One of the most common mantras in the startup business is “solve a real world problem.” In other words base your business on something that people need or want. And are willing to pay for. Its kinda obvious to state that B2B SaaS needs to solve a real business problem.
Business problems can be a complex area. The collective challenge is for the organisation. The common good devolves into an intricate web of threats and opportunities. A different picture for all the units and individuals that make up the whole. This creates both enthusiasts and barriers in almost every situation. For business to change, people must change
There is no easy formula to define a business problem. At heart it is always about change. This is true for consumers as well. Read Nir Eyal’s excellent book Hooked to understand how changing habits is the key to engaging users in any product.
People need to change to deliver any business change as well. But this must be orchestrated and coordinated. Everyone involved needs to change in the same direction. Yet that does not mean the same change for everyone. A new automated purchasing ordering system will result in extensive changes. It demands different day to day habits for procurement staff. It will also offer front line sales staff a better way to manage inventory. But the new habits will be different in each case. In a business of any size this complexity carries an almost automatic penalty. Every change will be unwelcome to someone. There will be different impacts on each role or division or business unit. Somewhere in the business there is a real threat posed by new systems or processes. Change raises barriers every time
The benefit to the whole business may be huge. Yet there may be parts where change means extra cost. Or perhaps just a static outcome. Those who don’t feel the gain will feel the pain. Even if that is an illusion.
Those who obstruct change can influence the buying decision in large enterprises. Some blockers don’t wield influence before purchase. Yet they can destroy the value gained after implementation. Managing expectations and behaviours in a business customer is no simple task. Your B2B SaaS pitch must ask the right questions
So your B2B SaaS pitch is about much more than functions and features and benefits. Sure your customer wants to know what you SaaS can do. They have plenty of other questions as well. Some explicit and some hidden through the process.
Engaging with and selling to a complex enterprise is a process. A process of recognising and asking the right questions. Not about providing perfect answers. I would start with a question that is of paramount importance to you as the entrepreneur: “Are you willing to change the way you do business?" If the answer is No then qualify the opportunity out. No matter how great a fit the potential customer may seem. Answer Yes and the game is on. By the way I found this one in an interesting article from the BBC. It suggests any problem can be solved by this and two other questions…. Questions to probe the reality of business change
Now you need to look deeper. Beyond the functional benefits. To help your customer understand, prepare for and execute the change required to realise those gains. So the next question is:
“How will the business need to change to realise the benefits of your SaaS?" Once you have a clear picture of how much needs to change, a more delicate question arises: “Do you (the customer) need more help to execute the change?" This can lead to some tricky answers. The chances are that if help is needed a SaaS Startup will not have the resources or skills to offer it. You may need some implementation partners. Or at least a cooperation with some business change experts. The 2 biggest competitors to B2B SaaS
Too direct an approach could also pose a threat. The customer still has the option of not changing. Once they realise the work involved, will the benefits still stack up? Or the organisation you are talking to may feel they can manage the change themselves. They will appreciate you recognising the issue. But not the offer of help thank you very much.
Remember when you sell a business solution (and B2B SaaS is a solution not a product) the top two competitors are always: Do nothing and Do it yourself. Your always has at least one and usually both these options open. The final important set of questions are about the barriers and the blockers: “Who will be against the change required?” “Will there be real losers in the organisation, maybe even redundancies?" An upfront discussion about where the obstacles lie will be great for your reputation. Show some insight into how those challenges can be overcome and you will truly stand out. And this is an excellent approach to reveal the true extent of the change required. Think about both the timescale the value of the benefits your SaaS offers in this context. Your offer to a B2B customer will be much more credible. Selling B2B SaaS has elements in common with any new product. Show people the sexy stuff. The cool user experience. The real time data opportunity. And the new mobile app. But also engage them in a discussion about how they can reach out and take the prize.
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If I had to pick one common weakness in the SaaS and startup businesses I see it would be customer discovery. I hear a lot about markets. And many great business ideas. Then I start to ask about engagement with real potential customers. Too often the the story gets thin. Yes there are contacts and introductions. Evidence of substantial discussions and learning can be lacking. This article is the start of an attempt to explore two questions: Why is a fundamental and invaluable business idea often ignored. Or at least implemented badly? What startup leaders can do about it?
I have called this the incomplete guide for two reasons. First, customers are people. Every relationship is a unique experience. So no set of rules or methods will cover everything. Second, it is intended to be the first of several parts. I am just not sure how many yet! Execution not strategy
My usual introduction to a company is a business plan or a pitch. Any competent business plan includes a view of the market. If the company is making progress there may also be some evidence of traction. My habit is to dig into these areas to find the answer to one key question: How close is this team to knowing who their real customer is?
In a good business this is a great conversation. It gives me confidence that the founders are engaged in customer discovery. Sometimes they are all the way there. More likely they are part of the way along the road. That’s fine. Good teams will talk about that journey. And that will build confidence. Customer discovery is a fundamental part of the startup journey. All it means is talking direct to people who may buy your product. And finding out what their needs are. So that feeds into the design of your product. The phrase was coined by Steve Blank in his best selling book Four Steps to the Epiphany. You can read the reasoning and the theory in the book.
For me this is a make or break question. Customer discovery is execution not strategy. I don’t expect to see it written down. I do love to hear smart people describing how they are reaching out to customers. What feedback they are receiving. How the dialogue is changing their product strategy.
Who to talk to
I don’t care much if you have read the book. What counts is the practical stuff you are doing to build your business. The first question is who are the potential customers that you are trying to talk to. The base answer to this is the people who have the problem your product is trying to solve. And for a consumer business this is straightforward.
