SaaS Economics 2020

Salesforce with 2020 Hindsight

Winter 2020

Back in 2010 we created a "quick and dirty" real world model to help us understand the relative efficiency of the SaaS business model vs. traditional COTS and Enterprise Licencing software sales models.

The model explained the key difference between SaaS and the other traditional sales models is when you buy COTS the cost of goods (including the costs associated with customer acquisition) are paid in full on delivery. With the SaaS model these costs are annualized as part of the Customer Lifetime Value calculation.

Basically the developer subsidises the customer's use of the software

Meanwhile the popular trend of vendors renting software infrastructure from the public cloud (Think AWS or Azure IaaS) to deliver these SaaS solutions means new entrants find themselves in the business of subsidising customer's use of both the software and the hardware

So rather than being a cash cow... SaaS is better understood as a Cash Furnace. A money pit...

With the COTS & enterprise licencing models each new product sale brings in new revenue to fund growth and R&D. Meanwhile, by annualizing the cost of customer acquisition and providing the hardware to run the software, each new SaaS customer actually increases the SaaS providers cost of doing business. Breakeven becomes a question of years rather than months. So rather than providing a "low cost of entry" for a new generation of disruptive software developers SaaS requires deep pockets to fund growth. The reason being, as with all networked business models, discovery across the network is the most expensive part of the equation.

The complete analysis can be found here

5 years later we revisited the model

To explain in more detail how the inherent risk of the SaaS business model is, if growth takes too long to achieve then, by the time the model brakes even with the COTS Model, it is already in decay.

Back in 2010 the model suggested that Salesforce had taken too long to scale and this tipping point wasn't very far away.

By 2015 we had established the model was holding up well (See here)

Salesforce appeared to have peaked at the very moment the model broke even on annualizing its total cost of doing business with its customers.

But competitive pressure was now squeezing the cost of growth (i.e. COCA & Return on COCA) and therefore the medium to long term sustainability of the model.

The question was would Salesforce see off this next wave of disruptors and bounce back from this position or would it simply fall into a period of decay? and,

If is was to thrive going forward would it pivot into a new model/product offering (ie build the future) or inject new blood into the model (i.e. acquire the future and/or the competition)?

The answer to that question is Salesforce adopted the Google innovation strategy (ie Acquire, Acquire, Acquire) pioneered by IBM, Microsoft, Oracle and SAP

Indeed the policy was already in place at the time of the original 2010 study. However this activity accelerated very quickly.

So much so that since 2010 Salesforce has acquired over 50 SaaS startups and merged them into the platform (See here)

e.g.

Radian6 - 2011
ExactTarget - 2013
RelateIQ - 2014
Demandware - 2016
Mulesoft - 2018
Tableau - 2019

Mulesoft was generating $355M in revenue and growing at +60% YoY when it was acquired for $6.5B. Today the revenue contribution to Salesforce's platform is well over $1B.

In 2019 Tableau generated $1.16B (16.5% YoY Growth). Together these two acquisitions equate to +14% of Salesforce's 2019 Revenue

The fruits of this decade long investment in acquiring the future can be seen in the chart below

The disruptive trend, predicted by the model and identified in 2015, was turned around by the acquisition spree and we now see the emergence of a new S-Curve... so yes, the challenge of acquiring the future is ongoing

and yes, this insight tends to rewrite the endless growth narrative surrounding enterprise SaaS

It isn't so much a story of Lifetime Customer Value (LTCV), Net/Gross or expansion Monthly Recurring Revenue (MRR), Annualized Run Rate (ARR), Customer Acquisition Cost (CAC) payback period, ARPU, Lead Velocity Rate (LVR) or Churn... more a game of acquire, acquire, acquire or be acquired