Excerpted from Tomasz Tunguz:
The three enduring types of competitive advantage for SaaS companies I’ve observed are network effects, data network effects and ecosystem creation.
Data Network Effects exist when the value of additional data is compounded with time. For example, Infer builds predictive scoring models that prioritize leads for sales teams. The more data Infer gathers about a sales team’s customers, the better their predictive ability. If a customer switched to a competitor after twelve months, the customer would destroy 12 months’ worth of machine learning, quite an expensive tradeoff.
Network Effects exist in enterprise social networks, jut not just any kind of network. Email and chat systems suffer from fungibility. GMail arguably serves an Outlook business just as well. Instead, data network effects exist when the SaaS company forges a new network with novel relationships like LinkedIn for recruiting, Axial and Angellist for finance, Doximity for doctors and so on. Those networks are proprietary and long-lasting competitive barriers to entry.
Ecosystem Creation: when a SaaS business surrounds itself with successful partners who serve many different types of customers, often not addressed by the SaaS company, and reinforce the value of the SaaS product, it has employed an ecosystem defense.