A traditional black and white approach would have SaaS entrepreneurs think that as an upscaling B2B SaaS business, you’re always selling a service. But as the world of SaaS gets wiser, we know that the scope of what your SaaS could be selling can evolve.
What’s The Difference Between a ‘Product’ and a ‘Service’
Why would a guide about upscaling B2B SaaS start with this? Isn't this question supposed to be plain vanilla? Does it need to be incorporated when thinking about funding-related legal issues for SaaS founders/management?
Yes, to the latter. It doesn't have to be 'plain vanilla', though.
The answer to this straightforward question goes a long way toward determining which corporate structure available in India would suit one's SaaS business (centered around the offering of either a product or service). However, this first question also introduces an ambiguity unique to the SaaS world.
Most of the things one deals with function as products. You pay for these 'things' upfront (like clothes, cosmetics, food, fuel, et al.) and consume them at your convenience. There are no 'terms of service' attached to the use of products. Customers don't need to enter into medium/long-term business associations with product businesses, with each purchase being a one-time thing.
On the other hand, services are more customizable and, more often than not, are based on the preference of the customer who is being serviced. Customers would ideally want to enter into medium / long-term relationships with their service providers since the time taken to build faith in service is longer than the time taken with a product.
If you're an entrepreneur, irrespective of what you call your business offering (whether a product or service), when replacing a product with a service, or vice versa, a palpable difference will exist in relation to how you support such an offering. A service offering will need to be supported with stable cash flows, whereas a product can be used until it's worn out (if at all).
Products mostly adhere to a common standard for all, i.e., those who sell them and those who buy them. Think of wallets to keep your money in, Uber - a product to hail rides, Zomato – a product providing restaurant listing services.
Services are a customized offering to the customers/market and depend on a professional's manual labor and inputs. Think of marketing, advertising, legal, or finance firms.
You can argue that a product itself could undergo customizations, but the same is usually done to cater to the needs of the largest target market of a startup – the way Zomato has customized its restaurant listing product vertical to its entire target market. To put it simply, you’d be able to scale a product when offering it to a (hopefully) progressively larger market.
Services mainly depend on professionals and need to be customized progressively more when offering them to a larger market, i.e. scalability is a challenge.
Since products are scaled for the masses and, therefore, are ideally already preferred by the masses, the quality of the same does not depend on the person making the product. However, the opposite is true for services.
Service vs. Product: Can Upscaling B2B SaaS Provide Both?
In short, yes.
We can view upscaling B2B SaaS companies as providing both a service and a product. A fair few successful B2B SaaS founders and investors have opined that offering a service is the best way to bootstrap. One could also view it as a way to become immersed with clients, learn about their problems, and do some service projects that generate cash and generate customer intimacy and trust. If (and it's a big if) an upscaling B2B SaaS startup can bootstrap its way to profitability, it could lead to investors knocking on one's door with a favorable term sheet. It can open doors for startups to move from just offering a service to also offering a product.
The mix of using a product and a service is not just seen as something to tinker with in the early stages of B2B SaaS businesses. Many mid to late-stage upscaling B2B SaaS startups often have to employ this offering mix in their business cycles. Many software companies generate substantial fractions of their revenue from professional services.
Note: Professional services usually mean consulting fees software companies charge to customers for software configuration, customization, and education.
In Conclusion
SaaS is an exciting category, and the answer depends on how customized or standardized the software being provided itself needs to be. As stated above, a market trend that has been observed is that SaaS could start as a service, but as the business itself matures/grows, it could take on the nature of a product. For example, a startup could enter into agreements that allow their offering to be tailored to a specific need but later on could diversify the same offering for a larger market.
In early and developing markets, selling complete products is often a superior go-to-market strategy, rather than selling innovation in a layer in the stack. However, for the reasons given above, B2B SaaS startups may also need to start as service companies solving specific problems. Therefore, SaaS can (emphasis on ‘can' and not 'is') be both a service and software.
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