In a B2B SaaS business this can be the first point of confusion. The people who have the problem will be end up being users of your product. They may be different from the people who write the cheques. Even in a small business the owner may see a difference between using a tool and buying a tool. As a result, it is easy to go wrong right at the start. Many startups (and many advisors) will gloss over the difference. they will pick companies as the target customer. This looks neat. Now users and buyers are the same people. And if the companies are large or well known, a nice target list will impress investors. Neat but a mistake. Companies don’t talk. So they are impossible to listen to. Worse, people in companies do talk. Speak to the wrong person and you will be hearing the wrong message. One option is to use a standard model to identify the right person in a company to talk with. There are several of these based on decision makers and influencers. Organisational roles. Job titles. In my experience this approach does not work. Every company is its own world with its own unique culture. Even within one organisation, different products may be chosen and bought by different routes. I prefer a map building approach:
The risk with this approach is that you invest a lot of time for no reward. If you end up selling to large enterprises this will always be a challenge. In the early days you have little to lose. Handled well, every meeting will add to your understanding. And improve your chances of finding good paying customers. The deeper you go the greater the risk. There is no complete answer to this. The best advice is rigorous honesty. Be clear about the progress you are making. Be prepared to walk away if it becomes evident that your product will not work for that customer. How to find the right people
A journey, as Mao sort of said. begins with a single step. To chart a path you need to find the people who have the problem you are trying to solve. This can seem like a scary task when you first start your SaaS business. Where to begin?
Having the conversation
If you are sticking with me you will now be working towards 30 or so introductions. The warmth will vary but they are at least not stone cold. Your objective is to have a conversation with as many of these people as possible. A discussion about the problem your business is going to solve.
This discussion can be quite informal and maybe short. A quick 10 minutes at a conference or meetup can be enough. You will not need an agenda (unless you are asked to provide one). But you do need to do 3 things:
These principles apply however you are introduced. If your contact makes a personal introduction, framing should be your first words. If you strike up a conversation setting the frame is the switch from small talk to business mode. If you call the person it is the way you describe the purpose of the call. It also forms the structure for any introductory e-mail that you send. If you want to know more about this, read The Mom Test by Rob Fitzpatrick. If you are confident you know what to do, read it anyway. There are few books that I consider essential reading but this is one. If it contradicts what I have just said, follow Rob’s advice. Keeping track - The anti-CRM
As soon as you starting talking to potential customers, you are building your business. The most tentative chat about solving a problem is part of that process. The connections you make will form part of the future of your SaaS. It doesn't matter if they never buy or use your product. They will be the start of the thread that leads you to your first paying customers.
So you should keep a record of who you talk to and where it leads. A whole sector of the software industry has grown up around doing just that. Its called CRM. It covers the spectrum from spreadsheets to the largest B2B SaaS company in the world. The trouble is that it is a false model. The initials stand for Customer Relationship Management. But the software is based on a top down management of the sales pipeline (or funnel if you prefer). In essence the software does not do what the name implies. The reasons for this would make a whole book. The point is to think different. When you are in customer discovery mode the issue is simple. You are nowhere near ready to sell. Even if your contacts want to buy. Trying to track these conversations in a sales funnel truncates all the value. Concentrate on gathering the lessons learned. And the connections that are growing your network. Make note of demographic information like roles, titles, interests and so on. You can use this to help build up personas when you are ready for your marketing campaigns. All this will be much more of an asset than an artificial pipeline. Don't stop exploring
Customer discovery is about execution not strategy. It is a lifetime process. The biggest companies with the longest established products are still doing it. Still talking to customers and potential customers. Still learning and building better products. Delivering the solutions their customers value.
The next part of this guide will look at how you use the information you have gathered. For now, remember three things:
I am a big fan of sharing. I worked in an incredible collaborative environment most of my career. And when I see great things happening in startups an open attitude to knowledge is always a part of it. I also know that no-one person has a monopoly on the best ideas. And luckily a whole lot of smart people love to share their best thinking.
One of the themes of this website is sharing the best ideas I find. You can see this in action in my SaaS Pricing section. The focus is SaaS and startups. But from time to time I will wander into other areas. I pick up ideas all the time from blogs and newsletters. I also share ideas generated in discussions I have with great founders and startup teams. For example the SaaS Scotland Group. You can see these in real time by following my twitter feed. One theme at this early stage in 2016 has been guidance on some basic and early stage stuff. As a startup founder or leader you will be asked to cover a bizarre range of skills and disciplines. Technical and sales of course. Strong marketing is obvious. But also finance, HR, procurement, strategy and planning, operations and many more. At the same time you must be an inspiring leader and a great manager. Make tough decisions. Take the right risks. Find and persuade investors. Contribute to the ecosystem. I could go on but it gets scary. No-one has all these skills. So in this post I am sharing the articles and guides I have found to a whole range of basic skills. If you are just starting out on the startup journey you should find some help here. I also read and reread some of these posts. When I was young (a long time ago) I played chess a bit. And I was always struck by the attitude of the Latvian former world champion Mikhail Tal. He told an interviewer once that he always watched the chess lessons for beginners broadcast on Soviet TV. (Proving the USSR was a real fun place.) As far as he was concerned it always helped to be reminded of fundamentals. I think the same applies to business. Things can get complex. But it is easy to forget the basics. Keep your eye on the simple things. And keep doing them right. You will go a long way to succeeding. First Steps
For many entrepreneurs the move from idea to a real business is the hardest step. You meet lots of people in everyday life who have a great idea for a business. They may be unwilling to take the risk. Yet the biggest obstacle is often just not knowing how to start.
