When reading about the Gracious Eloise algorithm which digitizes a person’s handwriting, allowing them to type out text and then automatically translate it into their own personal script, I instinctively went to look for the front end SaaS that would allow me to try it out. My assumption that there would surely be a proprietary Gracious Eloise consumer application was incorrect, however, as the company has decided to forego developing its own application in favor of allowing developers to leverage its technology by way of an Application Programming Interface – API. This is an excellent example of the API Economy, from which companies like Salesforce.com, Amazon, and Google are driving significant revenues (nearly half of Salesforce.com’s revenue is generated by its APIs), but in Gracious Eloise’s case their API is the sole route to market for their technology.
The business model that arises is an interesting one. We tend to consider the remit of SaaS companies as including backend technology, front end user experience and design, and on into sales, marketing, customer success, etc. But what advantage is to be gained by extending out into all of those areas if your competitive advantage is essentially a piece of patented software? If Gracious Eloise was to decide to develop a consumer-facing application, it would come up against the risks and costs associated with developing a great UX, marketing, and selling it to a critical mass of customers, and supporting end users to ensure their business is retained. As we know, this is a costly business and one in which it is difficult to win. Gracious Eloise would have a fighting chance in doing so if it could work out the killer application(s) for its technology and find the right product/market fit – but why take the risk?
The baker doesn’t need to become a grocer
In economics, the term forward integration refers to a business strategy in which a manufacturer builds or acquires the channels of distribution for its outputs – a classic example being a baker who decides to set up its own retail operation rather than wholesaling to established grocers. In many traditional markets, forward integration is the exception, but in SaaS it has almost become the rule. If your competitive advantage lies in your UX, your brand, your customer service levels, your sales and marketing, or other such areas then it makes sense to build your own SaaS. But does it make sense if your competitive advantage lies in a great piece of back end technology?
As we have discussed recently, SaaS industry verticals tend to be hyper-competitive, and there are likely to be a lot of me too providers doing more or less the same thing as you. For example, if Gracious Eloise had decided to build a messaging application that used their algorithm to deliver more personalized, hand-written messages, they would come up against hugely powerful, established competitors in the likes of Facebook Messenger, WhatsApp, Google Hangouts, Slack, and so on. So why not just sell your technology to those companies that have already done the hard work of developing end user applications and onboarding millions of users? And if you decide to go this route, how can you generate revenue from an API?
Monetizing your API
Among the use cases listed on Gracious Eloise’s website are boosting open rates on direct marketing, adding the personal touch to CRM, personalizing email and social media messages, as well as personalized gifting in e-commerce, thank you notes, and stationery. This points to another advantage of the API route to market as opposed to SaaS. In cases like this where the underlying technology has multiple feasible use cases the lack of forward integration means that there is no need to focus on just one. Various third-parties are free to use the API to enhance their own applications as they see fit, or third-party developers can use the API as the foundation for an entirely new application. As Kenny Fraser pointed out, SaaS verticals are often quite narrow and integration via API to other applications is vital for any SaaS start-up. For Gracious Eloise, its CAC remains low as it is one step removed from the mass market end user, and it is free to focus on what it does best, which is developing and enhancing its product, perhaps developing a suite of related APIs, and leaving the sales, marketing, and service to companies who are better suited to that role.
According to Intel, somewhat of an authority on APIs, integration, and mash-ups, there are several ways to monetize your API – from direct revenue where the application owner is billed on a per usage basis (this appears to be the case with Gracious Eloise) and the distribution channel model in the case of content APIs, through to using APIs as a way to generate market awareness or as a means of application enablement. There is a multitude of potential business models in the API economy, none of which is more or less likely to succeed than the multitude of potential business models in SaaS. The point, therefore, is that is crucial to identify your competitive advantage early on and to choose the business model that most effectively leverages that competitive advantage. SaaS is very much in fashion, and we do love it, but it’s not the only model out there.
by Michael Cullen @michaelcullen87