SaaS Is Under Pressure

SaaS has been the holy grail of software and, more broadly, technology as the go-to business model. And what’s not to like about it? Recurring revenue, high margins, and customer lock-in are some of SaaS businesses’ myriad positives. But the tide is starting to turn.

Small to big companies are now assessing their software subscriptions to see where they can cut. The trimming is a response to most companies being over-subscribed and in perpetuity. Companies are spending more on software subscriptions than ever before, and for many, it has become a runaway train. Companies are considering options to reduce their software subscription dependencies, including building their own and reverting to fixed-price contracts, not variable or one-time purchases in which they own the software. Yes, we are returning to a build-or-buy software era, more so in some situations than a rental one.

SaaS inherently means that a company is now committed to paying to rent software for the rest of the time. Companies can change from one CRM to another, akin to moving apartments. The floor plan and address have changed, but the financial obligation remains. Companies are starting to realize that the flexibility to stop renting software is a myth because if the software is part of essential processes and workflows, companies can’t just stop using it with massive changes to their operations. SaaS is the equivalent of software crack. Once a customer gets hooked, they can’t give it up.

Companies now realize they have a slew of SaaS subscriptions they can’t get out from under, and what was supposed to provide them with flexibility and optionality has proven to do the opposite.

SaaS companies that are likely winners in the future will empower their customers to use their products to replace and consolidate other SaaS products. The SaaS products are low-code or no-code products like Notion, Airtable, and Sharetribe. These products allow customers to configure the products to do a myriad of things that get to say, 80% of a more expensive and purpose-built SaaS product. Leveraging low and no-code products will allow many organizations to create their products for a fraction of the cost of purpose-built SaaS products.

When leveraging a low or no-code product doesn’t go far and deep enough to address a company’s needs, more and more companies will go back to building their customer-purpose-built software. Why? Several reasons:

• Lifetime Cost — In the end, building a custom piece of software will be less expensive than paying for a SaaS product in perpetuity. Even when the cost of evolution, management, and maintenance is factored in, custom purpose-built software is less expensive.
  
  
• Operational alignment and value — Custom, purpose-built software is created to align precisely with the needs of a company. Most companies have to either change their processes to align with SaaS software or customize it to align with their processes. Either way, SaaS causes comprises.
  
  
• Proprietary technology — Companies that have proprietary technology are worth more. Every company is a technology company, but not every company is a proprietary technology company, and the latter increases a company’s value exponentially more.

Vertical SaaS has become a thing in the past few years. Essentially, it is SaaS for a narrow and niche sector such as dog grooming companies, event planners, and florists; you get the idea. Vertical SaaS has become more prevalent as the promise and value of generic, broad-based SaaS has been under-delivered for many customers. In theory, vertical SaaS is also closer to the customer’s problem and value. Creating a product for a specific set of customers should be easier than making one for a broad set of customers. Vertical SaaS will always be smaller and more valuable than broad-based SaaS companies, but their ability to solve a specific problem in a manner that customers value can make them more appealing to the smaller set of customers. With its benefits, vertical SaaS is still under pressure, though, as vertical SaaS customers tend to be smaller in size and, therefore, have smaller budgets. Vertical SaaS doesn’t overcome the subscription fatigue that many companies are experiencing, and vertical SaaS companies tend to be more expensive since they are selling into a smaller market.

Companies like Once (www.once.com) are working to combat the SaaS fatigue by creating single-purpose software products that harken back to the days of pay for software once and you own it. Are Once and others going to replace SaaS as the predominant way software is sold and priced? No, but the fact that they are even pursuing it means something.

Another thing about SaaS products that gets glossed over is that they must be sold. Even with product-led growth and similar approaches to driving awareness and distribution of SaaS products, SaaS products require a sales team to get customers committed to buying the products. Demos have to be performed, configurations need to be determined, pricing gets negotiated, and more. SaaS products, especially B2B ones, must be sold, requiring expensive and easy-to-manage sales operations. Although SaaS started with the belief that it could be purchased independent of sales involvement, that has yet to prove true, and the opposite has taken root. SaaS is highly dependent on sales, marketing, and customer support, increasing SaaS companies’ overhead and decreasing their profit margin.

So, is SaaS dead? Not by a long shot, but what is becoming clear is that there is a threshold of how much companies can afford or are at least willing to spend for recurring software subscriptions. SaaS companies are losing their pricing power, which will continue to pressure revenue and profit margins. Customers will continue to evaluate how many, how much they are spending, and what value they are receiving from SaaS products compared to the history of unthinkingly taking on more and more products.