SaaS providers must understand the difference between consumers of their apps, producers of SaaS network effect data and how to monetize both.
ADP: A Case Study in Network Effects
A quick update for 2013: ADP now processes payroll payments for 1 in 6 American workers. Because of this massive “network effect” they’ve created, ADP has unprecedented, real-time visibility into America’s workforce; the ability to find answers in a way no large-scale poll could ever hope to achieve.
ADP recognized that, while there payroll processing services were valuable as a revenue stream, what made ADP super-valuable as an entity, was the network effect data and the ability to report on it in aggregate.
ADP is now the trusted source for US Employment Statistics and Trends, with Hiring Managers and HR departments, Media Outlets, and even Federal and State Governments hanging major hiring and policy decisions on what ADP says.
ADP isn’t a SaaS or Cloud company… ADP is a data company, and has used that to position themselves as not just a business resource for their customers, but an INVALUABLE resource to the United States of America.
Not a bad position to be in!
To Exploit or Not Exploit…
First of all, lets be very clear: its not exploitation and these revenue streams are not hidden.
SaaS network effect data (AKA data exhaust, aggregate application data, etc.) is based on the position of the SaaS vendor as a proxy in a multi-tenant environment and the value that is created by the network effect data can be quite significant when leveraged correctly; both for the vendor and the ecosystem.
Regarding SaaS network effect Data, as a SaaS provider, you should:
- Make sure your User Agreement is up-to-date and is clear about your intentions (see your legal department)
- Anonymize the data before leveraging it in aggregate
- Leverage the information as soon as it becomes actionable (critical mass is relative!)
- Understand that this is part of the trade-off that you get for managing infrastructure and operational burden for the clients
- Add value to the ecosystem when you leverage SaaS network effect data
The FUD of Exploitation
I realize that journalists or analysts attacking providers for “exploiting” SaaS network effect data are just spreading FUD to either push a personal agenda or – more likely – as link bait. Either way, I feel that I have to defend the rights of the SaaS vendor from these negative attacks, and maybe generate a bit of link bait myself.
Moreover, I also need to remind my clients, readers, and followers that these folks are just spreading FUD and that leveraging – not exploiting – SaaS network effect data, is potentially a critical piece of the value derived from being a SaaS vendor.
Many SaaS and Cloud vendors I’ve worked with have had that “ah-ha” moment when they realize for the first time they aren’t a technology company or a software vendor… they’re in the Data and Information business!
Always Add Value
Finally, I need to remind the users of SaaS that a credible, trustworthy vendor will leverage the SaaS network effect data in a way that provides value to you in a way you could never have expected from Legacy Software.
The problem with SaaS network effect data is that, just like SaaS itself, it is mis-understood. For example, too many SaaS vendors consider the de facto revenue model in SaaS to be monthly subscriptions, which is not only untrue, but limits the potential of the SaaS vendor substantially.
Selling Aggregate Data is Not New
In that same vein, most people think of “selling aggregate data” by a SaaS vendor as some sort of nefarious dumping of client-specific data to the highest bidder in a back-alley transaction. That is either an antiquated view, one that exemplifies the naiveté of the author, or worse…
It is not only common practice, but highly accepted, to leverage SaaS network effect data in these functional areas and market verticals:
- Supply Chain Management
- Financial / Banking / Credit Reporting
- Healthcare
- Entertainment (Music, Movies, TV, etc.)
- Retail
- Employment / Human Resources
Note the inclusion of Healthcare in there; an industry with tight privacy laws (not just industry suggestions, but laws). All of these industries have been trading in data like this for years.
As a SaaS provider, you need to ensure you comply with the proper laws and industry governance and make the right ethical decisions, but anyone who makes a blanket statement that leveraging network effect data by a SaaS vendor is “exploitative” or otherwise inappropriate is simply trying to stir the pot by being “edgy” or is, even worse, incentivized to spread FUD.
This is so 2009
When I wrote this in 2009, most SaaS providers didn’t consider leveraging SaaS network effect data as a viable revenue stream, mostly because they didn’t understand what they had at their fingertips.
Companies coming to market in 2013 not only recognize the value in network effect data, but have taken advantage of the Big Data movement to build in the proper mechanisms to fully leverage what they have.
In fact, SaaS companies that came to market in 2009 (or earlier) and didn’t recognize this often failed to build into their system adequate data capture methods in the first place, which prevents them from leveraging network effect data in any meaningful way.
Now in 2013 they’re struggling to retrofit their architecture to take advantage of the network-centricity they’ve had for the past 5 years. If only they would have listened to me back then.
Embrace Network Effects Early
These are things that need to be considered during the early phases of product development, even if you won’t be able to fully monetize for a long time.
In fact, how long it will take to get to a point where you can derive revenue from SaaS network effect Data is something that is 100% unique to your business.
When I work with clients, I leverage our proprietary SaaS Revenue Matrix to get past the false notion of “critical mass” for SaaS network effect data value and get to the real story of how you can profit – literally and figuratively – from Network Effect data.
Let’s Grow Your SaaS Business
For immediate consultation and advice on leveraging Network Effect data to scale your SaaS business, schedule a 60-minute meeting with me via Clarity. If you feel a more involved engagement is required for me to help you, email me with the specifics of your situation (as much detail as you’re comfortable giving) and we’ll setup a meeting to work through the particulars.
– Lincoln