SaaSnet, a new business model

SaaSnet is an emerging business model that combines a marketplace to create value driven by network-effects, and Enterprise SaaS to deliver deep enterprise value. In this post I’ll share the defining attributes, give three company examples, and growth strategies for this new disruptive business model. But first, here’s how models have evolved:

Quick History of Enterprise Software Business Models

This small section was originally posted here.

Enterprise Software business models continue to evolve. New models are driven by increased vendor competition and an increasing sophistication and choice by customers. Here’s a quick list of the primary innovations in Enterprise software business models:

1. Licensed: The initial shift from software services to software products with software licenses that enable the vendor to retain intellectual property and sell copies to multiple customers are a high margin.
2. Perpetual: The creation of a Perpetual License plus Support and Maintenance fees. Perpetual licenses had the benefit of being capital expenditures paid up front, combined with 20–30% fees as operating expenses, resulting in attractive +90% margins.
3. Open Source: The license to use and modify the software was free, and vendors and outsourcing firms charge for Support and Maintenance.
4. Hybrid Open Source: Combines a paid software product and a free open source project, plus the vendor charges for Support and Maintenance. Typically the deployment of the software reaches a certain scale that creates the demand for the paid product
5. Subscription: Software-as-a-Service combines the rights to the software, support and maintenance in a recurrent subscription.
6. Freemium: A recent innovation you see with companies like Intercom is enabling self-service in-app purchases, creating a third tier in a freemium (free, core paid product, additional paid).
7. Platform as a Service: PaaS is an extension of SaaS with rights to build upon the platform, to modify and extend the product.
8. SaaSnet: Combines a marketplace business model with SaaS. A new disruptive business model with the benefits of the subscription model with the power of network effects….

SaaSnet Attributes

The SaaSnet business model combines a marketplace with network effects and subscription enterprise software. Attributes include:

• A N-sided marketplace offers transactional value between the parties
• Use of the marketplace is largely driven by self-service
• The transactional value in the marketplace contributes a core value to the SaaS product
• The SaaS offering provides enterprise workflow and data owned by the customer
• In some cases, customers may start using the marketplace and grow into the SaaS offering

There are some parallels with PaaS (e.g. Salesforce’s app marketplace and SaaS products). But as often the case with the enterprise, inspiration is drawn from consumer innovation such as gig economy marketplaces like Uber and Lyft, Social Networks like Facebook and LinkedIn. Market Networks described by James Currier like Houzz and Honeybook combine attributes from marketplaces, social networks and SaaS workflow — but after we go through some examples you’ll see a difference in deep enterprise value.

SaaSnet Examples

In our advisory and coaching practice, it happens that three of our startups are SaaSnets.

OnFrontiers

OnFrontiers builds enterprise knowledge networks. A double-sided marketplace for expert consultations facilitates request matching, call scheduling, recording, transcription and more. Sales, business development, consulting and other expert requests are matched with existing profiles or sourced outside the network. For experts, it’s akin to a high end gig economy job for white collar work. After a customer gains success (for example, positioning and winning deals, or better project outcomes), they upgrade to the SaaS Platform.

The SaaS Platform creates a customer-owned knowledge network. The customer enables their employees, 3rd party experts and marketplace on the platform. Employees gain expert consultations, managed with enterprise admin and compliance. A knowledge base is created as a byproduct of consultations, valuable for both reference and future expert discovery.

One part of the future of work I’m excited about is that everyone will have a 3rd Voice, human or not, aiding individual employee productivity and growth. Costs to create these services have fallen, and so too is the boundary of the firm. A knowledge worker depending upon the context may have an expert consultant, a mentor or coach, a peer, community or other available helping them advance in ways their management cannot.

Let me illustrate the network effects at play with a flywheel:

Marketplace Experts increase the potential matches for expertise requests with Marketplace Customers and SaaS Customers. Marketplace Customers can grow into SaaS Customers. SaaS Customers of the Platform add SaaS Experts (employees, 3rd parties). SaaS Customers of the Platform can add Customer Partner organizations to their knowledge network, which contributes experts, and drives referral sales. A subset of experts from SaaS Customers and Customer Partners may independently become Marketplace Experts. And while the arrow would have to go all the way around the flywheel, of course the more Marketplace Customer requests, the more demand for experts.

With this context, the OnFrontiers business model combines the network effects of a marketplace and the deep enterprise value of SaaS. The marketplace product adds direct value and growing value to the SaaS product. Given it’s network effects, the marketing benefits include a lower cost of customer acquisition, a way for buyers to start small on a self-service basis and upgrade as they realize value (although some buyers skip this step and go straight to the Platform). A moat is built with the value of the network and data.

