SaaS Futures: Exploring New Revenues Streams

Published July 25-August 7, 2024

Writings – 1

In recent years, the SaaS (Software as a Service) industry has faced significant challenges: growth has decelerated, valuation multiples have plummeted, and the IPO pipeline has stalled. In this series, I will explore how SaaS companies can rekindle their growth momentum while maintaining profitability by tapping into new revenue streams.

As the founder of Netcore, a $100+ million SaaS company, I have a unique vantage point on the industry. Netcore is a Proficorn – bootstrapped, profitable, and scaled – which allows me to closely analyse and understand the dynamics of the SaaS ecosystem. In my previous essays, I’ve delved into various aspects of SaaS, and I’d like to share some of those insights here as a foundation for this discussion.

LEMMMA: A Playbook for US SaaS Success at Scale: “India’s SaaS story is still in its infancy. The US market is a very good hunting ground for both customers and other SaaS companies. The “product” gap can be bridged through SaaS – to complement India’s historical IT Services strength. Indian companies need to build scale – from $10 million ARR to $100 million and then onward to $1B and more…What would it take for Indian SaaS companies like Netcore to win big in the US and replicate the success of their IT services predecessors? It is in this context that I came up with a possible playbook: LEMMMA, for land-expand-maximise-moat-monopoly-acquire… LEMMMA can offer a winning framework for Indians SaaS companies to conquer new frontiers in the US, the largest market and biggest prize.”

Bundled Kaizen Services: An Advantage for Indian SaaS: “The belief in SaaS providers is to eschew services entirely. It could give the impression that the software platform is somehow inadequate on a standalone basis. It is not easily scalable since it adds people to the mix. And yet, the ability to bring in a people-driven services layer for Kaizen can be very powerful for making decisions – at least until AI is good enough to do it for us. By deliberately weaving human expertise into the fabric of the offering, SaaS platforms not only enhance the intrinsic value of the product but also redefine the paradigm of customer engagement and satisfaction. In doing so, they can not only bridge the gap between product potential and practical application but also pave the way for a new era of SaaS solutions, where the synergy between software and service elevates the efficiency and impact.”

New SaaS: Services, AI Agents, Sharing: “[There is a] a future where the lines between software and services blur, with AI playing a central role in redefining value delivery in the IT and software industries. This shift emphasises outcomes over outputs, and tailored, AI-driven solutions over generalised software tools, marking a significant evolution in how businesses and enterprises approach digital transformation and operational efficiency. Think of this as the new SaaS: software AND services bridged by AI agents… The “New SaaS” can be defined as an integrated, outcome-driven ecosystem that leverages the synergistic potential of services, AI agents, and performance-based collaboration. This novel model transcends traditional software delivery by embedding intelligent, autonomous agents within SaaS platforms to automate complex tasks, personalize user experiences, and drive operational efficiencies. It further enriches the value proposition by incorporating human insights and expertise through bundled services, ensuring that the software continuously evolves in alignment with user needs and market dynamics. The incorporation of a sharing or “progency” [product and agency] model signifies a shift towards aligning the economic interests of SaaS providers with the tangible business outcomes of their clients, fostering a partnership model that rewards innovation, effectiveness, and shared success. Together, these elements form the foundation of the New SaaS, marking a shift from conventional software as a service to a more dynamic, interactive, and value-oriented service model.”

Writings – 2

Profishare: A New Business Model for Enterprise Software: “The enterprise software industry has historically been dominated by two primary business models. The first is the traditional method where companies charge for their software…This approach often involves significant upfront costs for purchasing the software, followed by periodic updates or maintenance fees. The second prevalent model is service-based, where companies do not sell software products but instead offer their expertise to work on software projects… Over the past decade or so, a significant shift has occurred in the enterprise software landscape. The advent of Software as a Service (SaaS) has transformed the way software is sold and consumed. Unlike the traditional model of hefty upfront costs and on-premise installations, SaaS offers cloud-based software on a subscription basis, typically with monthly or annual payments…There remains an opportunity for a third, innovative business model in the enterprise software domain. This is where “Profishare” comes into play. Profishare is a concept that goes beyond the existing paradigms of selling software or services. Instead, it proposes a partnership model where software companies actively participate in the success of their clients’ businesses…The Profishare model proposed by Progency represents a novel and potentially transformative pricing model for B2C/D2C business. It transcends traditional methods of charging for software and services, focusing instead on generating revenue from previously untapped customer segments. By re-engaging dormant and churned customers, allowing businesses to focus on their core marketing activities, incentivising based on conversions, and fostering a co-marketing relationship, Profishare offers a comprehensive approach to enhancing profitability and operational efficiency. This model not only aligns the interests of Progency and its customers but also promises a win-win partnership to unlock new revenue streams, paving the way for businesses to become profipolies.”