Regular readers of this blog or my newsletter will know that I am a huge fan of the Crew blog. The writing is excellent and the content is consistently thought provoking. So I love this collection that forms a complete guide to building an online business. It is great for first steps and goes quite a bit further as well. If you prefer a more dynamic, rock’n’roll approach then this quick and dirty guide is also excellent. As in many walks of life, the best way is often to learn from others. In this blog post the founder of a classic B2B SaaS business tells his story. ToMo is an employee onboarding tool and this is how they got from idea to tangible product fast. A big challenge for many founders is tech skills. It can feel as if only programming geeks know how to create a software company. Or people who have lived on their X-Box for 10 years. This is far from accurate. Many great tech companies have been built by non-tech founders. HelloCompass tells the story of building a tech startup without tech founders. Accelerators have become a popular option for startups worldwide. The original and many would say the best is Y Combinator. This series of lectures put together by Y Combinator founder Sam Altman. He has pulled in many of his friends and Stanford University. You need a bit of time. But How to Start a Startup takes you through the whole accelerator journey with some of the most inspiring speakers you can find. Making the leap
The mechanics and methods are fine but you still need to take the risk. Most businesses fail. Wherever you look. In every country. All types of business. Any strategy or none. The chances are your business will fail. Yet so many people believe there has never been a better time to try. I agree with them. Perhaps one of these articles will help you make the decision…but remember no-one else can choose for you.
Let’s start with Ash Maurya. Ash is one of the gurus of the startup scene. And his book Running Lean is one of the best practical guides you will find. He also supplements the book with regular videos and posts to encourage real action. He gathered some of this philosophy into the Bootstart Manifesto. Nonetheless you will probably fail and this article explains why. SaaScribe by the way is a great regular collection of interviews and articles. With a specific SaaS focus. The team are also involved in SaaS meet ups and conferences in Europe. Full disclosure - I also write for them on occasion. Continuing the SaaS theme. In this article another SaaS guru, Jason Lemkin, explains that it takes 24 months to succeed. The time is not a fixed point. But he is dead right that perseverance is one of the qualities need to build a business. If there is one practical step you can take before jumping, it would be validating your idea. You need to feel confident that here is a viable, paying business for what you are trying to do. This is no guarantee. You still need, talent, execution and a bit of luck. Will anyone pay you money?
This is the first of 3 sections with money in the title. The order is customers, profit and loss, investment. This is deliberate. Tackle the money in this order. Too many founders jump straight to fundraising. Too many seed investors fall for this and give them cash. Bootstrap your way to early customers. And have a clear idea of a viable business model. Then raise funds if you need them. Always in that order.
My first selection is about what not to do. This just such a fundamental point. I see lots of business plans that talk about great markets. Yet have no mention of real customers. Aiming for the sky is awesome. Finding the first users and customers is indispensable. Your market plan must build from the bottom up as well as the top down. You can read the theory of this in detail in Steve Blank’s book Four Steps to the Epiphany. In many ways this is a terrible book. The prose is clunky and jargon laden (pot calling the kettle black I know). The author describes a business far removed from a typical 2 or 3 person startup. Yet the ideas are essential and universal. Who do you sell to first? Friends and family are a start. But you need to get out into the wide world at some point. In B2B this can seem daunting. Try this guide to finding your first leads. The founder of the company also contributed this piece to SaaScribe. How to find your first 20 customers. In the early days you are not trying to make sales. Your first job is to figure out if your product is right for your market. If not you need to change the product. Or choose a different market. Or a bit of both. In this post the Lean Startup team looks at this process. Known in startup speak as product/ market fit. For a simpler guide try this from yet another SaaS guru, Tom Tunguz. Finding the right answers is often about asking the right questions. The 8 in this post are relevant to anyone. At some point you will feel as if you are reaching a good fit. Then it is time for another giant leap. Paying for some marketing. Dropping money into the wide blue ocean to see if anyone bites. This is a bit more technical. But a good guide to spending those first advertising dollars - the first $10k to be precise. Just buying advertising is a crazy strategy in today’s world. You need to drive demand in other ways to. Here Drifft offers a 7 step process covering the whole product launch process. And don’t be afraid of something new. I found this site recently. It offers practical tools for every step of the process. From defining a market and prices to checking out the competition. It is a paid SaaS product with a 30 day free trial called Edison Plan. Would love to know if it works. Can you make money doing this?
First you find a market i.e. some real people prepared to pay real money for your product/ thing/ stuff. Next, will this make a viable business? This can be tough for founders without a financial background. Or even sometimes for startups with good finance knowledge. Building a financial model which reflects your business model is essential. You need to understand how your business will make money. If it makes money at all.
Begin with a plan. You will need accounting soon. But step 1 is to make a plan. Model some numbers and see if there is at least a chance of making money. That is the subject of this post. It also has links to some handy free resources like example spreadsheets. On the other hand you could try building your own. This is nice guide to the basics of making assumptions and assembling them into a financial model. I also think this is an excellent example. Written by top European SaaS investor Christoph Janz. It includes another free model and lots of good ideas about planning. In similar vein check out this post. It is in effect an interview with someone who spent 20 years building this type of model. Peter Reinhardt is a recent discovery of mine. Almost anything he writes is useful and in this post he covers the accounting basics you need to know. It is also worth understanding some accounting concepts. Focus on those that are most relevant to your business model. For SaaS and many others this boils down to many different ways of measuring revenue. If you think cash being paid into your bank account is revenue its time to think again! Profitwell explains what this means for SaaS here. Let me close with a link to the next section. When you start a company your biggest concern is going to be running out of money. Once you start fundraising this mutates into asking how much money do you need. The amount you spend every month is known as the cash burn. If you know this, you can figure out how many months your cash will last. Back to Tom Tunguz for some ideas on figuring out how much cash you should burn. Where can you find the money to build your business?
I cannot say often enough that raising money is not the objective of a startup. Building a great business is. However, chances are you will need outside investment at some point in the journey. So here are three posts to help you on the way.
Back to Y Combinator. They run an excellent blog called the Macro. In this item they have included a podcast covering all the basics of legal and finance. Some of the legal stuff is US specific. But there will be an equivalent in every country. Essential basics to avoid being trapped by more experienced or unscrupulous investors. Philipp Moering has written a good post on the fundraising process from an investor point of view. What do investors focus on? How does the early stage process work? What should you do to get ready? Includes a key message. Get to know investors before you start asking for money. If you live in Scotland there is a proven source of some free(ish) money for your startup. The Scottish Edge awards round 8 has just opened up. Final post is a collection within a collection. Another blogger I follow is Alex Iskold. He has put together this article with 25 of the best posts about fundraising. Some great choices. Some help with other things
There is no complete answer to all the things you need to cover when you are running a business. To round things out a couple of links to places you can find help. Addresses a wide selection of other business and management questions.
