What is your competitive strategy?
Does your strategy separate you from the other SaaS players in your market?
Have you fallen into a common trap? The one where you compete too much on price and not enough on value?
Michael Porter’s three generic strategies
Michael Porter described three generic strategies that firms can choose.
Segmentation Strategy is a demand-side strategy. You achieve competitive dominance by focusing on a narrow market.
Differentiation Strategy and Cost Leadership are both supply-side strategies. Here you gain competitive advantage through strength in a core competency.
Too many software companies pursue a Low Cost Strategy
Joel York points out that many SaaS companies have pursued a Cost Leadership strategy. To compete with software companies that sold client-server applications, SaaS companies developed similar product function, but delivered it over the web. They used multi-tenant server facilities, they aggregated their customers, and they sold their product for a lower price than what the client-server software could be sold.
SaaS companies lowered the total cost-of-ownership of business software and successfully pursued a Cost Leadership strategy.
However, the days of competing against existing client-server applications are long gone. If you pursue a Cost Leadership strategy today, you are likely to find that you have placed yourself “squarely into highly-competitive, price-sensitive commodity markets.”
Seek competitive advantage through differentiation
What’s the alternative? Choose Porter’s other supply-side generic strategy: achieve competitive advantage through Differentiation.
If you want to differentiate your service, York advises:
Enable order of magnitude productivity gains in core business processes by connecting your SaaS offering to the rest of the Web.
Your opportunities will arise mostly from “internal-external and purely-external processes” where you can achieve differentiation with “order of magnitude productivity gains in prospect, customer, partner, community, and computer-to-computer interaction derived from integration, network effects, user-generated content, and on-demand processing and data.”
Reach across the firewall to find order-of-magnitude productivity gains for your customer
Reach out across the web to:
- Prospects – Make something that your customers want to share with others (who are prospects for you, of course). An example is Zoho who lets you share your spreadsheet in a blog post.
- Customers – Make friends through feedback. Support, service and nurture community by proactively listening to customers. Crowdsource a support knowledge base or translation of pages.
- Customers’ prospects – Can your customers use a tool of yours to help their prospects solve a problem? For example, forms in a document flow system that lawyers, consultants, or financial analysts use. Let your customer “host” these forms for their clients. Of course, when they fill out the form, they get stored by your customer, so your customer and your customers’ prospects benefit.
- Partners – Can you make it easy to pull in information from another application in a way that benefits both your customers and your partner? RelateIQ encourages you to pull information from LinkedIn into your RelateIQ account. This benefits customers and also strengthens their ties to LinkedIn.
- Partners’ customers – Are there opportunities to make it easy for customers to connect the data from your application to the data in other applications that your customers use?
Too many software companies fall into the trap of competing on Cost Leadership.
Instead, find ways to reach across the firewall with your software and compete on Differentiation.
The value you create will separate you from competitors and give you the right to charge a price premium.