One important component of SaaS that isn’t talked about enough is the “Winner Effect.” Simply put, the Winner Effect is all the benefits that accrue to the winner in a specific market that ultimately results in a significantly more valuable company. SaaS is well known for its high quality business model: substantial recurring revenue, high gross margin, and tremendous predictability. The Winner Effect makes the model even more profound.
Here are a few elements of the Winner Effect:
- Sales Opportunities – Instead of hunting to find the potential deals in the market, the Winner Effect results in being in almost all the sales opportunities by default. Every prospect brings the winner in and it’s up to the upstarts to try and unseat the leader.
- Public Relations – The #1 in a market gets 10x the number of media mentions than the #2. This PR results in even more separation between first place and second place, which compounds over time.
- Third-Party Integrations – Even with all the middleware tools out there, integrating products is still a challenge, especially for the deep, more comprehensive integrations. As the winner in the market, more third-parties write integrations back into the platform creating an even larger moat for the next set of challengers.
- Valuations – Ultimately, category winners get a valuation premium both when raising money from investors and when going public or selling to a strategic. Look at the some of the high end SaaS valuations to see investors that believe they’re betting on winners.
Another way to put it is that SaaS has a real network effect that snowballs as the business gets larger and larger and becomes the de facto winner in the market.
The Winner Effect is real. Entrepreneurs would do well to understand it and seek it for their business.
What else? What are some more thoughts on the Winner Effect?