You are not alone. These are the top 15 areas where startups most often ask for advice. If you are not asking these questions, maybe you should be! Or maybe you just need a place to go and look for help. Founder Centric is startup focused and has some nice free tools on some key topics. Management Help is much more traditional business. On the other hand it has a more comprehensive collection of useful guides. Conclusion
Nothing is a complete answer. I will keep sharing ideas. And writing blogs or developing tools which share my own experience. You can download a couple of free things on this page. I also share a small selection of the best ideas every week via my newsletter. No matter what you read or what you do, we all make mistakes. If you sign up below, I will share the best posts I know about on founder mistakes in next week’s newsletter.
I spend a lot of time with startups. Mainly in Scotland. Where we our unique history binds a country on the fringe of the world deep into global innovation. We are proud of our two unicorns. And there are some amazing founders and businesses. Its tough to generalise - I met Alba Orbital who make satellites this week for example. But the most common business model is a subscription SaaS company aimed at SMB customers. That’s why I write about this stuff so often.
And it niggles a bit that a lot of SaaS analysts focus on the challenges of the SMB market. Every other week I read an article somewhere that argues that you must target the enterprise to achieve SaaS growth. Most of these posts are written by people smarter than me. Yet I can’t get away from a sense that they are missing something. That the economics of SaaS for SMB work. In a niche for sure. But also at scale. I have one fundamental and rational reason for this. SMBs are a huge market. As this Edinburgh Group report shows they contribute 51% of the economy in the developed world and 67% of employment globally . This week I found time to do some digging into the real economics of the businesses that might serve that market opportunity. Here is my thinking on how the unit economics of SMB SaaS could support a great company. Maybe even a few more of those one horned white horses. What do the base numbers for SMB SaaS look like?
As a starting point we need to pick some numbers to model the unit economics. These are averages or benchmarks. Not because you should aim for them. Just to give a representative idea of how a “typical” SaaS business works. The base levels for the analysis below came from:
I have summarised these assumptions in the table below. Showing the high, medium and low (HML) points for each assumption.
What follows is a whole lot of messing around with these numbers. If you don’t have the time or the appetite to follow this take away just these messages:
Analysis 1: Growth rates
Now let’s start looking at the impact of different trends in some of these basics of unit economics. I will start with the simplest variable which is growth rates. The graph below shows the impact of H (15%), M(10%) and L(8%) growth on monthly recurring revenue (MRR) and free cash flow (FCF). I have used revenue not gross margin. For small SaaS companies storage and processing costs are in effect fixed cost. Not variable with revenue. As you grow you should switch to gross margin for this type of analysis.
FCF is defined as the difference between the cash paid by customers and the CAC spent each month to acquire new customers. In this simple example cash paid and MRR are identical. Because I have assumed all customers pay monthly. We will examine the impact of upfront annual subscriptions later. The other main assumptions are constant across all the HML variables. Churn is 5% in each case, LTV/ CAC ratio is 3. ARPU at £39.99 and opening customer base of 100 are the same for all graphs.
This tells us two things. No surprise that the higher your growth rate, the faster MRR increases. By the end of just one year you can see that the High growth option is pulling away from the others fast. If you play with the numbers you find that 15% is around the minimum for the start of a hockey stick to occur within a year.
FCF works the other way around. Faster growth needs more cash to keep the users flowing in. This would change if the LTV:CAC ratio was better for higher growth instead of fixed at 3. This is an important lesson. High growth can arise either from a more efficient sales model or spending more money. If you are struggling to match the cash raised by your competition, the only answer is to be smarter. And the LTV:CAC ratio is the key metric to track. Analysis 2: Churn
What about churn? Lots of analysts think this is a key factor in SaaS success. Lets fix the growth rate at 15% just so we get a little hockey stick at the end. The graph below shows MRR at H (7%), M (5%) and L (3%) churn.
Here we see a spread of outcome which pretty much follows the spread of churn. Losing customers matters pretty much in proportion to the rate of loss. Keep an eye on churn but don’t get it out of proportion.
One important caveat. I have used churn in customer numbers here. In a SaaS company where the range of ARPU is quite narrow this makes no difference. But if your highest paying customers represent a significant portion of your revenue then MRR churn matters more. The bigger your customers the higher the likelihood that this will be the case. This will also have a big impact on your sales model. Upsell to existing customers is much more important with an enterprise customer base. Before we leave churn let’s take a look at another effect. If we use the same HML for churn and the same 15% growth rate and fix the LTV:CAC ratio at 3, look what happens to FCF.
Wow! That looks totally wrong. Cash flow gets worse the better churn gets? This is where a small understanding of the dynamics of metrics and ratios could save you a lot of money. Churn is used to calculate LTV. The normal formula is just ARPU/ Churn % = LTV. As a result lower churn gives higher LTV. If we fix the LTV:CAC ratio then higher LTV is an automatic translation into higher CAC .
Simple lesson. LTV:CAC ratio matters but so does the absolute value of CAC. If I fixed the value of CAC instead of the ratio we would see the same pattern for FCF as for MRR. Reducing churn is a good thing. But don’t allow your CAC to drift up at the some time by focusing only on the ratio. Analysis 3: LTV:CAC Ratio
Let’s take a look at that ratio. The 3:1 target is rough and ready. Anyone I have read recommends it and then add that there is no rationale behind the number. What impact does it have if we start changing the ratio?
