranks highest as a team member, marketing specialists and customer experience experts are seen as especially important contributors. This team configuration shows that leading SaaS companies understand the need to bring customers’ expectations and experience deep into the DNA of the SaaS product.

Please rate the importance of following members

This attention to customers has paid off. Leading companies are almost unanimous (98%) in reporting that SaaS has helped them to develop stronger relationships with their customers.

Strengthening customer relationships

73%

of respondents strongly agree that SaaS has helped them develop stronger relationships with their customers. Only 3% of respondents strongly disagreed.

Case example: In 2002, a new company entered the crowded online survey and polling market. While it believed it had the best survey platform, sales stalled and clients did not upgrade. Analysis of client behavior indicated that they wanted their vendor to take them beyond raw data into interpretation, insight and visualization. The company now provides its core product at a deep discount and counts analytics as its main business. It was valued at US$2.5 billion in its last funding round.

Woman freestyle kitesurf
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4

Chapter 4

Lesson No. 4: consider using platform as a service

The importance of IaaS and PaaS providers to SaaS business success

Many pioneering SaaS companies built their platforms from scratch — increasing risk and burning investors’ capital. But now, an emerging series of platform-as-a-service (PaaS) providers is short-cutting the process by providing out-of-the-box functionality including catalogues, meta tagging and advanced cybersecurity.

This outsourcing of development processes is a practice consistently followed by market leaders. We asked them to assess the importance of infrastructure-as-a-service (IaaS) providers and PaaS providers as part of their extended team.

Combined assessment of importance of platform

The results are striking. Eighty-three percent of the leaders rated infrastructure-as-a-service providers very important or critical to success. In addition, almost four out of five (78%) of SaaS leaders believe platform-as-a-service providers are critical or very important to success.

Case example: An EY member firm has partnered with a major platform-as-a-service provider to build a blockchain-based solution for content and royalties management. This complex market — which involves millions of transactions between thousands of participants each month — requires a complex and industry-specific design. The use of a platform has accelerated development time and significantly reduced costs.

Young man bungee jumping over river
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5

Chapter 5

Lesson No. 5: use SaaS to drive down costs and build margins

How important SaaS is in lowering costs

With its public image of astronomical growth, it is easy to forget that SaaS is a powerful tool for lowering costs — many SaaS companies are winning in their market as the lowest cost provider. We asked leaders how important SaaS was in lowering overall costs — over three out of four (76%) responded that it had a high impact or very high impact.

SaaS impact on operating costs

76%

of respondents believe SaaS has a high to very high impact on operating costs.

We then asked our panelists where the SaaS approach had the greatest impact on costs. SaaS showed a major impact across categories ranging from distribution to marketing. The greatest impacts were on refresh/distribution (with 78% citing it as “high impact” or “very high impact”), versus product development costs (73%) and packaging costs.

Please rate the impact of SaaS on operational costs

Case example: Sometimes SaaS doesn’t just lower costs — it can revolutionize the cost structure to create the newest low-cost provider. Take the foreign exchange market. Historically, banks have held large foreign exchange reserves, thereby incurring currency risk and tying up capital. They, in turn, charged hefty commissions — sometimes more than 50% on small transactions.

But savvy FinTech companies used SaaS-based platforms to create peer-to-peer exchange networks that bypass high administrative costs and reserve requirements. Now these companies have lowered commissions to less than 1% — using SaaS to disrupt the market as the low-cost player.

Man climbing rock wall moab
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6

Chapter 6

Lesson No. 6: keeping the enterprise secure

The importance of cybersecurity in SaaS solutions

Cybersecurity is a burning issue in the C-suite — and SaaS-based businesses are no exception to this rule. The premise of the SaaS provider — that it will host, store and compute with some of the client’s most sensitive data — places an exceptionally high security standard on the SaaS enterprise.

EY US’ Ramakrishnan says: “The trend toward real-time customer collaboration through the cloud creates a security imperative. SaaS providers have got to get security right — their brand and customer base depend on the highest security standards.”

There is a long-standing debate on which architecture — cloud, on-premise or hybrid — optimizes the balance between security and usability. It is probably not surprising that SaaS leaders are committed to cloud-based solutions (with 73% selecting cloud or hybrid cloud solutions) and believe strongly that they are the most secure option.

Which of the following is your primary network architecture

SaaS companies also believe that cloud-based solutions are the most secure — over two-thirds (68%) believe that a cloud-based solution like SaaS is more secure than on-premise software.

Which of the following captures views of SaaS and cybersecurity

That is certainly what the customer thinks. We asked the SaaS leaders what was most important to their customers in a SaaS solution — by a sizable margin, cybersecurity was top of mind.

Which of the following is most attractive feature SaaS

We asked our leaders to assess the impact of SaaS on the most important metric that a company has — profitability. Their response was overwhelming — nearly unanimous at 98% — in agreeing that SaaS had led to an increase in profitability. This is, of course, the key driver in valuations.

Profitability of a SaaS-based model

98%

of respondents agree or strongly agree that using a SaaS-based model led to an increase in their company’s profitability.

SaaS itself is not the creator of unicorns — the threshold requirements are and will always be an outstanding product, a talented team and capital to operate.

Summary

It is no coincidence that such a high percentage of unicorns are built on SaaS platforms. They enable speed to market. They allow the nimble company to navigate the unknowable. They disrupt customer relationships, lower costs and help keep the enterprise secure. SaaS models have been used to build some of highest-performing companies today and will undoubtedly be used to build the fabled unicorns of tomorrow.

For a further perspective on transitioning to SaaS, see the EY-Parthenon report Crossing the chasm: Lessons learned in transitioning to a SaaS business model.

About this article

Authors

David Padmos

EY Global Technology and EY West Region Advisory Leader

Experienced consulting leader. Technology enthusiast excited about advances in robotics, AI, cognitive analytics, blockchain and automation and the potential to improve our client’s business models.

Ken Englund

Ernst & Young LLP US North America Technology Sector Advisory Services Principal

Focused on helping technology, consumer electronics, internet, social commerce and software companies solve critical business issues.

Related topics TMT Technology Advisory