Wanted: A Constellation Software for Martech: “Martech has become a crowded space with many companies facing an existential crisis because funds have dried up and marketing spends from businesses have reduced. Some will die, others will get sold to either PE firms or larger marketing cloud or enterprise software companies. This Darwinian process of natural selection will ensure only the best survive. This assumes a given current market size for martech software. What if this market could be grown by many times? That may still not guarantee survival of everyone, but it could open new opportunities for growth for many companies. Some costs are common across companies – especially in marketing and sales. Buyers, especially in the mid-market, would prefer a more unified stack than spending money on integrating different point solutions. A simpler tech stack will also ensure data is not siloed enabling AI models to work better. While roll-ups of smaller martech vendors by the bigger ones is an obvious solution (and is already happening), the diversity of B2C/D2C/eCommerce/retail creates opportunities for a larger universe of companies under one roof. Exactly the way Constellation Software has done for vertical market software companies…How to unlock this opportunity and create a Constellation Software for martech? My answer: MarCo – a Martech Consolidator, which acquires, manages, and builds martech software…The growth by acquisition model has been used in many industries. What is new here is its application to a single software domain (martech) to build and realign one of the most important industries of our times.”

The SaaS industry needs to explore new pathways to navigate its current challenges and unlock new opportunities for growth. But first, let’s begin by celebrating the successful past of SaaS.

History

I asked ChatGPT for a history of the SaaS industry.

The Software as a Service (SaaS) industry has transformed the way businesses operate, delivering software applications over the internet rather than through traditional on-premise installations. This model has revolutionized the software industry, offering scalable, cost-effective, and easily accessible solutions. The journey of SaaS from its early days to its current state is marked by innovation, adaptation, and exponential growth.

Early Beginnings

The concept of SaaS can be traced back to the 1960s with the advent of time-sharing systems. Companies like IBM and DEC developed mainframe computers that could be shared by multiple users simultaneously, laying the groundwork for future SaaS models. However, it wasn’t until the late 1990s that SaaS began to take shape in a form recognizable today.

The Dot-Com Boom and Birth of SaaS

The late 1990s and early 2000s, known as the dot-com boom, saw the rise of the internet and the birth of many internet-based businesses. This period was crucial for the SaaS industry as it provided the necessary technological infrastructure for delivering software over the web. One of the pioneering companies in this era was Salesforce, founded in 1999 by Marc Benioff. Salesforce’s customer relationship management (CRM) platform demonstrated the potential of SaaS by offering a subscription-based service accessible through a web browser. This eliminated the need for businesses to install and maintain software on their own servers.

Growth and Acceptance

The early 2000s marked a period of growth and increasing acceptance of the SaaS model. Companies began to realize the benefits of SaaS, such as lower upfront costs, scalability, and reduced IT infrastructure maintenance. These advantages were particularly appealing to small and medium-sized enterprises (SMEs) that lacked the resources to invest in expensive on-premise solutions.

During this time, other notable SaaS companies emerged, including NetSuite (now part of Oracle), which offered enterprise resource planning (ERP) solutions, and Google, which introduced Google Apps (now G Suite) in 2006, providing a suite of productivity tools hosted in the cloud.

The Financial Crisis and SaaS Resilience

The 2008 financial crisis was a challenging time for many industries, but SaaS proved to be resilient. As companies looked to cut costs and improve efficiency, SaaS solutions became more attractive. The pay-as-you-go pricing model and the ability to quickly scale services up or down in response to changing needs were significant advantages. This period solidified SaaS as a viable and often preferable alternative to traditional software models.

The Rise of Cloud Computing

The proliferation of cloud computing in the 2010s further accelerated the growth of the SaaS industry. Cloud platforms like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud provided robust infrastructures that SaaS companies could leverage to deliver their services more efficiently and reliably. The integration of cloud computing enabled SaaS providers to offer enhanced performance, security, and scalability, further driving adoption across various sectors.

Modern SaaS: Expansion and Innovation

Today, the SaaS industry is characterized by its vast diversity and continuous innovation. SaaS solutions cater to nearly every business function, from HR and finance to marketing and customer service. The industry has seen the emergence of specialized SaaS applications targeting niche markets and specific business needs.

Moreover, advancements in artificial intelligence (AI) and machine learning (ML) are being integrated into SaaS platforms, providing intelligent automation, predictive analytics, and personalized user experiences. Companies like Slack, Zoom, and Shopify have become household names, illustrating the widespread adoption and reliance on SaaS solutions in both business and personal contexts.

Challenges

(This section has been written with help from Claude and ChatGPT.)

The SaaS industry, despite its tremendous potential, is grappling with significant growth challenges that affect both startups and established players. These challenges are reshaping the competitive landscape and forcing companies to rethink their strategies for sustainable success.

One of the most pressing issues is market saturation and differentiation. The SaaS market has become increasingly crowded, with numerous companies offering similar services across various niches. This saturation makes it difficult for new entrants to carve out a unique position and for established players to maintain their competitive edge. Startups must find innovative ways to differentiate themselves, often by focusing on niche markets or offering superior customer service. Meanwhile, larger companies are under pressure to continually innovate, either through internal R&D or strategic acquisitions, to stay ahead of the curve.

Customer acquisition and retention have become more challenging in this competitive environment. For startups, building a customer base from scratch requires substantial marketing efforts and investment. Strategies such as offering free trials, content marketing, and referral programs are crucial for attracting initial users. Established companies, on the other hand, must focus on reducing churn by enhancing their product offerings and customer experience. Both new and established players need to provide consistent value and excellent support to retain customers in a market where switching costs are often low.