This only affects FCF. MRR does not vary with the LTV:CAC ratio. I have stuck with the 15% growth rate for all 3 scenarios because this is cash hungry. Churn is fixed at the median of 5%. I also see no point in modelling a ratio of 1:1. In this case by definition you are never making any money so something has to change.
It turns out that 3:1 is right on the button. Below this level (1.5:1 or 2:1) cash burns fast. At 3:1 you can stay FCF positive - just. For your SMB SaaS ever to get to cash positive, 3:1 is the minimum ratio. Get there and keep improving is critical to a sustainable business. Analysis 4: Beware the discount factor
One final analysis of dynamics. Everything so far has been based on monthly subscribers paying every month. Most online SaaS offers packages to tempt payment in advance. Usual approach is a discount for paying a whole year upfront. The argument is that this boosts cash flow. How does this work out in practice?
Another sobering picture. I have fixed the other elements as usual but based on 10% growth. The pattern for 15% growth is the same but extends out over 2-3 years - this allows us to see the effect in 12 months.
The discount element is also fixed. I have assumed 10 months for the price of 12. Again a common approach. The most frequent in the sample of companies I looked at. HML here is about the percentage of new customers paying annual upfront - H (75%), M(50%) and L(25%). The higher percentage gives a big boost upfront. But it narrows fast. MRR shrinks the more you discount. If I laid MRR onto this it would show that MRR in the High scenario was 8% lower than in the Low option. Discounts are for the short term. They can produce a much needed cash boost. But keep your eyes open. The benefit is short and the bar for revenue gets higher with every giveaway. How big does SMB SaaS need to be?
The conclusion so far is simple. The unit economics of SaaS for SMB work. You can generate revenue and cash flow provided your CAC is under control. Yet these numbers deal only with free cash flow. You need to build and maintain a product. Proceed customer service and support. Do all the boring admin stuff that you need to run a business. And make a living for the founders. If each customer is small maybe you need a huge number to make a decent business?
The table below shows monthly and annual figures for 100, 500 and 1,000 customers. Using the mid point numbers for all the other operational metrics.
None of these are unicorn numbers. On the other hand in the context of SMB SaaS they are achievable. Even here in Scotland official statistics show that there are 359 thousand SMBs. Scaling further is great. This show that even 500 customers generates enough cash to make a real living.
To make this work you would need to find the funding to get you to 500. And manage your monthly cash burn within these margins. But it is possible. Working in the real world
These analyses are based on averages. There is no such thing as an average business. Every SaaS will be different. Even the “choice” between SMB and Enterprise is not real. Potential customers occupy a continuum. These rough and ready calculations can help guide you. And provide a bit of fun. They are no substitute for paying attention to the real details of your company.
I have put the assumptions and calculations I used to generate these numbers into a free Google sheet. You can access this and play with the numbers for your business if you like. Remember this is a simple sheet so you can produce strange effects like the one in Analysis 2 above. And even if your numbers look good you still need to make stuff happen. In the end metrics are just the voice of your business. What they say will depend on the specifics - customers, product, business model. What you do will depend on you listening and acting on what you hear. These figures are only indicators of the possible. Having worked through them I am convinced of three things:
For anyone involved in building SMB SaaS, don’t be distracted or discouraged. The business model works. Its success depends on delighting your customers so stop reading and get on with it.
I need to admit something. I have a problem with pure sales people. I have met some real nice ones. But the model just doesn’t sit with me. I worked all my life in professional services. Built on the principle that you must do AND sell. No separation. It is true that my former firm did hire the occasional pure “sales” person. It never worked. Those people did not add value. And our professionals did not value them.
I like to think of services in the words of a good friend of mine “We are all selling a little bit.” Hairdressers, plumbers, accountants, bankers. All services where the sale depends on people as well as the service delivered. I have also had the experience of building global partnerships. Alliances between professional services and clients/ partners with strong and successful direct sales models. This mix never worked in the real world. Sales people are great at selling a product but not at delivering a service. For me this creates an inherent conflict in SaaS. One consequence is a negative reaction to the wall of advice out there on how to more, organise and reward SaaS sales teams. I specifically hate the word quota. With a vengeance. All this material seems to be driven by an inherent assumption. That the the model for direct sales in traditional software companies is not broken. The advice and recommendations and even the basic language have this imprint. They bear an uncanny resemblance to the words you will hear inside Oracle or HP or whoever. This led me to work on a post called something like “Why you will never need sales in SaaS.” I have had versions of this kicking around for a while. But I realise that nothing in any of them is helpful or constructive. So let me try a different approach. Some SaaS companies will end up with a product which is best for large enterprises, government organisations and the like. The buying process in these customers is complex. The culture is unique and often challenging. Such sales need real people to spend time with the customer. Logic says that hiring people to engage with these customers will be necessary. For some SaaS companies at least. In my career I have worked with some of the best services sales people in the world. As leader I have been in charge of teams of professionals across the world. Generating billions of dollars of revenue. What have I learned? Below are a handful of truths. Things that work. Or at least reduce the risk of failure. This is not a system of success. But I hope it will be helpful if you are trying to build a SaaS sales capability. It is not just a numbers game
The funnel analogy is common in sales. Feed enough leads into the top and revenue will flow from the other end. Inevitable. Hire more sales people and generate more leads. Growth will follow. If this doesn’t work for any reason tweak it. Improve conversion. Fire your team and find better sellers. Market to a bigger audience. Build more product features. Until you have the economics working.
Is this a real philosophy? Crunch enough data and you will have the answer to life, the universe and everything? Of course not.
Metrics are a great way of figuring out what works and what doesn’t. But real revenues only arise form quality relationships with real customers. In an enterprise environment those relationships are complex. They are also few in number (at least until you are SAP). If you are SaaS is for large companies you need a clear plan for each relationship. Who do you need to meet? How will the target make its decision? What is the purchasing process? And much more. It is a long slog. You will have to listen to every nuance in each meeting. Understand and respond to different problems and agendas. Find features and benefits that work for the whole audience. Pumping numbers through is not the answer. Quality not quantity will win. Who will be the real sales person for your SaaS?
