In India, most consumer internet brands have used discounts as a hook to lure in users. If your service is good, those users will stick. If not, they will go to the next brand that gives discount. Discounts are good to drive consumption, change habits and make people use your app to indulge in the newly formed habit.
For B2B, discounts are not a sustainable way to create new marketplace.
Here are some reasons:
- Timing – Businesses do not have a need for a new service/product all the time. You can buy an extra t-shirt if there is a heavy discount but can you buy something extra for your business just because it is cheaper. An extra phone number? No. An extra LMS? No. Over procure commodity for trading – may be yes. Sustainable? Debatable.
- Cost – B2B has High ticket size transaction so high absolute amount of discount is required to move the needle.
- No lock-in. If it’s a commodity service/product, it’s easy to come in and easy to leave.
Let’s look at “tools” as a way to create a sustainable B2B hook?
We are not talking about selling the SaaS tool for profit but using a SaaS tool as a hook to marketplace or network. How does a tool fight the above 3 problems.
1. Timing – There is always a need for the tool, new companies will adopt your tool faster because they haven’t adopted any tool as yet. If a tool itself is powerful, it might give competitive advantage to early adopters and hence drive industry-wide adoption. A popular category tool will always find takers.
2. Cost – Initial development cost is as much as it take to create a SaaS company. Incremental cost of serving a new customer is negligible with SaaS. Giving it out for free or at a lower price will hurt, but not so much if the network it is building is valuable. Read this on when to choose free as a pricing model.
3. Lock-in – SaaS Tools are great for business lock-in, here’s why:
- Workflow and adoption – Each tool has its own workflow, if you have adopted one, it is very difficult to leave unless the incentive to move out is too high.
- Data – Moving existing data to a new system is cumbersome, if possible at all. Doing it across an organisation is like moving a mountain.
- Network effect is a true lock-in and a SaaS tool can do a strong seeding before the network effect kicks in. It’s like supporting each other for sustainability.
Why do tools not work to seed a network/marketplace?
- Bad tool – The tool itself is of low value or bad. In this model, you still have to make a good SaaS product. Future network effect is not an excuse to make a bad tool today.
- Unrealted tool and network utility – There is little to no relation between the tool and the network. This will end up being 2 products in the same org competing for resources and that do not add value to each other.
- The network is not valuable– The utility of network is of low value. You have a working and sticky SaaS tool but the value unlock is not valuable enough for businesses using it.
The tool, the network and the relation between the 2 must be analysed for this to work. It’s tricky, but when it does work, it is great.
Some companies doing SaaS enabled marketplace in US
- Stripe – Payment tech is really a SaaS tool. A lending company unlocks major marketplace level value. If a lending company has to be built otherwise, what seeding or lock-in do you have?
- Wave – Free book keeping software. Upsell accounting services.
- Zenefits – Low cost HR software, capture employee data, upsell insurance.
- Invoice.2go.com – SaaS for book keeping. Upsell invoice discounting.
All of them have used SaaS for seeding the demand side of marketplace. None of this has used a network effect. FrieghtOS has seeded the supply side. Network effect is still minimal.
Examples in India:
- Wishbook – Funded by Naukri. A SaaS tool for apparel manufacturers. Building a B2B marketplace on top.
- IconScout – Won grants from Adobe. SaaS tool, delivered as plugins for popular design tools, to manage your design assets. Building design assets marketplace on top – icons, illustrations, stock images.
- Refrens – Yours truly’s startup. We made an invoice and payments system for freelancers and SMEs (SOHO), and seeding sales referral network on top.
Ecosystem will take time to embrace this as a model because this is literally like making 2 products at once, with 3 chances of going wrong.
Will marketplace enable tools? Or tools enable marketplace or is it a case of “it depends”?
Related reading: 1, 2, 3.