When a web application gets popular enough, features matter less and the underlying ecosystem matters more. There’s a tipping point at which network effects outstrip software features. When that happens, users get the benefits of additional functionality — and the risk of new kinds of lock-in. Salesforce.com (S CRM), for example, started as a replacement for in-house software. Now it’s a software ecosystem complete with a programming language, developer conferences, and a marketplace for third-party developers. That makes Salesforce a lot harder to leave than if it were just a bundle of software features.
Freshbooks, whose SaaS-based billing tool tracks time and expenses and sends invoices to customers via email or post, is at that tipping point. It’s grown to 900,000 subscribers using a mix of free and paid offerings. Now that there are so many users, subscribers often wind up sending bills to one another. So the company made it possible to send those invoices within the system directly, bypassing external email. Today, Freshbooks revealed that 20 percent of its subscribers had adopted this new capability — taking Freshbooks from software tool to SaaS ecosystem.
Is this how freemium pays off? In “Free,” Chris Anderson speculates that information-based businesses won’t make money from what they do, but rather because of what they do. Here, Freshbooks may not make money from every subscriber — but it can offer compelling new features because of them.
Once a SaaS provider hits a certain size, secondary business models based on network and ecosystem effects can eclipse the initial business. This makes the economics of running a SaaS provider a bit strange: Too much focus on short-term revenues may undermine long-term success, because free helps reach critical mass, where new models can emerge. At the same time, network effects may make it hard to launch a new SaaS offering, since early players can erect significant barriers to entry.
For SaaS customers, this portends a new kind of lock-in. SaaS promised us freedom from the proprietary formats and costly, custom deployment efforts of enterprise software, but network effects can constrain subscriber choice and make it hard to leave. If you want access to Salesforce’s ecosystem, you have to use Salesforce.
Freshbooks CEO Mike McDerment, understandably, maintains that network effects are more about added benefits to end users than about lock-in: “If you can add a feature that’s not possible without a network, and there’s sufficient value offered by that network, then it’s worth it to stay on the network.”