The technical challenges of scalability and performance are also significant. As SaaS companies grow, they must ensure their applications can handle increased loads without compromising performance. This requires careful architecture design and infrastructure management, often leveraging cloud services and advanced technologies like microservices and containerization.

Data security and privacy have become paramount concerns, especially with the increasing frequency of data breaches and the introduction of stringent regulations like GDPR and CCPA. SaaS companies must invest heavily in robust security measures and ensure compliance with various regulatory frameworks, adding complexity and cost to their operations.

Managing costs and profitability while pursuing growth is a delicate balancing act. Startups need to manage their finances carefully to ensure sustainability, often operating on lean models to optimize costs. Established companies must focus on operational efficiency to maintain profitability while still investing in innovation and expansion.

The industry is also facing broader economic challenges. Many SaaS companies are experiencing a deceleration in growth rates, making it harder to maintain the high valuations they once enjoyed. This growth slowdown, coupled with changing market conditions, has led to significant valuation pressure. Companies are finding it more difficult to raise capital at favorable terms and are under increased scrutiny to demonstrate profitability sooner.

The stalled IPO pipeline presents another hurdle. The challenging economic environment has led to a slowdown in initial public offerings for SaaS companies, limiting exit opportunities for investors and making it harder for companies to access public markets for funding.

Jaimin Ball

I asked Claude to summarise a June 19, 2024 newsletter from Jaimin Ball (Altimeter Capital) looking at Q1 2024 public cloud software earnings.

Weak Overall Performance: Q1 2024 was generally a weak quarter for software earnings. Most companies faced pressures as buyers expressed caution in purchasing decisions, often weighing whether vendors would help them transition to AI or be disrupted by it.
Hyperscaler Resilience: Major cloud providers (Azure, AWS, GCP) continued to benefit from AI-driven demand. Their revenue growth showed signs of recovery after the previous period of cloud cost optimizations.
Declining Growth Rates: The median quarterly year-over-year growth rate for SaaS companies continued to decline, although there was a slight uptick in Q1. This suggests that while growth is slowing, it may be starting to stabilize.
Improving Profitability: The median Free Cash Flow (FCF) margin continued to rise as companies exited the zero interest rate period and focused on efficient growth. This indicates a shift towards profitability in the SaaS sector.
Pressure on Customer Metrics: Key customer-related metrics showed signs of strain:
- Net Dollar Retention rates have been declining in recent quarters, indicating challenges in expanding revenue from existing customers.
- The median Gross Margin Adjusted CAC (Customer Acquisition Cost) Payback period has been increasing, suggesting it’s becoming more expensive and time-consuming to acquire new customers.

Here are a few additional pointers from Jaimin Ball’s recent newsletters.

July 12, 2024: “You have no choice but to invest in AI given your competitors are. Failure to do so implicitly means you’re giving up on the race and ceding ground and market share to you competitors. This is the Red Queen Effect. I do believe, however, that those who “win the race” in their respective markets will see orders of magnitude returns on their early CapEx. Industrial revolutions don’t last a couple years. They last decades.”

July 5, 2024: Key operating metrics from the listed cloud companies:

Median NTM growth rate: 12%
Median LTM growth rate: 17%
Median Gross Margin: 75%
Median Operating Margin (10%)
Median FCF Margin: 14%
Median Net Retention: 110%
Median CAC Payback: 53 months
Median S&M % Revenue: 40%
Median R&D % Revenue: 25%
Median G&A % Revenue: 15%

June 28, 2024: “The challenge is private markets are FULL of companies who were growing 50-100% at ~$100m of ARR, who are now growing <20% at $200-$300m ARR. And there are many reasons for this. Some [are]: TAMs were captured sooner and companies didn’t scale into their next product line, large incumbents bundled them, execution challenges popped up. Scaling to $500m of revenue is HARD! If the public markets valued a company at 15x revenue who was growing 50-100% at $100m of revenue, who then saw growth decelerate to 20% at $250m, the multiple compression would eat away all of the returns. A company growing 20% at $250m of revenue very well may trade at 5x revenue. And that would leave every public market investor who invested at $100m of revenue underwater.”

June 21, 2024: “The market today is simply saying “we don’t want to make assumptions about your profitability or growth at scale. We’ll pay the high multiple once the company is established.” The fact that 80% of the 20 highest revenue multiple companies have >$1B in revenue (and 100% of the top 10 are >$1B in revenue) shows this. IF you’re able to hit platform scale, and IF you can show FCF leverage, then and only then will you be rewarded with a premium multiple. For everyone else, they find themselves in a “prove it” stage.”

Jason Lemkin

Here are some pointers from Jason Lemkin (SaaStr) on the state of SaaS.

July 7, 2024: “So folks in venture are back to business. 2022 was a year of dealing with the fallout of fallen unicorns, terrible deals, and slashed valuations. 2023 was a year of capitulation, markdowns, and more. But also — a year of AI excitement. The epic growth of OpenAI, Databricks and more have enticed VCs at the Series A and later stage back to work. It was 2 years with a lot of pausing in venture. Now, venture is back to work. The seed markets remain vibrant, and later-stage investors are looking at more deals. Redpoint in our recent Workshop Wednesday noted 2024 is sort of back to normal for growth investing now … and that we may be reaching the end of the bottom in net new VC investing. But … but … here’s the thing. A reality has set in. It’s Year 3 of the Venture Downturn in SaaS.”

