Developing software to compete with established SAAS rental products

Imagine you have have a customer/prospect that are already using an existing software product which they are renting from another software vendor through a SAAS (Software As Service Service) model. Now suppose that you want to develop your own new and improved version of your competitor’s product and sell it to your customer/prospect to replace what they’re currently using. An engineer’s first thoughts will be centred around what features can be developed to differentiate themselves from the competitor. Although this would be a good question, it shouldn’t be the main question because you have bigger problems than that:

  • Money constraints: the biggest problem you’ll have is funding, or the lack thereof. With your competitor already having an established SAAS business, they have a reasonably safe source of passive income to pay developers’ salaries and other costs, while you on the other hand have nothing i.e. at least not from the product you’re planning on developing. At this point you’re probably thinking that getting an investor would be the answer. However, here are the problems with investors:
    • Firstly: most investors will not give you any money unless you’re already making money. Most people invest in things that have a proven track record with an upward growth trajectory, not some airy-fairy idea that you came with up last Wednesday while in the shower.
    • Secondly: people understand that investing in a product that is in its infant stage carries a lot of risk. For that high level of risk, they expect a high level of return on their investment e.g. they want to see 50%, 100%, 200% (or more ) year-on-year growth, because otherwise they may as well invest their money in the stock exchange or put it in a savings account that has a small but guaranteed growth. What this means is that your product needs to have the potential to become a unicorn, not just an app that competes with an already established app. In other words, products aimed at catering to a niche market are basically out of the question.
    • Lastly, even if you manage to get an investor, it’s still not going to solve your time constraint problems.
  • Time constraints : you have to keep in mind that your competitor has already developed their product, while you have nothing to show except a presentation outlining some ideas. That means your competitor is already miles ahead of you. Before you can develop your fancy features that differentiate your product, you will need to still develop the basic core product which your competitor has already done. There’s a good chance that by the time you develop the core product, your competitor will have already developed the fancy features you’re planning on. In other words, you will always be several steps behind them. At this point you might think that you’ll just have to work harder and faster than your competitor. However, in most most cases the competitor has already spent years investing time, money, blood, sweat and tears into their product. Moreover, your competitor already has an established business with a stable cash flow and resources. So for you to think that you can simply work harder and faster to catch up to them would just be naive. I’m not saying it’s not possible, but just that your chances of success are drastically reduced i.e. you probably have a less than 10% chance of making it and I’m being very generous in saying that.

Given these constraints, how are you as David going to take down Goliath? A big established corporate may be slower than you because of bureaucracy, processes and procedures, but they have much bigger muscles. They just have to hit you once and you’ll go down, no matter how fast you think you are. In the story of David and Goliath, David wins the fight not because he was faster or stronger than Goliath, but because he identified Goliath’s weakness and changed the game. Instead of fighting in close combat which Goliath excelled at, David knew that Goliath had terrible eye sight. So he kept a safe distance from Goliath and used a slingshot to shoot a rock straight at Goliath’s forehead i.e. he changed the game.

In the same way, you will never be able to win against an established SAAS company if you take them head-on playing their game by their rules. You need to identify their weaknesses and use them to your advantage:

  • SAAS model weakness: in the case of a SAAS company their greatest weakness is their business model renting out the software instead of selling it as once off. Regardless of what the marketing machines around the world are spewing out, most people do not like the idea of renting products and therefore paying in perpetuity. Any person that thinks long term will prefer to own the products that they use, pay them off and never have to worry about payments again. The only reason the SAAS model exists is because the tech industry has realised that they can make a lot more money long term if they rent their products instead of selling them once off. SAAS is not for the benefit of the end-user or consumer, it’s for the benefit of the tech industry and developers that work in it. SAAS is basically a really good marketing scam.
  • Bloated product weakness: the other problem with established software products is that most of them are massively bloated with thousands of features that most people never use. All of those features are costed into the rental fee that their SAAS customers are paying for every month/year. That means that most customers are paying huge sums of rental fees for features that they never use. It’s like renting a mansion with ten rooms, but only using two of the rooms 99% of the time.
  • Lack of flexibility: one of the biggest problem in dealing with established out of the box products is the lack of flexibility. If the customer ever wants to a customisation to cater for their specific business needs, this will just not be possible. They have virtually no chance of convincing Goliath to change their product. The best the customer can do is voice their concerns and/or file a request for an additional feature in new release. If enough customers make the same request the software vendor may consider it and develop the feature in their upcoming release which may become available months or even years later. On the other hand, having software developed specifically for them allows the customer to be involved in the development process. They can submit a change control request to the developers and the feature can be available within days, or weeks

Knowing these weakness of most SAAS companies means that you can change the game by changing your business model. Instead of trying to develop and sell your product to your first customer under the SAAS model, you should offer services. You present your customer/prospect with the option of developing the software product by charging them for your development hours only, but promising that they’ll never have to pay any rental fees ever again i.e. they will own the software product once developed. The obvious issue here would then be the question of whether or not you’ll be able to resell the software to another customer. To get around this, you negotiate with your first customer for them to receive royal fees if you ever to resell the software to someone else. In other words, your first customer will also become your investor.

Using this method you can get your customer to pay for the development who will also have a vested interest in your product because they will not only get the benefit of using your product but also receive royalties for any sales you make in the future. Once you’ve gotten the product developed, you can then offer it to other customers on a SAAS model if you so wish. In summary, I believe with this strategy you can get your bread buttered on both sides i.e. get paid to develop a product as well as get paid after it’s been developed. I have personally executed and seen this strategy in action and therefore can vouch that it works.