Once upon a time in a Silicon Valley, not so far away, a fascinating new business model was developed. It was a model focused on getting software in the hands of end users much more quickly and easily. Rather than waiting for IT to implement new solutions, this software was hosted in the clouds. It enabled users to immediately have access to software solutions.
It was, also, offered in a very different way that much software had been offered before. Individuals could buy and use the software. Rather than going to CompUSA to buy a box with a CD, individuals could access the software in the clouds. Rather than having the entire organization commit to use the software individual could buy it and use the software themselves (but many software solutions could only work when implemented across the enterprise.)
In addition to making software easy to access, these suppliers made it very easy to buy. Rather than paying up front for a license, people could pay on a monthly basis for a subscription. Just like buying the Wall Street Journal or subscribing to a magazine. This enabled individuals and small teams to acquire the software within their budgets and not have to get approval to spend $10s-100s of thousands for licenses.
Since the target customers, initially, for these tools were individuals and small teams, the methods others had used in consumer product selling were adapted. Materials explaining the capabilities of the products, demos, 30 day free trials were heavily leveraged. Since the investment was small, the risk to the customer was small, just like in consumer products. And just like consumer products, mass marketing techniques were used to make customers aware of products. When customers said tell me more, the sales process was usually pretty short.
And it was a very powerful and very productive model that served customer hunger for new tools. And we called this business model SaaS, software as a service.
As the initial companies offering SaaS solutions started demonstrating success, it generated huge interest among diverse audiences. Users could more quickly and more easily get solutions to help them do their jobs. They didn’t need to get IT approval, they didn’t need to get others to agree to use the software, they could pay for it on a monthly basis.
Entrepreneurs saw opportunities to develop new software solutions and create companies. The risk to entrepreneurs was relatively small. They could develop the Minimum Viable Product, then with acceptance add more capability to the product and grow the customer base.
And investors found a great way to make money. With relatively small investments, they could fund these companies, creating great returns.
And within a few years, 1000s of new software companies emerged in the Valley and in other places around the world. Business seemed to be booming, at least within the context of the SaaS industry itself, though it was still very small in the context of the economy. But it presented tremendous opportunities to entrepreneurs and investors.
And soon, visions of unicorns were dancing in people’s heads.
And as SaaS exploded, new dynamics started emerging.
Since lean/agile techniques were so successful in the product development, they were extended to the GTM strategies. Sales/marketing started applying these manufacturing principles to the “mechanization” of the process. This mechanization produced the concept of predictable revenue (though that concept was actually pretty old when one looked at other industries). And assembly line process started to emerge. Each worker on the assembly line had did their job, then passed the customer to the next workstation on the assembly line, until a PO was spit out at the end of the process.
Initially, this was very predictable. Toss X number of customers into the beginning of the assembly line and Y in POs would emerge from the end of the line. If you wanted to double POs you doubled the number of customers you tossed into the beginning of the assembly line.
It seemed so predictable. The jobs for each person on the assembly line were well segmented and well defined. Just like staffing a factory, the companies could take relatively inexperienced “factory workers” and train them to do their jobs.
The concept of scaling took over everyone’s hearts and minds. Just like a factory assembly line, it became so easy to grow. Double the inputs, double the outputs. Quadruple the inputs….. And because the capacity of each “factory” worker was known, it was easy to apply the same math in scaling the factory workers.
And life was good! The industry developed its own swagger, it started looking a little SaaSy. It seemed the world, business, and markets revolved around SaaS. SaaS was the “King of the World!” And if you were a cool person, you went into SaaS.
And some outsiders scratched their heads at this mindset and self centerdness. As these outsiders looked at thinking, SaaS is not (for at least the next 5 years) expected to comprise more than 1% of the global GDP. Today, it is somewhere around 0.3-0.5%. These viewers might be seeing a different fairy tale at play, “Much ado about……”
Yet more entrepreneurs rushed in, more investors rushed in, billions were being invested.
Because it seemed so easy and formulaic to scale, people wanted to grow quickly. But the old business models based on not spending more money than the company generated, stood in the way of capitalizing on this growth formula. Investors and entrepreneurs started scaling regardless of cost. Because they were creating subscriptions, they knew the money would eventually come in.
As funders and SaaS enterpreneurs looked at traditional valuation models, they didn’t work. Valuations were built on multiples of expected growth and profitability, the SaaS model focusing on growth regardless of cost, didn’t fit. So a new formula was invented to justify these investments, it was called the rule of 40. And with this, money continued to flow into these companies.
And within the companies, this rapid growth and lack of concern for costs created huge opportunities. Hiring and competition for sellers, marketers was wild. New people were brought in, the “experienced” people were moved into management positions. Opportunities flourished. The only limitation to growth seemed to be generating the volumes and velocity of the people doing the work. The mantra of more volume and more velocity was the secret to success.
And the definition of success in SaaS started shifting from the traditional views of business success. The focus of investors and the people in these companies was on exits and maximizing market cap, where the traditional view was building profitable companies that would last. The race to high valuations and exit dominated much of the thinking.