June 18, 2024: “Liquidity is down 50% in Private Equity…Private Equity overall and Venture Capital in particular had an insane amount of “exits” for high dollar amounts in 2021. An IPO a week, and seemingly, a billion+ exit every week as well. From Slack selling for $27 Billion to Salesloft for $2.5 Billion and so, so many more. It just makes sense there would be a hangover after that era. And indeed there is. But while Venture Capital and Private Equity are overall built to be patient, and wait 10+ yeas for returns from any given investment — in exchange for higher returns — they aren’t build to be all that patient in the aggregate. PE and VC expect a steady stream of returns each year to, at a minimum, recycle back into new VC and PE funds. Right now, that’s at a decade+ low. And it’s looking like 2024 is much of the same.”

June 6, 2024: “To start adding eight figures and then nine figures of new bookings a year, it can really help to focus on bigger customers. And bigger customers almost already have higher NRR. Which makes them even more valuable. What I worry is when it’s going all-in on bigger customers and going enterprise is for too many tactical reasons. To combat the fact that new customer growth has slowed. Then it can often mask issues around new customer acquistion for a year or two. And what I see in that case is folks often abandoning their long tail. They stop supporting, or at least investing, in their smaller customers. Their advocates. Their biggest champions. And some times, folks that can grow into larger accounts over time. As founders especially, you have to fight for the smallest customers. You have to fight for the ones than in 3-5 years may get bigger. You have to fight for the ones that may only pay $29 a month, but tell 100s of folks how great you are.”

April 6, 2024: There’s a bit of a malaise hanging over the SaaS world today. AI excitement obscures it a bit, but it’s there. A feeling that:

Growth has slowed everywhere (true overall. The average public SaaS company is now growing less than 20% a year!)
Sales is so much harder, and the old playbooks aren’t working well
Folks don’t want to work as hard anymore
There are even more competitors than ever
Every leader is competing with each other, trampling on their turf (Gong v. Outreach v. Salesloft v. Zoom, or Rippling vs. Deal vs. Gusto vs ….)
Layoffs have become normalized
Customers are angry from endless price increases and upsells
Budgets are being cut to find budget for AI (true)
Every renewal is not just a battle but a downgrade
Profitability is all that matters
VCs have checked out in a lot of non-AI SaaS
A feeling we’re in a massive “downturn”, even as the overall U.S. economy still is booming
A feeling products have fallen out of product-market fit, or at least, become more “nice to haves” vs. must haves
Even healthy customers scrutinizing budgets in ways they haven’t in many years
Happy customers churning simply because they have to cut apps
A feeling things actually won’t ever get any better or easier in SaaS

More Inputs

Pitchbook (June 17, 2024): “As enterprises feel pressured to buy into the AI revolution, they’re cutting back spending on other software tools—a shift that is crimping growth at SaaS leaders and startups alike. Revenue growth at newly public US VC-backed SaaS companies fell sharply in 2022 and has remained low, according to PitchBook data. The best of these companies were growing sales at more than 73% year-over-year in Q1 2022, a rate that declined to 32% in Q1 of this year. The median growth rate for the cohort is now 19%, down from 35% in Q1 2022. This cohort is a bellwether for the broader late-stage software startup market and an indication that the higher growth rates that were common pre-2022 remain elusive.”

This is from a recent Pitchbook report on Enterprise SaaS:

Bessemer Venture Partners published its State of the Cloud 2024 report recently. A couple graphics from it:

These charts are from a July 2024 report on Front Office Software by Moelis:

Morning Context (Jan 31, 2024): “This is a delicate time for India’s SaaS businesses. For the longest time, SaaS—software as a service—has been one of the top performers in the country’s venture-funded startup ecosystem. The ability to scale and create a recurring revenue stream by a few companies and sell their services to clients in the US, essentially earning their income in dollars and accounting for costs in rupees, made it an extremely lucrative sector for venture capital investors. But now, this is changing. Two points currently dominate the conversation around India’s SaaS landscape: (1) The fear of generative AI. Everyone is afraid that generative AI can do what software and software services do (2) The worry that Indian SaaS companies could become uncompetitive because of ballooning costs.”

Mark Roberge (Stage 2 Capital) on his #1 advice to SaaS founders: “We have had arguably the most macro disruptions to the startup ecosystem in the last 5 years than any other time in at least my lifetime. Between the initial COVID economic shutdown to the tech V-shape recovery to the rise and fall of the public and private valuation landscape with inflation and interest rates to now the advent of a massive technology breakthrough with AI, these are crazy, fast-moving, and exciting times. The advice we give, especially for entrepreneurs who have been working on their startups for a few years is, imagine if you could start over today, knowing what you know about customer sentiment, the macro conditions, the technical capabilities, etc., what would you do with a clean start? That reflection could lead to some important breakthroughs around the optimal vision for your path forward.”

