BY JOE HASLAM, Executive Director, Owners Scaleup Program at IE University.
There are now two types of businesses in the world, those who know that they are a SaaS business and those that do not know it yet. It is the message I have long been sending to the participants of the Owners Scaleup Program at IE Business School. If anything, the Coronavirus (COVID-19) pandemic has reinforced my view that this is the direction that all companies must go.
SaaS and me have a long history. Twenty years ago, at the height of the dot.com boom, I left the world of Management Consulting. Along with five others, we formed Marrakech, a SaaS solution for the back office problem of e-procurement. Seventy five million dollars in Venture Capital and over 250 employees later, the company was sold. Even people who worked there do not believe me when I sell them that the software they wrote still operates today. The lesson here is that a good SaaS solution can take a long time to reach its potential but once it does, it´s almost impossible to move.
So what is Software as a Service (SaaS) then? Here I turn to Luigi Mallardo, the Professor who teaches the classes on SaaS for the Owners Scaleup Program. The mistake, he tells me, is to think only about the technical implementation of running software in the cloud. Instead you need to think of SaaS as an mindset. It´s not so much what it takes to set up a SaaS platform but what having a SaaS platform enables you to do. You are not so much selling a product but instead creating a lifetime customer by delivering a superior experience. The real work begins after the sale.
One of my interests is adventure sports, specifically climbing mountains. I spend a completely indefensible amount of time reading the Gearguy on Outside magazine. Next year´s Arc’teryx hardshell jacket will be lighter! Are Lowe Alpine going to do a twenty five liter backpack without the annoying crossloop? These might mean nothing to weekend ramblers but to expedition climbers, the details are a very, very big deal. And once a new piece of kit comes out, the question arises as to the best place to get it? I drive my wife crazy with the amount of price watching I do at The North Face Outlet Store just outside Madrid.
But what if I decided that I would be Alex Honnold and only wear The North Face? What if TNF could be like Netflix whereby in exchange for paying them a monthly subscription, I got access to a superior experience beyond what was available to their retail customers? If I could engage with their product designers about what I liked and didn´t like, I could help design their future products. If I was prepared to give them some data on how I used their products, in time they would know what I needed before I did.
A good first question when I give a masterclass is “How did Warren Buffet make his money?” Everyone knows that he is a value investor but much less people know what sectors he has invested in. At least one of the answers is insurance. Buffett has said that had he not acquired an insurance business “Berkshire would be lucky to be worth half of what it is today.” And why? For the “predictable and recurring premiums”. The Sage of Omaha was into SaaS business models before there was even a cloud.
In almost every respect, the Irish retailer Primark has done what a Business School Professor would advise. Experiment until you find a formula then double down on that to the exclusion of everything else. This is what allows you to grow exponentially. When analysts pointed to the British online fashion and cosmetic retailer ASOS, Primark would point to the queues outside their stores on Europe´s major high streets. Then the Coronavirus (COVID-19) pandemic hit and all their stores had to close. Without any online channel, sales went from £650m per month to zero. Z-E-R-O.
The scaling up phase of a business is what happens after you find a scalable and repeatable business model through experimentation. In particular, the benefits come from the tight integration of an ERP with your SaaS platform. It takes patience and time but the result is recurring revenue, low churn and high margins that grow every year. A great reference text for those new to this area is Aaron Ross and Jason Lemkin´s 2016 book From Impossible to Inevitable: How SaaS and Other Hyper-Growth Companies Create Predictable Revenue.
Jason likes to talk about the rise of the SaaS Decacorns, over 20 companies worth $5b or more. Here are their names: Salesforce $180bn, Shopify $90bn, ServiceNow $70bn, Zoom $48bn, Atlassian $45bn, Workday $40bn, Square $35bn, Veeva $30bn, Twilio $29bn, RingCentral $23bn, DocuSign $24bn, Okta $23bn, Datadog $22bn, Slack $17bn, CrowdStrike $17bn, Coupa $15bn, MongoDB $13bn, Wix $11bn, Dropbox $9bn, Cloudfare $9bn, Zendesk $9bn, Avalara $8bn, Hubspot $8bn, Five9 $7bn. And we are only getting started! The real benefits will come when the software world connects with the physical world. As with Apple, stores have a role to play in this as well.
Scott Galloway is a professor of marketing at the NYU Stern School of Business. You may know him from his twice weekly podcast with Kara Swisher on Vox, the weekly Prof G show or his new show No Mercy, No Malice on VICE TV. Scott likes to big up the “rundle” short for “recurring revenue bundle”. He argues that in truth consumers want LESS, not MORE choice in their busy lives. They are happy to go with one brand 99% of the time if they trust that brand will not let them down. It´s really an extension of Clay Christensen´s jobs-to-be-done methodology. In areas such as media, apparel, travel and health, we all want the “job” to be done for us. For a monthly fee and engagement via an app your FOMO disappears. Perhaps a rain jacket for another company is better, but no one was ever laughed at for wearing The North Face.
The more I checked in with the past participants of the Owners Scaleup Program, the more the challenges they were facing stayed the same. No predictable and recurring revenue, no real customer stickiness, no information on which to make product decisions about the future. I´m thinking in particular with one founder. Let´s call him Pierre (for that is his name). Pierre has been success at most things that he has done but he has never had to face anything like Coronavirus (COVID-19). The call started with a catchup but then the familiar issues emerged. As time ran out, he told me that the call had been very useful, when could we talk again? “Pierre, I love you man but I´m not in love with you. Call me when you are ready to admit to yourself that you are a SaaS company, until then you are just wasting my time.”