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Based on my own experience and that of many participants in the www.SoftwareCEO.com forums it seems that the ‘Slow but steady’ is winning the race against the ‘Wham, bam, thank you M’aam’ software co’s springing up.  It’s the classic age-old debate of ‘Experience vs skills/speed’.

What I am talking about is that in the ASP (Application Service Provider) and SAAS (Software As A Service) business model sector (Rented/hosted software), there is a strange reminiscent undertone vaguely familiar of the dot com boom/bust in the late 1990’s. It appears that in the rush to gain customers quickly, the software co’s have forgotten the basic principals of business. To make a profit! And to create a valuable product/service with a viable business model.

All too often these days I’m reading about companies that scaled to quickly, only to collapse under bad infrastructure, or worse, needed to expand infrastructure quickly, and did so, but had to give away most of the business to VC’s. How do I know this? I keep a ‘watch list’ of many players in the ASP market, and each year, I’m seeing new entrants come in and old co’s (who were new last year etc) dropping out.  The new players look great, flashy, and have awesome functionality, but many don’t survive long. There is a core of about 15-20 major players in the ASP space (ie: Salesforce.com, Replicon.com, OpenAir.com, Us, ProWorkflow.com) who have been around for 4-10+years (some seem untouchable in size), but for most ASP’s, the lifespan seems to be 1-2 years (regardless of the quality of the website or product). I’ve also noticed some of these new co’s (1-3yo) now tacking on additional ‘quick money’ services such as web design, development, customizing etc, which seems like a sure sign that they’re not making money off the core solution.


The only honest reason to have an ASP or SAAS business (if we’re all honest) is the ‘ka-ching’ factor, otherwise known as ‘Strong recurring revenue from a mostly automated service’. Or better put as ‘Great cashflow, from a viable, well built business system’.  So for software co’s with a low inertia focus (SAAS) to change to a high inertia focus (Custom Development etc) – this says to me that the business model isn’t right.

A strong profitable business model is the most important factor and it seems to be missing in a lot of the new high functionality, flash looking SAAS co’s today. They look healthy on the surface, but a few simple equations can soon prove that they are surviving either by the skin of their teeth, or they must be propped up somehow (VC, Angel, etc). On the other hand the older more experienced co’s seem to be doing ok, despite having older, uglier products. They have the focus right…  "Don’t touch the product, just sell it" and their cost structures allow them to do this profitably.

Here are some points to watch for with SAAS businesses:

Ridiculous pricing:
There is a physical infrastructure cost to providing a good SAAS service. If the service pricing is too low, question the underlying infrastructure. The market average is about $15 per user p/m. Salesforce are about $65p/u p/m but hundreds are about $5p/u p/m or less! or free!  You know the saying… "You pay peanuts…". We recently had a customer come to our ProWorkflow solution because his hosting provider lost all his business data (few years worth) and had no backup! They advertised that they had backups, but when I challenged him, we discovered their server backups hadn’t been working for about 6x months! and this was a hosting server with 100’s of other clients! Nobody at their end had thought to check the backups were working! And to make it worse… The company I’m talking about is one of Australia’s largest hosting providers!
He paid for a cheap hosting provider and guess what – he got cheap service!

Ridiculous User Numbers:
Ever noticed that SAAS businesses either have hundreds of users, a few thousand or hundreds of thousands? but there is a big gap between the few thousand and 100,000+… Here’s some advice…    Some are lying. A particular co I know say they have 175,000 users, but the truth is, they have about 5,000 active users and 170,000 people who have ‘used the demo’ or tried the software and quit it as it didn’t work for them. The true number is about 10,000 users. Also, they’ve said 175,000 users on the website now for about 4+ years, and if at their current pricing this was true, their turnover would be 8.7 million per month, which it isn’t – I guarantee it.  Another co I know advertises ‘Demo Users’ rather than ‘ Active product users’ so of course the numbers are higher.  The point is – Never believe the user numbers!

Ridiculous Functionality:
Be wary of SAAS business with a complex solution or ‘functionality driven’ focus. These co’s are not ‘Customer Centric’ but rather ‘Development/Feature Centric’. The whole point of using a solution is that it needs to simplify business processes, not complicate them. The SAAS’s that continually add functionality tend to make the customers life more complex over time rather than simpler. Yes, you need functionality, but the focus should be on ‘Usability’ and making the solution a seamless addition to the customers business, not making it an extraneous burdon as many SAAS’s do.
Each release, with www.proworkflow.com we do add some functionality (requested by multiple customers) but we also try to make the app more usable with each release.

"Problems Groweth!"
As you grow a business, you have to constantly look at improving infrastructure, billing, sales, marketing, staff, product, etc otherwise all you will do is ‘Grow Problems’ and at some stage you can’t continue – the ‘Problems are too big!’.
Returning to the purpose of this blog, I see and know of (through various CEO forums or contacts) many sofware co’s that have one or two parts in order, ie: product, marketing but the rest of the business model is flawed. Unless these co’s put more emphasis on the other areas of their businesses, I predict that we’ll see another bust (of sorts) in the coming year….

Remember: "Anyone can make a better burger than MacDonalds, but can you build a better business system!"

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About the author:
Julian Stone, CEO – Project, Task & Time Management specialist for: ProActiveSoftware.com, ProWorkflow.com & Julian101.com


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About The Author:
Julian Stone begin_of_the_skype_highlighting     end_of_the_skype_highlighting is the CEO of ProActive Software, developers and creators of the leading web based project management software http://www.proworkflow.com.