How can SaaS companies navigate their path forward? They have two options: either wait for market conditions to improve or proactively seek out new opportunities. In this discussion, I will focus on the latter, exploring five tracks for future growth:

New Products
New Markets
New Geos
Services
Mergers and Acquisitions

New Products

As SaaS companies grow, they often face the challenge of balancing specialisation with diversification. While depth in a vertical space can lead to product superiority, breadth can satisfy customer demands for more consolidation and fewer vendors, and also open new growth avenues. The key is to strike a balance that maintains core competencies while exploring new opportunities.

Netcore’s experience provides an excellent case study in this approach:

Maintaining a wide presence: Netcore has deliberately kept a broad focus, covering email, CPaaS (SMS, WhatsApp, and RCS), and customer engagement (marketing automation). This diversification strategy has allowed Netcore to meet a wider range of customer needs and create multiple growth avenues.
Strategic acquisitions: The addition of Unbxd to Netcore’s portfolio expanded their offerings into search and product discovery. This move not only broadened their ecosystem but also opened up new market opportunities.
Continuous innovation: Netcore has leveraged its diverse portfolio to introduce new product features across its offerings. Examples include AMP in Email, Co-Marketer and Digital Twins for customer engagement, and visual search in Unbxd. These innovations create more land-and-expand opportunities within the existing customer base.
Balancing depth and breadth: While expanding their product range, Netcore has maintained a focus on product superiority in each area. This approach addresses the constant dilemma between depth (pushed by new competitors) and breadth (demanded by existing customers looking to consolidate vendors).

I asked Claude to discuss the benefits and challenges new product development in SaaS.

Benefits

Expanded Market Opportunity: New products can open up additional market segments or geographies, increasing the total addressable market.
Increased Customer Lifetime Value: By offering a wider range of solutions, companies can increase revenue per customer and improve retention.
Competitive Differentiation: Unique or innovative products can set a company apart in a crowded market.
Cross-Selling Opportunities: New products create opportunities to sell additional services to existing customers.
Risk Mitigation: A diversified product portfolio can help buffer against market changes or shifts in customer preferences.
Innovation Culture: Continuous product development fosters a culture of innovation within the organization.

Challenges

Resource Allocation: Developing new products requires significant investment in time, money, and talent, potentially diverting resources from existing products.
Market Fit: Ensuring that new products truly meet market needs and achieve product-market fit can be challenging.
Technical Debt: Rapid product development can sometimes lead to technical debt, creating long-term maintenance issues.
Organizational Focus: Multiple products can lead to a lack of focus, potentially diluting the company’s core strengths.
Increased Complexity: Managing multiple products increases operational complexity in areas like sales, marketing, and customer support.
Integration Challenges: Ensuring that new products integrate seamlessly with existing offerings can be technically challenging.
Cannibalization: New products might compete with existing offerings, potentially cannibalizing current revenue streams.
Market Education: Introducing entirely new concepts or products often requires significant effort in market education and adoption.

New Markets

SaaS companies have the flexibility to push their offerings up or down the customer segmentation pyramid, targeting different tiers of businesses based on their size and needs. This vertical expansion strategy can open up new growth opportunities and revenue streams. I will explore this concept using examples from Netcore’s experience.

Moving Upmarket: The Unbxd Example

Unbxd, a part of the Netcore family, provides a compelling case study in moving upmarket:

Initial Focus: For a long time, Unbxd concentrated on mid-market ecommerce companies. This allowed them to refine their product and establish a strong presence in a specific niche.
Catalyst for Change: Recognition from industry analysts like Forrester and Gartner served as a validation of Unbxd’s capabilities and opened doors to larger enterprises.
Strategic Shift: Leveraging this recognition, Unbxd has been actively pushing into the enterprise segment over the past year.
Implications: This move upmarket often requires enhancements in product robustness, scalability, and customisation capabilities. It also typically involves changes in sales strategies, with a shift towards more complex, longer sales cycles and higher-touch customer relationships.

Exploring Downmarket Opportunities: Netcore’s SMB/DIY Initiatives

On the flip side, Netcore has been exploring opportunities in the SMB (Small and Medium-sized Business) market from its historic focus on mid-market and enterprise:

Long-term Interest: Netcore has long considered the potential of offering SMB/DIY (Do-It-Yourself) solutions, recognising the vast market opportunity in this segment.
Product-Led Growth (PLG) Potential: The possibility of introducing a PLG-led go-to-market strategy for Epps (email apps) presents an interesting opportunity to tap into the SMB market.
Implications: Moving downmarket often requires simplifying products, making them more self-service oriented, and adjusting pricing models. It may also involve developing new marketing and customer acquisition strategies suited to a higher volume, lower touch approach.

I asked Claude to discuss the benefits, challenges, and strategies of vertical expansion.

Benefits

Market Expansion: Accessing new customer segments can significantly expand the total addressable market.
Revenue Diversification: Different segments can provide varied revenue streams, potentially smoothing out business cycles.
Product Evolution: Adapting products for different segments can lead to innovations beneficial across the entire customer base.
Competitive Positioning: The ability to serve multiple segments can be a strong differentiator in the market.

Challenges

Product Adaptation: Significant changes may be needed to make products suitable for different market segments.
Sales and Marketing Adjustments: Different segments often require distinct sales and marketing approaches.
Support and Customer Success: The level and type of support needed can vary greatly between segments.
Cultural Shift: Moving between segments might require shifts in company culture and mindset.