Kea

Kea.ai is a cashier in the cloud for restaurants, taking orders over the phone with AI-augmented Agents. The company has a single-sided marketplace of Agents and a SaaS product sold to Quick-Service Restaurants and Franchises.

While recently more meals are from outside the home than not, restaurants are a tough business with small margins, highly competitive, it’s hard to recruit and attrition rates are high. Order completion rates suffer at peak hours and customer satisfaction is hard to maintain. Even with the rise of food ordering and delivery apps, in many cases the bulk of orders come over the phone (that refrigerator magnet isn’t going away soon). DoorDash, GrubHub and others cut into their margin (charging 25% per order) and dis-intermediates demand.

Kea takes a specific business process, the cashier taking orders over the phone while interfacing with customers and delivery people in person, and in some cases engaged in food prep, and moves it to the cloud. Remarkably, this grows restaurant revenue by over 20%, saves 10 hours a day in labor and increases customer satisfaction. Some of their Agents used to be cashiers, and now they work from home supporting multiple restaurants at higher pay. An attractive gig economy job. I’ve taken orders as an Agent myself, and it’s an amazing experience to shepard orders at high volume with a bot doing much of the work.

With this context, Kea’s business model combines a single-sided marketplace and SaaS offering. As the network of agents grows, and data yields optimization, product/service efficiencies are realized. Customers retain ownership of the phone as marketing channel, increase margin and customer satisfaction. A moat is built with the value of the network and data.

Skillprint

Skillpint.co is a LinkedIn for inner-talents derived from playing games. By playing existing casual games (think Tetris on your phone), your gameplay behavior can tell you a lot about who you are. Assessing strengths (e.g. are you creative, bold, precise, and/or strategic?) in this engaging way enables them to continuously engage people and recommend ways to up-level their skills.

The product is in private beta, and you can read about their vision in VentureBeat. The business model is a double-sided marketplace where consumers, employers and marketers may pay, that will evolve to include a SaaS Product. I mention them here to segway on how to grow this model…

SaaSnet Growth Strategies

First, principles:

• To grow any marketplace, you have to primarily focus on either the buy side or sell side to secure it first.
• If the marketplace includes consumers or individual professionals, you serve them first and foremost. LinkedIn codified this into their culture as Members First.
• Initial go-to-market with the marketplace.
• You may have to have a shallow SaaS offering to aid product discovery, but after you gain basic marketplace liquidity and network effects, invest deeply in the SaaS Product.

In Skillprint’s example, they could chose a different business model, just pure SaaS. Employers could pay them for inner-strength assessments of recruits and employees. But if they chose that path, they would lose out on the bigger prize. Pure SaaS has less growth potential and lower barriers to entry than the network effects of SaaSnet. A PaaS like Salesforce’s app marketplace can start out with a SaaS product and add a marketplace when there is scale attractive to developers on the platform. But if you achieve scale with a SaaS product for soft skill assessment, it won’t be an advantage for launching a marketplace, and in fact your customer traction may put you at a disadvantage. The attribute of the marketplace providing a core value to the SaaS product means you can’t just choose to focus solely on marketplace or SaaS.

At the beginning of any startup, you will have to make changes to get it right, even to the point of pivot or restart. But I believe the product you start with is the product you end with. For example, Evernote was personal productivity, making it very hard to gain adoption and monetize for group productivity. The business model you start with is also most likely the business model you end with. You could be like Google and start without one, and later discover targeted search ads. Or you could do a bold restart like Netflix from CDs to streaming.

Please learn from my lesson on how not to innovate. Once I started with a SaaS product and tried to shift to a Hybrid Open Source business model.

Also while at SlideShare we had a media business model and realized even while it was successful it had it’s limits (you can only sell ads on trafficked inventory). We launched a freemium offering which was doing well at the time LinkedIn acquired us, but if freemium was part of the business from the onset, as the network effect grew so would this line of revenue. Even with a massive base of users to market to, it was hard to change the perception of SlideShare only being free. And given that the community loved us, it’s not like we could take things away from free!

In consideration of this learning, if you are aiming towards a SaaSnet business model, here’s the balance to strike. Focus on proving out the above principles in sequence, but lay out the full business model in a lightweight way. That might mean your initial SaaS product is just one feature, available only on a self-service basis.

Feedback appreciated

I see this as a new trend. I have conviction in the power of the model because of growth in companies I’m close to, and how it relates to business models I’ve operated before. I’m looking for examples of other companies developing this model. Without many other examples, it wouldn’t really be a trend. And if you are operating it, I’d appreciate if you could share the principles that you think matter for growing it.aa