This is a guest post from our friend Alex from No Best Practices. If you want to unsubscribe from marketing groupthink, subscribe over here. It's worth your time.

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After more than a decade of hype, the verdict is in: it was a mistake to fund DTC brands using the venture capital model.

This story is old news in the world of consumer goods, but in less than five years we’ll be telling the same story about most B2B SaaS. 

SaaS has historically been the cornerstone of venture capital – once you’ve built the product, variable costs to scale are almost nonexistent. It makes sense for these brands to spend a few years losing money to chase rapid growth and a big exit. A hit list of VC-backed success stories – Tableau, Slack, Skype and many others–proves this is possible.

But the competitive landscape is changing. Big exits for B2B SaaS are still possible, but they’re far from guaranteed. And venture is no longer the best funding and valuation framework for most SaaS companies.

What changed, and how should today’s SaaS entrepreneurs proceed, especially in the rocky world of eCommerce? To navigate the future we can look back to the past, to another industry that was disrupted by shifting market forces–the fashion industry.

The Fashion-SaaS Connection

What do software and fashion have in common? More than meets the eye. Code and apparel production can both be considered a craft: 

  • There are a set of foundational rules that determine a functional output, but a lot of creative leeway once those rules have been met.
  • There are a range of techniques that take varying levels of skill to master.
  • Remixing those rules and techniques into something that is both innovative and commercially desirable is an art.
  • There is limited ability to defend one’s output via copyright law; brands are protected but individual designs or blocks of code sit in a legal gray area.

Due to the evolution of technology, the skills of a “master craftsperson” are no longer a moat. Technical complexity is much less of a barrier to entry today than it was in the past. This increases the number of competitors in the market, who must seek out new ways to differentiate and win.

The fashion industry experienced this transformation about a decade before the software industry with the arrival of “fast fashion”.

‍“Fast fashion” was a new way of structuring the apparel supply chain: removing the physical and psychological distance between the designer and the factory and dramatically increasing inventory turnover. This allowed fast fashion brands to get product to market faster, reduce cost of goods sold, and sell clothing at lower prices than the competition while taking in more profit.

Before fast fashion it was almost impossible to bring technically complicated apparel to market profitably at a “mass” price point. Selling anything unproven or “fashion forward” was too risky, and a long-go-to market process made it hard to catch trends at the right moment.

The go-to-market timeline at the mass market brand where I started my career was 12 months from start to finish. Zara can get a garment from design to the shop floor in 15 days. Fast fashion retailers beat brands like Gucci and Prada at their own game, getting knockoffs to market faster than their runway originators. 

Before this supply chain revolution, the craft of apparel production was a differentiator because the mass market could not touch the master craftsperson’s output. Complexity–detailed construction, ornamentation, distinctive but temporal design–was a mark of status, because you had to pay high prices to get it.

After Zara, H&M et. al flooded the market with “good enough” reproductions of the master craftsperson’s work, complexity lost its status. Many brands that launched in the early 2000s with a thesis tying craft and complexity to status shut down by the early 2020s. 

“Fast Fashion” Comes For SaaS

Anyone involved with the eCommerce industry for more than a decade can remember the time when the craft of code was a moat. Think back to 2005, a year before Shopify launched. If you wanted to sell online at scale, you were probably building a site from scratch or using a highly-technical framework like Magento.

‍Wanted to sync orders to your warehouse for fulfillment? Custom code. Wanted to integrate a new payment gateway like Paypal? Custom code. Wanted to implement a new feature, like an email capture popup? Custom code.

Would-be software entrepreneurs of all types faced the same barriers to entry. If you wanted to start a social network you had to be ready to build it from scratch, down to the login and password storage functions. If you wanted to create business software you had to be prepared to support custom integrations for each of your clients.

The level of investment required restricted the total addressable market for SaaS to larger companies. You didn’t see many small businesses running their own eCommerce stores; solo-preneurs often listed on platforms like eBay instead. Few “mom & pop” businesses had their own websites, and local service businesses kept paper records.

What fast fashion did to apparel retailers, “no code” did to software development. This change hit the market in two waves: 

In the first wave, more businesses of every size started using SaaS as part of their operations. You no longer needed a software engineer to run an eCommerce store or a POS. In this wave, the total addressable market for SaaS exploded, making the category even more attractive to venture capitalists.

‍In the second wave, more developers of every size and level of experience started building and selling software. This wave has been more recent, aided by no-code tools like Zapier, app development frameworks and a wave of computer science grads (~JuSt LeArN tO cOdE~).

Now Shopify apps get ripped off and repackaged at a lower price, just like runway designs. When a new idea hits the market, higher and lower priced competitors are sure to follow in a matter of months.

‍For both fashion and software brands, features are no longer enough to differentiate a product or a brand. So what is the recipe for success in this environment?

How To Win: Advice From Those Who Have Been There

Now that technical complexity and individual features are no longer moats, successful brands have moved on and identified new ways to stand out from the market. In fashion, these moves have been thoroughly analyzed over the past decade. We can apply many of these frameworks to software.

To help make this advice even more actionable we’ve included input from Chase Mohseni of Pencil and Rabah Rahil of Triple Whale. Chase and Rabah are seasoned SaaS marketers who helped build two of the most talked-about software brands within the DTC community. 