New Geos

Exploration and expansion into new geographies has been a hallmark of humanity since time immemorial. This is how empires got built. Multinational corporations (MNCs) did it and continue to do so. SaaS companies need to think along similar lines to drive growth and capture global market opportunities.

Netcore’s journey provides an instructive example of strategic geographical expansion. Beginning in India, the company methodically expanded its footprint into South-East Asia, the Middle East, and Africa. While forays into the US and Europe are still evolving, a recent expansion into Latin America is yielding very promising results. This diverse approach underscores the potential of exploring various markets, each with its unique characteristics and opportunities.

Geographical expansion can be executed through various strategies:

Sending a leader from headquarters: This approach ensures alignment with the company’s core vision and culture.
Hiring locally: Tapping into local talent can provide invaluable insights into market nuances and help navigate regional business practices.
Partnering: Collaborating with established local entities can accelerate market entry and provide immediate credibility.

I asked Claude to list the benefits and challenges of expanding to new geos.

Benefits

Market Expansion: Access to new customer bases and increased total addressable market.
Revenue Diversification: Reduced dependence on a single market, enhancing overall business stability.
Global Brand Recognition: Presence in multiple markets can enhance the company’s international reputation.
Innovation Opportunities: Exposure to diverse markets can spark new ideas for product development.
Risk Mitigation: Geographical diversification can help offset economic or political risks in specific regions.

Challenges

Cultural and Regulatory Adaptation: Navigating varied business cultures, practices, and regulatory frameworks across regions.
Financial Investment: Significant upfront costs for market entry, often with delayed returns.
Operational Complexity: Managing a geographically dispersed organization and coordinating across time zones.
Market Understanding: Developing deep insights into new customer needs, buying behaviors, and competitive landscapes.
Localization Requirements: Adapting products, marketing, and support to local languages, preferences, and technological infrastructures.

The triad of new products, markets, and geographies represents a powerful set of growth levers for SaaS companies. Each element of this triad offers unique opportunities for expansion and diversification:

New products allow companies to broaden their offerings, meeting more customer needs, increasing stickiness, and potentially increasing revenue per customer. They can also open doors to entirely new customer segments.
New markets involve targeting different customer segments or industries, leveraging existing products to solve problems for a wider range of businesses. This can lead to increased adoption and new use cases for the company’s solutions.
New geographies enable companies to tap into fresh customer bases, often with different needs and expectations. This global expansion can significantly increase the total addressable market and provide a hedge against regional economic fluctuations.

When strategically combined, these three levers can create a multiplicative effect on growth.

Services – 1

During a recent customer meeting, I received valuable feedback from a CMO that highlighted the growing demand for integrated services in SaaS offerings. The CMO stated: “Netcore should offer managed services under its own control and ownership. We’ve purchased your SaaS solution, but that alone doesn’t guarantee adoption or, more importantly, effective usage. Your team knows the product best, having built it. Why not provide a team that can work directly with us to ensure we achieve our desired outcomes? Without this support, in a year or two, we might question the effectiveness of what’s been delivered and start looking for alternatives.”

This was the third time in a few weeks that I had got this feedback from a CMO. As I reflected on the conversations, I realised that SaaS companies like Netcore need to consider going beyond just providing software. Clients are increasingly seeking partnerships that ensure they derive maximum value from their investments. By offering managed services, we can bridge the gap between software capabilities and real-world implementation, fostering stronger, more enduring client relationships.

SaaS and Services have traditionally been viewed as fundamentally different business models, akin to chalk and cheese for most companies. The mindsets driving these two approaches are indeed quite distinct. SaaS companies typically focus on scalability, product development, and recurring revenue, while service-oriented businesses emphasise customisation, client relationships, and project-based work.

The economic metrics for these models also diverge significantly. SaaS companies are often valued based on their high gross margins and the predictability of their recurring revenue, resulting in higher valuation multiples. In contrast, services businesses generally have lower gross margins due to the labour-intensive nature of their work and are typically valued at lower multiples.

However, in today’s challenging business landscape, where competition is fierce and customer expectations are ever-increasing, software companies must be open to exploring new avenues for growth and customer satisfaction. This is where a thin layer of services as an add-on capability can prove invaluable.

By introducing a carefully curated set of services, SaaS companies can:

Enhance product adoption and customer success
Deepen client relationships and increase stickiness
Generate additional revenue streams
Gain valuable insights for product development
Differentiate themselves in a crowded market

The key is to strike a balance – maintaining the core SaaS model while leveraging services to augment the overall value proposition. This hybrid approach can help SaaS companies navigate market challenges, meet diverse customer needs, and create a more robust, resilient business model.

There are three types of approaches that SaaS companies could take for adding the services layer:

Professional Services involve providing expertise to help clients implement, customise, and optimise the SaaS solution. This could include initial setup, integration with existing systems, and training. Professional services are typically project-based and have a defined scope and timeline, aimed at getting the client up and running effectively with the software.
Managed Services offer ongoing, hands-on management of the SaaS solution on behalf of the client. This approach involves taking responsibility for the day-to-day operations, maintenance, and optimisation of the software. Managed services can include regular updates, performance monitoring, troubleshooting, and continuous improvement of the solution’s use within the client’s organisation.
Bundled Kaizen Services refers to an approach where the SaaS provider offers services aimed at constantly enhancing the value derived from the software. These services are bundled with the SaaS offering and focus on regularly analysing usage patterns, identifying areas for improvement, and implementing changes to boost efficiency and effectiveness. Bundled Kaizen services create a partnership where the provider is actively invested in the client’s ongoing success and evolution in using the software.

