In the world of software as a service (SaaS), there are some common rules of thumb. How much you should spend acquiring customers, how much each customer should be worth, etc.. David Skok, widely seen as the Godfather of SaaS, has an excellent blog describing metrics for growth, profitability and product development. A great read if you want to understand how businesses are objectively measured for high growth potential by investors.
One of the well-known truisms for SaaS is the 3:1 value principle: whatever you charge the customer, you should be able to quantify three times the ROI. The metrics could be savings, revenue generation, or something else. Occasionally you’ll find more nuanced value propositions, where a SaaS tool might save you time or help you hire people faster. These activities are harder to objectively measure, and it’s up to the salesperson to derive the value for the customer.
As markets get more and more competitive, companies have started settling for lower ROI. If we look at a large enterprise resource planning (ERP) system in healthcare, it’s not uncommon to find ROI metrics that are less than 100%. You could look at the math this way: instead of building and maintaining a system in-house for $1M a year, the hospital might opt to pay a SaaS provider $750K a year for the same product. If we followed the 3:1 value principle, the SaaS provider should demonstrate value of $2.25M. In this example the SaaS solution is only showing a ROI of 25%; but that beats zero ROI.
In brick and mortar retail, the trend is often the other way. The status quo is partly responsible for these large ROI outcomes: most brick and mortar operators are missing very basic technology improvements that other industries have had for literal decades. What would normally constitute trivial improvements can have a big impact in retail.
Many of the startups I see chasing brick and mortar constantly deliver 1,000% ROI. That’s more than THREE times the SaaS rule of thumb, and exponentially larger than the ROI of ERP SaaS. Unfortunately, retail SaaS providers must generate these levels of ROI in order to get the retailer’s attention. Why?
In many cases the retailers believe they can either build the products themselves (though for some strange reason they haven’t) or the value isn’t enough to get excited. A billionaire hedge fund manager has been underperforming the market, wrote an op-ed, and is being slammed for not spending time on his business. Retailers keep getting their asses handed to them by digital evolution but management is passing on solid ROI products. Where are the activist investors when you need ’em?
In a classic Catch 22, retail’s modus operandi has put them in a very quantifiable – and precarious – position. It’s clear from any rational outsider that management in brick and mortar enterprise suffers under the Emperor’s New Clothes delusion, and exceptionally few have taken them to task. I’ll soon share how this way of thinking has, and continues, to perpetuate the stagnating feudalism that retail has grown into.