Get a clear idea who will truly sell your product. In the early days it is always the founder(s). By definition the team selling are also doing. Why then jump straight to a “pure” sales person? What you need is someone who can persuade your customer to buy your SaaS. Not just someone who says they can sell anything.
The best professional services sales people I worked with had the right combination of three things. Skills and track record that were credible with the client. The right personal and cultural fit for the client’s way of working. Enough knowledge and patience to navigate the buying process. Remember what counts is not your sales process. It is your customers way of purchasing.
In an established business I had to find these people and allocate them to accounts. It was a combination of personal experience from working with them and instinct. Not always right. In a startup you don’t have this. Instead apply a principle from the other side of the equation. Build up a persona for your ideal sales person. Then go out and find people who match. Hiring is a real jungle
Sales are built on relationships. You need the right people. No matter how big your company gets. No matter how tough the economy is. Finding the right people is always tough. Get over it. And be patient. I said it in a different context last week. Maybe means NO. You will still make mistakes. But only hire when your gut tells you it is right. This applies to sales as much as any other role.
My firm went through a big hiring exercise a few years ago. We needed senior people. Partners who would generate real revenue. Headhunters told us to expect an attrition rate of 20%. We achieved 6% over 5 years. There was no process. All we did was have people in the team meet candidates. If anyone who met them was unsure we said No. We kept going until we were sure. Every time. Don't be afraid to promote from within
Your best option may already be on the payroll. I can already see this happening with a couple of the SaaS startups I work with. Youngsters who have started as interns are growing before the founders eyes. Take a chance on someone you know. Who fits into the team culture. And has worked for it. This is much lower risk than insisting on someone who has a CV that ticks every single box.
Seeing people grow and succeed. In roles they would never have imagined a year or two earlier. This is one of the most rewarding experiences you will ever have as a leader. The fallacy of reward
Sales theory is often based on a pure, individual financial incentives. You pay on personal performance. You match or exceed the going rate. You hold individuals accountable and fire them if they fail. This is great for getting hard driving mercenaries. And high staff turnover. It is bulls**t for your business and your customers.
The more complex your SaaS and your customer’s business, the wronger it becomes. Selling products or services to large enterprises requires a team effort. Everyone from the PA who makes the appointments to the CEO who seals the deal has a role to play.
Startups are small teams by definition. Everyone and everything depends on everyone and everything else. The last thing you need in your culture is a high paid outsider. Motivated only for him or her self. Ditch those individual quotas. Get everyone working as a team in development and in sales. Reward team success. You will be more effective and have more fun. The myth of CRM
CRM must be the wrongest named software category in history. It implies that the system is about managing customer relations. In reality CRM is about building and tracking sales funnels and pipelines. Nothing wrong with that but call it what it is.
The wrongness doesn’t stop there. CRM is a crowded space with hundreds of companies - most SaaS based - offering solutions. The basic proposition is the same. A system and the metrics it drives will transform your SaaS growth. The trouble is sales is tough. And overcoming the challenge is not just about process and numbers. It needs thought, analysis, effort and a bit of luck. In the early days your success is not about being more organised. Or a more precise measure of progress. It will be about working out and guessing the right path. Through the messy world of the right corporate customer. There will be a tiny number of real quality leads. You will not win by trying to impose a pattern on these. Rather you must treat them as individuals until you see something that repeats. This will take a long time in the enterprise. The right choice at the right time
In enterprise SaaS sales the biggest decision is right at the start. Are we selling to the right customer? Most times this is followed by the other key choice. Are we selling the right thing to this customer? These things are true in every business. They matter more in enterprise sales. Because the time and cost of investing in a sales relationship with the wrong customer is so high. It can be enough to kill and early stage SaaS company.
The second choice (what to sell) is not about changing your product. It is about focus on the benefits that will make the biggest difference. Do not allow CRM or logo blindness to distract you from this fundamental. Dig deep to find out if you can add real value to your target customer. Listen to every contact. Direct or indirect. Even if your product is what they need, are they ready to adopt it and realise the benefits. Every culture is different
The sales model I have disparaged throughout this post does work in some places. National cultures vary. Industry cultures vary. Every large organisation has a culture all its own. You will build your own culture for your own organisation. Whether you like it or not. Once your SaaS is established it will have a culture.
You should respect and grow that culture. But you must understand and adapt to the culture of your customer. In enterprise sales buying is a reflection of culture and process. You will need to navigate both. I had a period where I looked after relationships with the Europe, Middle East and Africa (EMEA) business of two Fortune 50 clients of my firm. We were trying to sell the same portfolio of services to these clients. Their total procurement spend was similar - $14Bn per annum for one and $12Bn per annum for the other. As far as we could see the spend on professional services was also close. Yet the experience was different. There were many reasons. The first signal lay in procurement itself. One client had 180 people for its entire global spend. The other had 1,100 just for EMEA. At the same time, the buyers in the first client were happier to spend time with us than for the second. Despite having one tenth the resources. If you must hire sales people....
There are a series of process mistakes that are common in sales. Quotas too high. Measuring and rewarding the wrong behaviour. Hiring the wrong people. And so on. In enterprise SaaS you need to think deeper and more strategic. Fixing the wrong system is not the answer.