Services – 2

I asked Claude to highlight the India advantage for SaaS companies.

SaaS companies headquartered in India have a unique opportunity to capitalize on the country’s vast pool of skilled yet cost-effective talent. This advantage can be particularly powerful when it comes to offering services alongside their SaaS products. Here’s how they can leverage this:

Cost-Effective Talent Pool: India boasts a large number of well-educated, English-speaking professionals in IT, engineering, and business fields. The cost of hiring these professionals is often significantly lower than in Western countries, allowing Indian SaaS companies to offer high-quality services at competitive prices.
24/7 Support and Operations: The time zone difference between India and major Western markets can be turned into an advantage. Indian companies can offer round-the-clock support and managed services, ensuring that client needs are addressed promptly, regardless of the time of day in the client’s location.
Scalability: The abundance of talent in India makes it easier for companies to scale their service offerings quickly. As demand grows, additional staff can be recruited and trained relatively quickly and cost-effectively.
Expertise in Service Delivery: India has a long-standing reputation in the IT services industry. This experience and expertise can be leveraged to deliver high-quality professional and managed services for SaaS products.
Competitive Pricing: The lower cost base allows Indian SaaS companies to offer services at prices that may be difficult for their Western counterparts to match. This can be a significant differentiator in price-sensitive markets or during economic downturns.
Investment in Training and Development: The cost savings can be partially reinvested into comprehensive training programs, ensuring that the service teams are always up-to-date with the latest product features and industry best practices.
Enhanced Product Development: Close interaction between service teams and clients can provide valuable insights for product development. The lower cost base allows for larger service teams, potentially accelerating the feedback loop and product improvement cycle.
Blended Delivery Models: Companies can create blended teams with onshore (client-location) and offshore (India-based) members, offering clients the best of both worlds – local presence and cost-effectiveness.

By leveraging these advantages, Indian SaaS companies can offer a compelling value proposition: high-quality software combined with comprehensive, cost-effective services. This can help them compete effectively on a global scale, potentially disrupting established players in the market.

However, it’s crucial to note that this approach should not compromise on quality. The focus should be on delivering high-value services at competitive prices, rather than simply being the cheapest option. Indian SaaS companies need to position themselves as providers of excellent software and services that happen to be cost-effective, rather than low-cost providers that happen to offer software and services.

To summarise: Integrating services into a SaaS offering is not without its challenges. It requires careful balancing of resources, pricing strategies, and operational models to ensure that the core SaaS business isn’t compromised. However, when executed thoughtfully, this approach can significantly enhance customer success, improve retention rates, and unlock new revenue streams. By offering professional services, managed services, or bundled Kaizen services – or a combination thereof – SaaS companies can transform their relationship with clients from mere vendors to strategic partners. This evolution not only addresses the immediate needs of clients but also positions the SaaS provider for long-term success in an increasingly competitive market. As the SaaS industry continues to mature, those who can effectively blend software with high-value services will likely find themselves at a distinct advantage, better equipped to meet the complex and evolving needs of their customers.

M&A

Mergers and acquisitions have long been a central strategy in the business world, and they can serve as a potent growth lever for SaaS companies. In an industry characterised by rapid technological advancements and changing market dynamics, M&A can provide a fast track to expansion, innovation, and market dominance.

Netcore’s experience offers a prime example of how M&A can be effectively leveraged in the SaaS sector. The company’s strategic acquisitions of Boxx.ai and Hansel.io, followed by the larger $100 million deal for Unbxd, illustrate different facets of M&A strategy:

Capability Expansion: The smaller acquisitions of Boxx.ai and Hansel.io were aimed at enhancing Netcore’s core customer engagement platform. This approach allows companies to quickly add new features or technologies to their existing products, staying ahead of market demands without the time and resource investment required for in-house development.
New Market Entry: The Unbxd acquisition brought new capabilities in both product offerings and geographical reach. This demonstrates how M&A can be used not just for product enhancement, but also for entering new markets or customer segments.
Scale and Synergy: Larger deals like the Unbxd acquisition can provide significant scale benefits, potentially leading to cost synergies and increased market power.

I asked Claude to discuss how consolidation through M&A becomes even more crucial in the current challenging climate for the SaaS industry.

Resource Optimisation: Combining resources can help companies weather economic downturns more effectively. Shared costs in areas like R&D, marketing, and administration can lead to improved profitability.
Market Consolidation: In a crowded SaaS landscape, M&A can reduce competition and allow companies to gain market share more quickly than organic growth alone would permit.
Talent Acquisition: In the tech industry, acquisitions are often as much about acquiring talent (“acqui-hires”) as they are about technology or market share.
Diversification: M&A can help SaaS companies diversify their product offerings or customer base, reducing risk and potentially opening new revenue streams.
Accelerated Innovation: Combining the intellectual property and R&D capabilities of multiple companies can speed up innovation cycles.

