Head to Tail – Leveraging the Network Effect for SaaS
This is the second in our series of of four articles about “The Long Tail” and services (SaaS, On-Demand, etc.) and the Internet.
In the first article in this series, we asked the question, “Which of Joel York’s Top Ten Do’s and Don’ts of SaaS” relate to the concept of The Long Tail?” If you haven’t read Joel’s article I encourage you to do so because – in one way or other all the do’s and don’ts are related to the network effect described by The Long Tail.
Yes, there are some that apply more easily than others – but if you understand the power of the Internet at all – you certainly understand that in its simplest form the Internet is all about ubiquitous connections. And when you consider Joel’s premise in depth, you begin to see it revolves around one simple thought – if you are going to place your application on a ubiquitous network, why would you not leverage its power?
Consider for a moment the current statistics for the network we call the Internet. As I write this article, 1.4 billion of the 6.6 billion people on earth are among what we call “Internet Users.” That is a penetration of over 21% of the world’s population. From the year 2000 to 2008, the number of users has grown over 300%. The profiles of those users run from young kids on slow and unreliable connections in some of the most stressed communication systems in the world to high tech entrepreneurs with the latest 3G “smart phones.”
But, a market as diverse as the Internet is too broad to consider “as a whole.” Search engines, content portals, feeds and alert services are just some of services available to help users to cut through the huge volume of data on the Internet. If you are a seller however, waiting for Google to deliver customers for your “one-of-a-kind” collectable can be difficult indeed. You could buy keywords for what you may call “something” but your prospective customer may be searching for “something-else.” Unless you tap into a community of prospects looking for things in your area of collectables, they still may never find you or even know your item exists. What about a photo of your collectable with tags that can be indexed by search engines? What about writing an article and posting it on a blog….
Or finally, what about a SaaS application that brings together the platform for selling your collectable, posting a picture and description, a community of collectors, links to current news of interest to the collector community, user recommendations of events and items available, all the various ways the network we call the Internet can be leveraged – in one place? Does everyone have to subscribe to belong? Maybe, but perhaps (like Amazon) the registration is free and fees are charged on transactions and services that are mostly transparent to customers. And if customers can get something in return for the registration – like the ability to post recommendations, a focus on the area of collecting they are interested in, access to forums of users similar interests, email and RSS alerts – then they will be much more likely to register and in effect “subscribe” to the service.
This is an example of the “head” and “The Long-Tail” and leveraging the network effect for achieving successful SaaS applications. In the world of SaaS, success isn’t just providing an application for the one person who wants to sell their one-of-a-kind collectable. It also isn’t just providing an online platform for selling collectables or selling to a particular collectable market. The head end of the long tail in this example is captured by providing a functionality that satisfies the core processes of finding, collecting, selling and buying. The tail is served by providing ways for potential buyers to find specific things they want and to be shown things they may be interested in but never considered. The Netflix Cinematch prediction system that recommends movies for subscribers is a good example of this type of active recommendation. The network effect is leveraged by building communities of collectors with similar interests and allowing users to interact by customizing the information the application shows them, allowing them to contribute personal recommendations and to be engaged with others in specific areas they find interesting. In the last few years, Netflix has added “friend” capabilities and even extended Cinematch-like functionality to help users find friends with similar interests in movies. Some applications are leveraging existing applications like Facebook to provide similar functionality.
In his recent article about SaaS economics, Joel York exposed one of the many misconceptions about Saas applications:
“In the Web 1.0 wave, B2B software firms just scratched the surface of the Internet’s potential to create competitive advantage. They put up a marketing website, set up a support email and maybe a knowldegebase, but not much more. B2C software has and still does lead the way on the Internet. Unfortunately, this near-sightedness has heavily influenced SaaS when viewed as an outgrowth of enterprise software. SaaS is simply a dumbed-down enterprise application delivered through a browser with lower TCO, so SMBs can afford it…right? Wrong! This perspective all but abdicates the core advantage of being online and the natural birthright of software-as-a-service. Don’t just deliver your application over the Internet—become part of the Internet.”
Returning to our example of the collectables site – does this mean all successful SaaS applications are little more than second generation eBays? No. Amazon sells directly to customers and provides a market for its competitors. Netflix is only offering rentals from its own stock, but it offers all genres of movies. Salesforce provides customizable CRM, a market for applications linked to the Salesforce core, and a community. iTunes offers music, video, rentals, ways for artists to sell through the “store,” free listings for podcasts, and much more on top of a free application that also stores users music and sends them recommendations based on what they listen to. And of course, it supplements a line of personal music and video players that Apple sells.
None of these approaches could exist or succeed without the Internet. Not one of them is a clone of an application that once was available for individual users or business. They each are leading examples of SaaS applications leveraging the power of the network effect and The Long Tail successfully. And each started out with a basic approach to the problem they wanted to solve that they could continue to build on over time.
What other successful SaaS aggregators are out there and what are their stories? We’ll consider that in our next article in this series about SaaS and The Long Tail. Stay tuned..
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