Six lessons from leaders in building SaaS-based businesses

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.

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.

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.

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.”

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.”

“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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.