Software as a Service July 4, 2020

How can so many similar SaaS competitors exist?

edspire

I notice there are domains with a significant number of saas competitors, and yet they're all able to find customers. Think the countless numbers of project management software, web scraping software, or even automated QA testing software.

I'm sure there are solutions that are differentiated in the space, but many of the solutions are 80%+ similar in functionality.

Assuming that's the case, is product differentiation NOT the main driver for customers but rather owning certain distribution channels? IE getting to your customer first before someone else does, which at that point there's little incentive for them to switch to another SaaS which is basically the same.

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    Many product categories don't have any network effects, which means there's no real advantage the big players get that makes it easier for them to recruit new customers (besides spending on ads etc.). This becomes doubly true in categories where switching costs are high, or where people simply don't do a lot of comparison shopping and are instead happy to stick with the first product they try. The result is a market with lots of players who are all doing well enough.

    And of course there's distribution competition. The easier it is to carve out your own distribution fiefdom, the more fragmented you'd expect a market to be. The prime example is brick-and-mortar businesses: restaurants, retail, etc. Their distribution is limited to their local area, so you see lots of local monopolies but fewer global monopolies. Even if you open up the best seafood restaurant in your town, it doesn't stop me from succeeding with my own seafood restaurant in my town.

    This can happen on the Internet, too. For example, in product categories that aren't typically found via winner-take-most distribution channels (e.g. Google search results), you might see lots of word-of-mouth recommendations within various niches, which means you can have lots of different successful products that simply target different niches. Perhaps Asana is great with the startup crowd but Basecamp is more popular with the SMB crowd and Trello is popular with developers, etc.

    Product differentiation matters, but I think it's overrated in a lot of categories.

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    Being in the startup ecosystem, we get an inflated idea that most people have even heard of the majority of businesses and products out there that we're familiar with.

    I recall speaking to a company that was starting a meeting scheduling assistance for enterprises, a market with dozens of really good quality competitors, yet the customers they spoke to didn't even realise this type of solution existed. As far as the customers were concerned, this company had an innovative solution that fixed a problem for them.

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      This is so true. Sometimes when I talk to people outside of the tech world and I just roll off these businesses that do X or 'why don't you just use Y' to be met with....you are a genius. Then it hits me that as soon as you step out of the Techcrunch, ProductHunt world, normal people are just not aware of tools and software. Sometimes I genuinely feel like the startup ecosystem is basically a self-serving, self-funding machine.

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    What you're describing is actually more or less my strategy. Instead of coming up with something completely new that doesn't exist yet and having to validate that, I went with a product that already existed: it's validated by the market.

    The product is the same, but I am differentiating in a few categories (design, value for money, simplicity) yet you can argue that still these can be 'copied'. But as others pointed out, the market is so big and fragmented that I'm confident I'm able to provide value to a set of customers that's big enough for me to build a profitable business.

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    You should always think about differentiation, at least as an insurance policy if nothing else. How much you think about differentiation depends on the market you choose to enter.

    If you enter a market dominated by 1 or 2 brand names with high share of mind, differentiation is more important because potential customers will very likely make comparisons between you and widely known market leader(s). For example, new entrants into the email marketing space will surely get compared to MailChimp.

    On the other hand, if you enter a market absent of any widely known alternatives, differentiation is less important. Because it's less likely your solution will be compared. For example, no well-known uptime monitors come to mind when I think about the market for uptime monitors (This is a purely illustrative example. If you ask a site up engineer, you might get a different answer).

    Notice I said less likely above, not UN-likely. It takes no time for a SaaS shopper to Google search alternatives before making a final buying decision. A customer may be unaware of the alternatives at the beginning of their buying journey, but you can safely assume they will look for alternatives before finally pulling the trigger. And, since barriers to entry in SaaS are so low, your potential customer will see a lot of choice.

    That's why it's so important that your product and your differentiated message shows up in all the right places throughout the buying journey.

    Not even Facebook with massive network effects can survive without differentiation. And when a competitor succeeds or shows strong potential, FB moves to acquire them (e.g., Instagram and WhatsApp).

    So, in the end, differentiation is still king and queen.

    Also, on the topic of first-mover advantages...

    I have seen too many examples of first-mover advantages in SaaS amount to nothing. Again, you can blame low barriers to entry and low switching costs for customers to switch from one software to another.

    Plus, if first-movers can avoid getting complacent or distracted, I find that there's always something customers want that the first-mover cannot or will not prioritize. It's very difficult for a SaaS to be everything to everyone. That leaves an opening for a competitor to wedge its way into a category and take a shot at toppling the first-mover.

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    Product differentiation is still the primary (but not only) driver, in my opinion. Even though a lot of saas in the same space may be 80%+ similar as you mentioned, it's that ~20% that can (and often will) cause churn and changing between the different competitors. For example, if you are with company A and love 80% of the features but feel like they are missing a key feature and then find company B with that same 80% but the key feature, you'll potentially make that move.

    With that said, you could potentially still see movement between almost identical products for other reasons. Product itself aside, there are a number of other factors that also influence customer movement, which could be things like customer service, pricing, etc. For example, if you have a really terrible experience with one, you may look to move elsewhere to another similar product.

    A sort of foolish way I like to look at it (for better or worse) is like juice at a store. Take something like orange juice as an example. If you go to the store, you'll likely see multiple brands of orange juice and everyone is going to have a different "taste" on which they prefer, but they are all still orange juice. You'll even sometimes see people change brands over time as their previous favourite made a change to the receipt they didn't like.