If You Speak To Everyone, You Reach No One

Fashion retailers that have struggled over the past decade–from DTC footwear brand Allbirds to heritage department store Macys–failed to hone in on an audience and develop a strong value proposition for that audience. 

‍Features (or a design language) aren’t enough, because features are easy for competitors to replicate. You need a strong “reason for being” to stand out in a crowded market–something that creates an emotional connection with your audience.

“Even with their move up-market, [Shopify] are still seen as software ‘for the people” — Rabah Rahil, Chief Evangelist at Triple Whale

There are hundreds of menswear brands, but Aimé Leon Dore cultivated an obsessive following that stands in line for a chance to shop the brand’s flagship store. It doesn’t matter that Jos. A. Bank or hundreds of other competitors are selling at lower prices–fans want the real thing.

The same is true for SaaS. Despite the reputation for being a logic-driven category, SaaS purchasing decisions are still driven by emotion. When features are easy to replicate and competitor apps pop up within months, emotion keeps customers bought in.

“The ingredients of a great SaaS brand are three fold: a face, a product and a mission. Shopify encapsulates all three,” says Rabah Rahil, Chief Evangelist at Triple Whale.“Even with their move up-market, they are still seen as software ‘for the people.” That mentality has meant that — despite many pricing changes and notable logos, they’ve remained accessible. The reality? It can cost hundreds of dollars to maintain a Shopify account without ever transacting, and that reality has led to untold profits for the brand.

Shopify is a form of aspirational luxury for a new group of entrepreneurs — Gen Alpha — and Shopify is using the likes of MrBeast to sell it to them. Speaking directly to the future of commerce (the next generation) has allowed Shopify to stay human and relatable, while moving decidedly upmarket. “The biggest thing I think SaaS companies miss is that there are people behind the numbers,” says Rahil.. 

That Said, A “Product Pyramid” Helps Keep Your Funnel Full

The secret to the success of today’s largest “accessible luxury” brands like Michael Kors and Tory Burch? Creating the perception that the brand’s modal AUR is $500 when it is actually under $200. 

SaaS brands can use the same strategy to reach multiple segments of the market. Landing large, enterprise clients takes time, while smaller brands may be more willing to test something new.

These brands use marketing to create an aura of status and luxury but offer products and merchandise categories at accessible price points to capture more of the market. These flip flops, priced under $100, are one of Tory Burch’s largest volume drivers.

The most obvious way to implement this strategy is through pricing tiers or a “freemium” model. But that doesn’t make sense for every software brand–sometimes advisory services are a big part of the value-add or implementation and onboarding is complex.

Level of service [at a luxury brand] doesn't change whether you spend $300 or $30,000. SaaS companies need to remember that every customer's money – however large or small – matters. [Customers] want to feel like they are getting the premium experience that the massive 9/10 figure brands get. — Chase Mohseni, Head of Marketing at Pencil

So what can SaaS brands do if they’re not able to serve smaller businesses profitably? Educational content and community building can help potential clients build strong associations with a SaaS brand, making the purchase decision a no-brainer when the client’s business levels up. 

“Louis Vuitton has products that are accessible… and products that are off limits for most customers,” says Head of Marketing at Pencil, Chase Mohseni. “The level of service doesn't change whether you spend $300 or $30,000.” Can the same be said of most SaaS experiences? As the scale changes, and pricing demands shift in the ecosystem, it can cause a once-accessible app to feel more luxe; and push customers out, rather than draw them in.

Some businesses have done this better than others. “Northbeam has done a great job making sure they stay true to the size of the customer they work with but making content/events that are accessible for everyone,” says Mohseni.

Still, there are perspectives that linger — we’re all consumers, after all. It’s hard to take off that consumer hat when you’re sitting in the operator seat. “Content, Community and Education. The challenge with most SaaS companies is that they are run by extraordinarily smart people,”says Rahil. “The Beginner's Mind has been lost and without that empathy is hard to generate.” 

To Rabah’s point, a ‘beginner's mindset’ requires challenging groupthink; a beginner has no prior context, after all. This means questioning the “way things are done,” calling our beloved “best practices” into question.

Leverage The Intellectual Property You Can Defend

Luxury brands have been some of retail’s biggest winners of the last decade. When fast fashion eroded the craftsmanship moat, many of these brands pivoted to a moat they could legally defend: the logo.

The logomania trend started to take off in mid-2015, around the time that fast fashion and eCommerce reached critical mass. While competitors could legally copy a dress design line-for-line, they could not legally copy a logo or a brand name. By making the logo a larger, more creative component of the offering, luxury brands made it harder for the competition to replicate their product.

To do this successfully, you need to put in decades of work to develop desirability and mass awareness of your logo. And while software companies probably won’t strike it rich with logo-ed gear, they can invest in building a product that becomes more valuable with scale. 

The classic example of this strategy is an ad-supported social network like Meta or TikTok. As more users interact with the platform, the “feed” algorithm gets better at serving each individual user with both organic and advertising content. This increases the value of the experience for both the user and the advertiser.

This strategy is difficult to implement–just like building a luxury brand–but offers incredible upside. The value of the product increases as the business scales. And while competitors can copy features, they can’t copy your user base or the specific learnings you’ve gleaned from their use of your software.