But then problems started to surface. Rather than the clouds people were used to, darker clouds started to emerge.
The old formulas weren’t working as predictably. X customers fed into the process were producing significantly less than Y in POs. Win rates were plummeting, sales cycles were growing. Customers didn’t behave properly on the SaaS assembly lines. They changed their minds, shifted priorities, stopped and started, or even abandoned projects. The assembly line model was successful as long as there was no variation, but customers didn’t pay attention to that ground rule, they started behaving the way they wanted to behave, not the way the assembly lines had been designed.
An even bigger problem emerged, it was generating those X customers to toss into the hopper. The old methods of emails, phone calls, texts, social were no longer as effective. But, applying the factory line mentality, these companies knew the answer to that, more volume and velocity. Soon it took 10 times the outreach to generate the X customers. But since those X customers were producing far less than the $Y in POs, the outreach was scaled to 20X, 50X and more…….
And this required more resources, more people were put on the GTM assembly lines, people with some experience were promoted and the people with a few more years of experience were promoted even further. To attract more sellers, promises of comp went up, people moved from company to company. But quotas were also skyrocketing, so the percent of people achieving their goals plummeted. Soon more than 60% were not achieving their goals, so they moved on, either voluntarily or involuntarily.
Recruitment was becoming a huge issue. Tenure’s plummeted, with average tenures at all levels of sales spending an average of 11-18 months with an organization, then moving on. Productivity started to plummet because of the inexperience and inconsistency in selling. But more software and AI started coming to the rescue. Automating more, increasing the tech stack was the formula for success in this new work environment.
The pandemic provided a bit of false security for many of these companies. The WFH and other restrictions resulting from the pandemic drove demand for many of the products.
More companies entered the market, thousands more companies were established. The markets weren’t growing, the number of potential users wasn’t growing significantly, but there were more suppliers competing for the attention of these potential users.
And to stand out, volumes and velocities skyrocketed……
And then the storm clouds rolled in.
The economy, globally, started slowing down. Customers were buying less. They started cutting back, rationalizing their spending.
In addition to these reductions, fewer and fewer were responding to outreach. All of a sudden, the SaaS companies started to recognize, “We have to keep the customers we have, we have to focus on retention to protect our revenue streams!”
But then more storm clouds rolled in. The concept of growth regardless of cost was being questioned. Investors started using the “P” word with their portfolio companies. They started saying, “You need to get your costs under control, you need to start generating profits!”
These have created a huge wake up call in SaaS. Layoffs and downsizing is happening. Managing for profitability was completely outside the experience base of these companies. People never cared about what was being spent, as long as they complied with the rule of 40.
All of a sudden, leaders were confronted with issues that were completely out of their experience base. They faced issues they never faced before. They didn’t know the answer to the issues they face. All of a sudden, the SaaS gurus started to focus on “Profit Efficient Growth. (PEG).”
Many are considering “new GTM innovations.” Some are looking at partners and channels to support GTM (where have I heard that before?) Some seek to accelerate cashflow by adopting pseudo purchase strategies. Some are looking at moving beyond software to services, and even devices.
But too many aren’t considering these because they aren’t “SaaS.”
I suspect they are seeking a “Happy ever after” ending to this fairy tale, perhaps with visions of Unicorn exits dancing in their heads, but may struggle in finding it.
The end…..
As one reads this fairy tale, it’s astounding to see how narrowly focused SaaS leaders are in their perspective, particularly when one looks at the creativity at the inception of the SaaS business model. Those originators may no longer be involved or have moved to different businesses/models. But they were innovators in looking outside the traditional ways things were done. They looked at other businesses and models, they picked and chose different pieces from many different models.
They recognized the challenges customers face in acquiring and implementing solutions. They changed the rules, they picked up aspects of a new business model from other industries. Much of the GTM approach came from Consumer Product Marketing, their offerings were modeled after media industries, their implementation was derived from the ancient timeshare business.
They created a new and innovative approach to providing solutions, not by inventing something new, but assembling different pieces-parts in new ways.
Today’s SaaS leaders suffer from being prisoners of their own experiences. Most have never experience anything outside of SaaS. It has been the center of their worlds and they don’t look outside it, like the originators of this business model did. Too many talk to each other, wring their hands, wondering what to do. But the answers don’t lie within SaaS, the answers are found in looking at other industries to see how they have dealt with similar issues. The answers are found by adapting practices that may be dull and mundane in other sectors, but are new and innovative when implemented within the SaaS companies.
And this cautionary tale applies to those outside SaaS. Too often, we become prisoners of our own experiences. We do things the way we always have done them. When they are no longer as effective we ramp up our efforts, thinking doing more is the answer.
We have to constantly be innovating and adapting. The easiest and most overlooked way is to start looking in different-non traditional places. Look at what people in industries/markets very different than yours are doing. Look at business models that are very different than yours. Engage people who think differently, bring them into your company as employees to help you and the organization think differently. Be constantly curious, look outside business to what others may be doing, that you can adapt.
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