The economics of SaaS makes a lot of sense for software providers. A company can theoretically sell the same product to an infinite number of customers at a very low marginal cost. On the demand side, however, it makes very little sense. The customers essentially have to comply with whatever product, services, and the pricing model the software provider has to offer with little negotiation room and customization. This is particularly true for Small to Medium Businesses that have very little leverage over the SaaS tools they use.
Even for large enterprises, the stake in making a SaaS purchase is very high. Besides the financial risks, there’re also risks associated with adoption, customer support, data security, and more.
To strike a balance between the right contract size and the right product offering, a lot of negotiation needs to happen between the buyers and sellers, inevitably it causes a longer sales cycle. Many SaaS startups may fail before they ever reach commercial success because it is very hard to find that balance. These unique unit dynamics make SaaS an expensive space for both customers and sellers.
On one hand, sellers need to spend time assessing needs, and negotiating contracts. On the hand, sellers need to build a lot of product services before they find a product market fit. The economics of this transaction is getting worse for both parties as there’re more and more SaaS providers as funding and investor enthusiasm grow. There’s a growing number of providers to evaluate for buyers. In the meantime, there’s an increasing amount of competition and it’s hard to reach feature parity and product market fit.
Eventually, only the category winner wins, and then they lock their customers in by charging more for less. This trend again makes a SaaS purchase harder and harder. The future actually looks increasingly bleak for the SaaS space. As transactions become harder, sales professionals are required to facilitate trades more. This makes it even more difficult for smaller SaaS to survive since they’re already burdened with high development costs. For customers, they are getting increasingly locked in and forced to pay more for less.
More and more enterprises will shift to enterprise software that can provide a great variety of services at a lower cost. These services will fulfill needs across departments for different use cases. The biggest catalyst for this motion is AI, which is the ultimate deflationary force for software development.