If your SaaS needs a sales force it is because your customer wants and need personal relationships before they buy. This is true for most large organisations. And it may be true for some things in the SMB sector as well. Professional advice is a great example. This is a great opportunity to learn about your customers and deliver real value. Instead of “How do I create the right sales process?’ Ask yourself “How can I best learn about my customer’s business and help them improve?” Build your sales team on that answer. Being in front of customers talking about their problems is fun. The rest is bull. Happy New Year to everyone. I hope you are ready launch into another SaaS year. I have spent a fair bit of time over the holidays thinking about some of the big topics related to SaaS. You will hear much more about my ideas over the coming months. For this first blog of 2016, I want to concentrate on one specific topic. Cash. Every SaaS is looking for moneyWhen I look at the SaaS companies I advise and/or invest in, almost all have one common feature. They have either raised funds in the recent past or they are planning to raise in 2016. In some cases both! So I was thinking about why SaaS businesses always seem to need money. And I came across this post from Jason Lemkin - Why Can’t SaaS Just Mint Cash? Here is one of the gurus of SaaS looking at the exact question. How come even successful SaaS needs more and more money to sustain progress? It also reminded me of an earlier post by another legend, Tom Tunguz. One of his themes is to analyse the published number of listed US SaaS companies. I think he has a basket of 51 that he tracks. This article highlights numbers for that group of SaaS companies. Almost none of these businesses are generating free cash flow or GAAP profits. Only 18 (of 48 at the time of the post) have ever recorded even 1 year with positive net income. The cash position is better but it still takes on average 6 years for SaaS to become cash positive. Why does SaaS eat cash?Why should this be? And does the SaaS business model still make sense if the overall economics are so tough? I believe it does because these numbers are a product of growth. Not the result of a fundamental flaw. That does not mean you can relax if your SaaS is swallowing cash. Growth is one factor but it can also highlight areas of the business model that need attention. The key challenges that create cash burn are:
Is Enterprise the only answer?One option to work your way out of the cash bind is to go up market. Enterprise sales generate more cash. Big organisations are great for upset. More users. New modules. Extra locations. It all adds up to a strong ongoing revenue stream. This option is not open to everyone. Selling to the enterprise means a substantial investment in sales and service capability. You will get the cash flow right in time. But only if you can raise more cash up front. $100m plus rounds are common in the US. This type of funding is much harder in other startup ecosystems. 4 SMB SaaS ideas for 2016And maybe that is not how you want to run your SaaS business. Your product and market may be squarely in the SMB sector. In this case spending heavy to hire sales people and sell to multi nationals would be the wrong strategy.
So we are back to the start. Every SaaS business needs cash. 2016 could be a year when the business environment gets tough. Fundraising may soon be harder than ever. If you are growing an SMB SaaS business, what can you do to mitigate the cash burn? I have no easy answers. These 4 ideas are worth trying:
Don’t be afraid to invest in what works. When you find a model. Or a channel. Or a person. Back them. One thing for sure. You will never succeed if you don’t spend the money you do have. Find the right solutions and go for it. How well do you understand your data? If you run a SaaS business you better have a good answer to this question. Its a truism but SaaS is all about data. Every step of the process is measured and tracked. Pipeline metrics. Growth metrics. MRR v ARR. LTV/CAC ratios. And all the rest. It is a are week when no-one posts a new measurement idea critical to SaaS success.
Many blogs and analyses are published by those who believe this enables a goal setting culture. Set the right targets for key metrics. Build sales and customer success teams that are accountable for those objectives. Establish clear quotas and incentives. Drive the business culture by focus on the right results and you will succeed. This approach is favoured by a lot of entrepreneurs and investors with more experience in the startup world than me. Yet I think there is a different, better way. For me metrics are the voice of your business. Most important that also makes your numbers the voice of your customers. I prefer to listen to the data. Learn from what it tells me. And improve your SaaS using that knowledge. The only trouble with this philosophy is that many people don’t know how to listen to their data. Even those with great numeracy and technical skills. Using and understanding metrics is a different skill from doing the calculations. You can read a fascinating and moving article about the common mistakes at “Beginner’s Guide To Data Based Thinking”. So when you are faced with a mass of SaaS data, what can you do to understand what those metrics are trying to tell you?
Metrics are a gift for any business. We are lucky in the SaaS world that so many data points are available. The numbers are a guide to many unknowns. They can provide a picture of customer behaviour. Buying intentions. Churn signals. Growth trends. They can show the strength and weakness of every business. Learn how to use your metrics. Listen to them. Ask the right questions. Make better decisions based on the answers. Build a constant cycle of learning and improvement. A big percentage of the press coverage around the release of iOS 9 has been about ad blocking. Apple has made it possible for consumers to stop all those annoying banners and pop ups. Cue much consternation about the future of revenue generation on the Internet. Content blogs and sites which depend on advertising for all their revenue are predicting a bleak future. All this noise has made me think a bit more about the growth challenges facing SMB SaaS startups. Most of these businesses rely on the web in various forms to reach potential customers. The obvious impacts of a reduction in general online advertising would be:
Short Term Windows Will CloseFine and good. But the reason for fearing ad blockers is more fundamental. People don’t like being bombarded with ads. There is a limit to how far Facebook and others can push. Content marketing which is just brochure ware is also seeing its audience dwindle. Over time direct advertising channels will narrow and become much more expensive to access. The good news is that there is a different approach for SMB SaaS. Distribution is the answer. I used to think of distribution in an old fashioned model. It was about getting the product to the customer. With cloud based SaaS this could never be a problem? A New Definition For SaaS DistributionCorrect in the physical sense. But in SaaS distribution now means reaching the audience. Advertising channels may shrink but the audience - the market for SaaS products - continues to grow. More consumers have access to a reliable connection and a smartphone every day. Software is eating the B2B world. Whole sectors are being transformed by digital. So if distribution is the key how does your SaaS reach this growing audience? Modern software has unlocked this door. The key is integration. The ability to link SaaS products together makes every product a potential channel for others. Most SMB SaaS solves a narrow well defined problem. In startup mode there is a minimum feature set so this is even more pronounced. But integrate your product with the forest of other exciting new software. Each SaaS becomes the gateway to a whole ecosystem of solutions. Make Your API Your Sales ForceYour API can become your best sales tool. Integration with other SaaS can open up distribution through a bunch of channels:
Will Integration Led Distribution Work For SaaS?The strategy is right. Reaching a big customer audience that is already open to using SaaS in their business manse sense. It must be more effective than battling with rising costs from Adwords or Facebook. And falling conversions.
