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On SaaS

I came across the following post yesterday and a few thoughts popped up in my head.

Lol when rent seekers complain about others seeking rent

Taking a software product, converting it into an online service and providing it on a per users subscription model has become a popular strategy in the technology industry. In the best case, this is a win-win scenario for both the producers and the consumers. The producer can start out by offering a Minimum Viable Product for a low price and then use the consumer fees and feedback to drive the development of subsequent features. The consumer gets a working product with no big upfront financial commitment and is able to make use of newer features without any extra work on their part.

But this dynamic changes when investors get involved. They pump in a lot of money to drive the rapid growth of the service so that it can become the dominant one in its domain. This is usually done through a mix of advertising and evangelism at conferences and in the always obliging tech media and by providing the service at a significant financial loss for a long period of time. Additionally they also coax the producer to build in features that severely restrict the ability of the consumer to switch to a competing service if they wanted to.

The consumer is now trapped. There are almost no equivalent alternatives available in the market. Even if they found one they like or decided to build their own, the cost and effort involved in migrating would be enormous. The producer can now raise prices, put commonly used features into higher cost tiers and even push out breaking changes without being concerned about the consumer’s ability or willingness to adapt.

This is why I always advise everyone to think about an exit plan before signing up for a SaaS offering. How difficult would it be to switch to a different provider? If you need the historical data, will you be able to pull it down and what are the associated costs?

In addition, close attention to be paid to the regular announcements from the provider. Unlike with an annual contract, a SaaS producer can change their terms in a matter of months. This is a risk that you have to build into your operating budget.