[limejuice]

There is intense competition in the Saas space, but competition is different from commoditization imo.

The simpler the Saas service, and the lower cost of switching, the more competition and commoditization that may go on. But this article is talking specifically about Saas replacing enterprise software. Software is sticky, and some software is very sticky because it is mission critical, highly integrated into the business workflows, and/or there is significant user interaction.

For example, if a company has 500 sales people all happily using salesforce.com, why would a CIO disrupt everyone's work to switch to a cheaper but different product? The cost of salesforce.com is not a significant cost to the business, but the cost of disrupting people's productivity swamps any savings you might from switching to a cheaper service.

This is similar to someone telling a company to drop MS Office because OpenOffice or GoogleDocs have equivalent "good enough" functionality and are free. There is no 'commodity' version of MS Office which looks and behaves exactly like MS Office but just with a lower price.

[itsprofitbaron]

Your Salesforce example highlights a SaaS replacing Enterprise Software - Salesforce vs. Siebel. Regarding your point about software being sticky like some hardware offerings have been commoditized - software can also suffer this to some extent (especially in the SaaS space as noone is doing anything that revolutionary that a competitor or competitors cannot come along and literally clone them).

I do however agree with you about the switching costs, Salesforce actually use this as part of their lock-in & differentiator in that they have got their users to associate them with CRM - their stock ticker is it etc - this they become product evangelists for them. As a result, there is a network effect built around Salesforce which has helped them create a lock-in.

However, that sill does not mean users won't switch (look at the new http://www.moz.com it isn't a coincidence that the UI looks like Google Analytics - that is one such example of how to "break" the lock-in). Moreover if a customer is offered a Salesforce alternative for 20% of the cost & it does exactly what Salesforce can do (as well as having a similar UI) that becomes a serious incentive for a business to switch - after all most of the decisions are made by the CIO etc who doesn't necessarily use the product day-to-day.

Finally to address your point about there being no commodity version of MS Office the problem is, is that no alternative has actually managed to provide a product to a similar level - Excel is by far the most superior spreadsheet product on the marketplace.

[inthewoods]

The only part I would disagree with you on is that SF.com isn't a significant cost - that's 500 x $100/month or $50,000 a month or around $600k a year. Now I know there would be significant discounts - but you get the idea.

But you are right that the switching costs trump the costs.

For the switch to make sense, I think you need to offer 4x the value to make up for the switching costs. So that can be some combination of cost savings and better functionality.

Salesforce.com is a perfect demonstration of the power of the network effect - the product, in my opinion, has really isn't that great. Yes, it's fairly flexible but feels very dated and the reporting is slow and cumbersome. In theory, their system should be relatively easy to disrupt, but none of the competitors can match the number and level of integrations out there.

A good article about the economics of SaaS: http://pandodaily.com/2013/06/15/what-the-data-reveals-about...