In our last article we have shown one way of categorising Software-as-a-Service (or SaaS). See also the diagram below.
The obvious point was not to make a systematic attempt of categorising SaaS. With over 25,000 SaaS companies in Crunchbase and who knows how many actual SaaS solutions that would be a futile attempt.
The two bigger points were:
- To point out that different types of SaaS solutions use different types of business model playbooks: In our little mind map we can distinguish between those that are on the left from those on the right hand side in terms of key business model elements. What I mean with that will become more clear throughout this SaaS series. Suffice it to say for now that there are key differences in terms of research & development as well as sales and marketing business model tactics.
- And that when you want to develop a SaaS solution you should do something similar for your area. Having a good idea is good (in fact, great!). But doing some market analysis on a regular basis is still a good idea. In the last article we have seen that there are already over 8,000 marketing tech solutions. It’s fine if you want to be the 8,001th (or wherever the counter stands now … it may be even lower). But I would recommend doing some homework by finding out what others are doing.
Categorising SaaS
SaaS Research and Development (R&D) business model tactics
This is part 2 of our SaaS series.
And it will discuss business model elements for the research and development playbook.
Note, I am saying business model. This is not about programming (yes, I have programmed for a long time myself and been a certified Java programmer - but this is not a technical article). We all know that R&D is key for a SaaS startup as well as scaled up SaaS companies.
Here is Slack’s cost structure of the last few years.
Slack launched in August 2013 and went to their IPO in Apr 2019.
As late as 2 years prior to their IPO their R&D costs still stood at 92% of their revenue which was ~$100m.
And it still consumed 39% or $157m in absolute terms in the FY ending 3 months before their IPO.
Note that we can’t use the post-IPO data because it includes large amounts of stock-based compensation for the engineering folks distorting what was actually spent in that year.
You will see R&D expenses in the vicinity of revenue or even higher for many startups in the first few years after revenue generation starts.
If you needed evidence that R&D is really important from a business model perspective, this should give a strong clue.
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SaaS R&D business model canvas elements
Now, let’s use our popular tool, the business model canvas (BMC) to show the tactics related to SaaS R&D.
What is an R&D BMC?
Well, trying to have an complete biz model canvas for any company would be very complex.
By showing only key element related to one aspect - here research & development - we can reduce the complexity.
I call each of the number below a business model tactic (or innovation tactic).
And the remainder of the article will refer to these numbers and elaborate briefly on each.
Key Activities
R&D will take a prominent space in the key activities section of the BMC.
(1) The key is to develop the value proposition(s).
More technically speaking, we develop features that provide value to our prospective customers.
But how do we even get started?
- One way of getting started is to solve an entirely new problem. But that’s probably less often.
- Hence, many SaaS solutions emerged simply by solving an existing problem differently.
This is very high level and we can distinguish further (more later).
Salesforce, Workday, Concur, Zendesk are SaaS providers who started by focussing on elements that are also part of traditional, large enterprise resource planning or ERP systems as offered by SAP and Oracle.
These early companies were sometimes category creators because they were the first ones to move the respective features & functions to a standalone SaaS solution.
Focussing on a core element of a traditional solution and making it cloud-native is one way of getting started.
But there are more (and we are covering them in our course).
Value Proposition
Cloud-native solutions often differ from cloud-migrated solutions (i.e. legacy software moved to the cloud) in ways that users can tell immediately in terms of look & feel, etc.
But often there are more fundamental differences.
Some of the most successful modern SaaS solutions follow a number of principles that underpin their success. Let’s just take three sample principles:
- They align with modern organisational principles - this is our tactic (2)
- They reduce admin work by moving data entry to the source
- They provide features useful for all that are affected by the software (as opposed to a management / admin level)
Let’s compare two project management solutions: MS-Project vs ClickUp.
(There are over a dozen more that we are covering in the course. But let's leave it at this to demonstrate the point.)
MS-Project vs ClickUp
MS-Project was introduced in 1984 but has recently been moved to the cloud. Undoubtedly, it is now more collaborative than it was as a desktop software.
Nevertheless, it still caters more towards the old model of one project manager managing the entire project for the whole team (or most of it). The skill set required and the pricing model give pretty clear cues on that (among other things).
ClickUp is very different in its entire philosophy. There are many different views including very simple things like to-do lists, a great focus on collaborative and communication features, etc. Things that anyone can use without knowing anything about project management.
The simplicity of the UI and the intuitiveness of the UX make this pretty clear.
(3) It helps with the adoption of the software through individuals.
(4) A focus on collaborative features sets single-sided network effects in motion that help to spread the word within the firm and find the exact right people that the tool will provide value to (a marketer’s dreams).
Cost Structure
(5) It’s important to have the right mix of single-user and collaborative features in your Freemium layer to support the spread within firms. These costs are booked against marketing & sales in our cost structure.
Revenue / monetisation
Revenue / monetisation
This brings us immediately to our revenue model. We don’t want to give away the house for free.
(6) Initially, we may need to be more “generous” with what’s included in the Freemium layer to later tighten the rules up.
This should be done based on experimentation and solid user data.
(7) Early revenues will also provide cues to what’s in demand. It can help us to inform our roadmap.
This links directly to two other elements of our business model canvas:
- Customer segments
- Key activities
We should try to understand which customer segments value what. Usage date will give pretty clear pointers.
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Customer Segments
We can slice and dice our customers in many different ways. For example:
- By their vertical: there will be big differences in how a chip manufacturer will use a project management software compared to a software development company or a marketing company or a bank.
- Large vs small companies: there will be differences between large and small companies.
(8) Another important way to look at segments is the pertinent question whether we should give more to our current segments and strengthen our relationship and expand to similar types of customers or whether we should try to expand to new types of customer by developing new types of features.
Key activities
This brings us back to our key activities of which another one is to
(9) put a roadmap for our SaaS features in place.
Let’s say we want to expand to large companies. This will inevitably mean that we need to put advanced security and audit features on our roadmap. Good luck with large customers if you dont do this.
If you want to remain catering to small companies, then you can hold off with this (though you will always need baseline security - I think that’s clear).
Closing the circle
So, this closes the circle.
You see how all elements of the business model canvas are connected to each other (simply follow the sequence of numbers in the BMC and the article to see the connections).
That said, this is only a short version of our covering of business model tactics related to R&D in the SaaS space. Check our course in our products for more on this, if you liked this.
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