It will not be free. As the number of apps on each platform grows the fight for attention will rise in cost. We might also see some of the big platforms exploiting their app centres as a revenue stream. As always the key will be execution. Choosing the right platforms and doing the right work to maximise the benefit will deliver results. I expect that better insight on this will emerge in time. Right now, I am working with one SaaS company. They are experimenting with this approach. I will let you know when they crack the code. For more ideas to grow and develop your SaaS business, subscribe to our newsletter below. Right now investor focus is on SaaS companies that can deliver hyper growth in customer numbers. And revenues. Profits and cash are secondary considerations. Look at the giant of the SaaS world. Salesforce.com doesn’t yet turn a profit. This makes sense as a land grab in a growing industry. Which is the exact place we are today. It is not sustainable as a long term investment strategy. SaaS is going to be real. A major sector of the technology industry for many years to come. With good earnings and high (ish) margins. What Happens When SaaS Goes Mainstream?As we approach this phase we can see what type of SaaS business will be attractive to mainstream investors. The type of institutions and funds that drive the NYSE, Nasdaq, London Stock Exchange and other global bourses. There will be different sizes and specialisms. But the companies the main markets will love are going to have:
SaaS Is Not Just About StartupsRight now SaaS is seen as near pure startup play. It is all about exposure to explosive growth and high risk/ high return dynamics. That is fine. Startups like this will always exist. And the fashion (or asset allocation in the jargon) for this investment class will rise and fall. SaaS is going to create a big sector of companies that are a solid and secure investment base. Far removed from the startup world of VCs and Angels. We are talking pension funds, income funds and hedge funds here. Revenues will range from $100 Million to $100 Billion. The common factors will be cash flows, margins and predictability. One day we will be able to read the story of how SaaS led the Tech sector into the established world. Away from the wild fringes of the market. Into the ranks of cyclicals, defensives, growth stocks and the rest. Unicorns and valuations in the stratosphere are wonderful. Building sustainable business that changes the world will be much more fun. Look out for the companies that transition to the next phase of SaaS. Excitement will be lower but achievement will be much more widespread. Next StepsWe will see more IPOs. Indices that look at performance over a quarter, then a month and even real time. Specialist funds will emerge that invest in portfolios of SaaS businesses. Market analysts will develop expectations of margins and cash flow. Investment ratios. Churn analytics. Drama will be replaced by strong regular income.
SaaS will be a vital part of the long term, established economy. Integral to technology but also an element of almost all sectors. And of course new startups will emerge to disrupt the SaaS model! Keep following the best ideas to build great SaaS businesses. Sign up for our newsletter below. Software is changing the world of business. SaaS startups are offering great products with real tangible benefits in every business sector. But persuading business top adopt new technology is tough. Often the benefits of SaaS are sold in terms of time. But turning time into money is not easy. SaaS for SMBs needs to find ways to help their customers realise these benefits. Many things have changed in the world of enterprise software. Yet there is one apparent constant. Almost every product claims that it will save the customer time. Sometimes the word used is efficiency. Often the marketing team will jump straight to advertising cost savings. A quick look will confirm that the real benefit is time reduction. Tasks, routines or processes carried out faster or with less pairs of hands. Tech Does Not Turn Time Into MoneyThis is a problem. There is a management principle that work expands to fill the time available. It is even older than than the computer industry. IT projects have a long and undistinguished history of failing. They don't deliver any real benefits from all those time savings. Unless you do something about it, saving time does not turn into saving money. This matters because enterprise software buyers are all sceptics. The benefits of new IT are in doubt throughout the business world. Executives in companies large and small all bear scars. Memories of expensive projects with zero benefits. The traditional solution to this problem is change management. In the last 10 years the enterprise software industry has become dominated by services. A large part of the revenue in this area comes from change projects. Designed to extract concrete business benefits from high priced software implementations. How Can SaaS Tackle This Paradox?So if your SaaS is designed to save your SME customers time, how can you tackle this paradox? First you need to be clear how time converts into money. Your customer has three basic options:
Business leaders in any company hate number 1. Don’t believe what you read about executives who love taking the hatchet to payroll. It is a sad and painful business in any organisation. Number 2 is more popular among leaders. But it means change. And there is always a solid group of employees who fear change. It is discomfort rather than outright pain. That is enough to create resistance. Resistance eats benefits. It is relentless and invisible. But it is horribly effective. SaaS For SMEs - Use Content And OnboardingSelling SaaS to SMEs you don’t have the time or resources to deliver change for your customers. That does not stop you from helping customers understand the benefits of your product. The two best opportunities are through content marketing and onboarding. Your content marketing is a great opportunity to promote the upside of your product. Turn the time benefits into language a customer will understand. I am on the board of Appointedd. A time and scheduling app for SMEs. I love their simple way of expressing the benefits to a small business owner. Do More Of What You Love. There are plenty of other examples. The key is to use content to help your customer think about real business questions:
SaaS OnboardingFor onboarding the trick is to broaden your thinking. Most onboarding processes focus on the SaaS product. This is important your customer needs to know how to get up and running. But don’t stop there. Provide help which enables your customer to use the product as well as just installing it. Give illustrations of the product working in practice. How have other customers delivered the benefits? Show them through case studies and war stories. Next StepsB2B SaaS is about building products which provide real business benefit. That is the promise you are selling to customers. It is the mechanism that will allow software to disrupt and transform industries everywhere. Startup founders need to understand how their product delivers benefit need to end.
Just showing how to save time is not enough. Think through the real wins from your product. And build content and onboarding services that help your customers get there. To keep update with the best SaaS ideas and thinking sign up for our newsletter. Get SaaS gems in your inbox every week. |
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AuthorKenny Fraser is the Director of Sunstone Communication and a personal investor in startups. Archives
September 2020
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