If you are an avid reader of business news, you have kept up with the collapse of software-as-a-service. Tech layoffs are accumulating greatly to reach hundreds of thousands. Valuations are collapsing. Raising funds is not what it used to be. So, this is a hard reality check for all start-ups and SaaS businesses. Some call is a collapse. I call it a debacle.
Many of these SaaS companies and their founders made fun of the industrial dinosaurs and called them obsolete. Over the past five years though, many of these small, medium and large manufacturing companies have invested steadily in digital transformations and have launched their own SaaS ecosystems. They have transformed slowly but surely their companies to be able to bring innovative and valuable digital solutions to their clients and installed base.
Meanwhile, SaaS companies have poured billions of dollars in funding into the acquisition of logos, into hiring of teams because they could and into beautiful but unnecessary workplaces offering free snacks and unlimited vacations. When so much capital and funds are available, you forget the essence of why your company exists, what its core mission is and what product/market fit really means. What is happening today in the SaaS world is the result of exuberant spending, irrational growth plans and crazy speed that lead to short circuiting what needs to be done.
I have worked with many SaaS companies, and I have learned a few things along the way. There are things in this debacle that industrial companies can learn to become even better at their digital transformations and developing SaaS opportunities.
1. Focus on your core value proposition even more: This is the heart of everything you do. You have to go deep into customers’ pains and gains to uncover their unmet needs. Many SaaS companies do not conduct enough customer research before they embark on deep customer insights programs. Their value propositions are weak, not tested, or outdated. They also think too much in a vacuum, not realizing they have lots of competition out there doing the same value proposition work.
2. Focus on hiring top talent, not just filling positions: Take the time to hire the right people for the right job with the right capabilities. I have worked for SaaS companies that hired extremely junior people in chief experience officer or top management positions. I have worked with SaaS professionals who jumped jobs every 12 months and arrived at a vice president role with zero concrete experience. I had to provide basic advice on basic business parameters. It is not because you have 20 positions to fill that you need to fill them with poorly qualified people, even if your board is pushing you. Take the time to find the right talent. Slow down if you need to.
3. Making a profit still makes sense. Focusing 100% on topline growth or logo acquisitions is not sustainable. Right now, SaaS companies are getting challenged with the rule of 40 (revenue growth rate plus profitability margin should be equal or greater to 40%) when growth slows down. Their boards are asking them to focus on EBITDA. For industrial companies, it is second nature. EBITDA (earnings before interest, taxes, depreciation and amortization) must still be part of the equation. Profitable growth is the key goal right now. That also brings me to the topics of selling services and consulting as part of the SaaS offering. SaaS executives do not wish to be in the service/consulting business even if it is profitable. That impacts their annual recurring revenue and therefore their valuations. That is utter nonsense.
4. Going fast is good, but getting it right is better: SaaS speed is overrated. Going fast with the wrong value proposition or the wrong product/market fit is the equivalent of driving faster into a wall. The best approach is to go stealth until you have tested all your hypotheses with a few industrial customers. The time you take to test and validate will provide fuel and power for your future scaling process.
5. Do not launch until you have done your homework: There should be no rush to launch. Ask yourself the right questions. When industrial companies want to launch an SaaS offering, there are many variables to take into consideration. Product cannibalization, working with trade channels, designing their sales process and pricing their SaaS offers are a few of them. Take the time to do customer interviews. Run a conjoint analysis to test the pricing options and willingness to pay. Refresh your segmentation. Many SaaS companies cut corners on these critical steps.
Obviously, the SaaS debacle is not pleasant for thousands of workers and investors. We do not wish that on anyone. We can learn from this situation, and we can do better. As industrial companies continue their forays into the SaaS world, they have all the tools and knowledge at their disposal. And now, they have access to some talented people who lost their jobs.
Never waste a good crisis. Now is a good time to learn and invest!
Stephan Liozu is Founder of Value Innoruption Advisors, a consulting boutique specializing in industrial pricing, digital business and subscription-pricing models, and value-based pricing. Stephan has 30 years of experience in the industrial and manufacturing sectors with companies like Owens Corning, Saint-Gobain, Freudenberg and Thales.