The benefits of increased M&A activity in the SaaS sector extend beyond the companies involved:

Customers can benefit from more comprehensive, integrated solutions and potentially more stable vendors.
Investors may see improved returns as companies achieve greater scale and efficiency.
Employees might find new opportunities for growth and development within larger, more diverse organizations.

However, it’s crucial to approach M&A strategically. Not all deals create value, and the integration process can be challenging. Successful M&A in SaaS requires careful due diligence, clear strategic alignment, and effective post-merger integration planning.

As the SaaS industry matures and faces economic headwinds, we can expect to see increased M&A activity. Companies that can effectively leverage this strategy – whether as acquirers or acquisition targets – will be well-positioned to thrive in the evolving SaaS landscape. For the industry as a whole, this consolidation could lead to a more robust, efficient ecosystem that delivers greater value to all stakeholders.

Summary and More

I asked Claude to provide a summary of the key ideas discussed.

The SaaS industry is facing significant challenges, including decelerated growth, plummeting valuation multiples, and a stalled IPO pipeline. This essay explores how SaaS companies can rekindle growth while maintaining profitability.
The author, drawing from his experience as the founder of Netcore, a $100+ million SaaS company, proposes five tracks for future growth: new products, new markets, new geographies, services, and mergers and acquisitions.
New Products: SaaS companies must balance specialization with diversification. Netcore’s approach includes maintaining a wide presence across email, CPaaS, and customer engagement, making strategic acquisitions, and continuous innovation. The benefits of new product development include expanded market opportunities and increased customer lifetime value, while challenges include resource allocation and market fit.
New Markets: Companies can push their offerings up or down the customer segmentation pyramid. Unbxd, a Netcore company, moved upmarket from mid-market to enterprise customers. Conversely, Netcore is exploring downmarket opportunities in the SMB sector. This vertical expansion can lead to market growth and revenue diversification but requires careful product adaptation and sales strategy adjustments.
New Geographies: Expanding into new geographies can drive growth and capture global market opportunities. Netcore’s journey from India to South-East Asia, the Middle East, Africa, and Latin America illustrates this strategy. Benefits include market expansion and risk mitigation, while challenges involve cultural adaptation and operational complexity.
Services: There’s growing demand for integrated services in SaaS offerings. By offering professional services, managed services, or bundled Kaizen services, SaaS companies can enhance customer success and deepen client relationships. This approach requires balancing the core SaaS model with service offerings.
Indian SaaS companies have a unique advantage in offering services due to their access to a cost-effective, skilled talent pool. This allows for competitive pricing, 24/7 support, and scalability. However, the focus should remain on delivering high-value services rather than just being the cheapest option.
Mergers and Acquisitions (M&A): M&A can serve as a potent growth lever for SaaS companies. Netcore’s acquisitions of Boxx.ai, Hansel.io, and Unbxd demonstrate how M&A can expand capabilities, enter new markets, and achieve scale. In the current challenging climate, consolidation through M&A becomes even more crucial for resource optimization and market consolidation.

I then asked Claude if there are additional ideas which can help SaaS companies.

Top 3

AI and Machine Learning Integrations: The integration of AI and ML capabilities into SaaS products represents a massive opportunity. As AI technology advances rapidly, SaaS companies that successfully incorporate AI features can significantly enhance their value proposition. This could include predictive analytics, automated decision-making, personalized user experiences, and intelligent process automation. AI integration can justify premium pricing and create substantial differentiation in crowded markets.
API Monetization and Developer Platforms: Opening up your software through APIs and creating developer platforms can dramatically expand your ecosystem and revenue potential. This approach allows third-party developers to build on your platform, extending its capabilities and reach. It can create network effects, making your software more valuable as more integrations are built. Revenue can come from API usage fees, revenue sharing from third-party apps, or offering premium API tiers.
Usage-Based Pricing: Moving from flat-rate subscriptions to usage-based pricing models aligns costs more closely with the value customers receive. This model can attract a wider range of customers, from small businesses to large enterprises, as they only pay for what they use. It can also lead to higher revenues from power users while still being attractive to smaller or occasional users. As businesses increasingly scrutinize their SaaS spend, usage-based pricing can provide a compelling value proposition.

Additional (from Claude)

Freemium Models with Premium Features: Offer a basic version for free, then charge for advanced functionalities to drive user acquisition and upsells.
Performance-Based Pricing: Align pricing with the value delivered, charging based on measurable outcomes achieved using the software.
Industry-Specific Solutions: Develop tailored versions of your software for specific industries, addressing unique needs and commanding premium pricing.
Custom Solutions and White Labeling: Offer customization services or allow other businesses to rebrand your software, reaching new markets and premium clients.
Training and Certification Programs: Offer paid training and certifications to help users become proficient, creating an additional revenue stream.
Virtual Events and Webinars: Host paid online events and workshops, providing valuable content and networking opportunities.
Partner Ecosystems: Create a marketplace for third-party apps or services that integrate with your software, taking a commission on sales.
Data Monetization: Aggregate and anonymize user data to provide valuable insights and analytics as a separate product.
Micro-SaaS Add-ons: Develop small, specialized tools or features that can be sold separately from your main product.
API Monetization: Offer paid access to your software’s API, allowing other developers to integrate your services into their applications.

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