A research on the SaaS market
What are the key challenges/problems SaaS businesses face and will face?
Drive revenue growth by acquiring new customers (acquisition), retaining the existing ones (retention) and increasing the revenue generated by them (monetisation).
- The key challenges for a SaaS business are different from a traditional software business in that there are two sales that have to be accomplished:
- Acquiring the customer
- Keeping the customer (to maximize the lifetime value)
- This is because the revenue for the service comes over an extended period of time (the customer lifetime). If a customer is happy with the service, they will stick around for a long time, and the profit that can be made from that customer will increase considerably. On the other hand if a customer is unhappy, they will churn quickly, and the business will likely lose money on the investment that they made to acquire that customer.
- A research report from JP Morgan talks about the factors that drive public company SaaS valuations. While the top factor impacting the multiple on revenue is revenue growth rate, the report clearly shows how both retention and monetisation are strong secondary factors (which both contribute to revenue growth rate). An upsell increase of 2% means a 28% higher public valuation. A churn decrease of 2% means a 20% higher public valuation.
- Here is a graph from Intercom that shows the correlation between the EV/R multiple and the expected revenue growth of public SaaS companies:
- And here is a graph that shows that SaaS valuations have little correlation to profitability (in contrast to what one may think):
- Metrics: http://www.forentrepreneurs.com/saas-metrics-2/
- Why startups fail. http://www.forentrepreneurs.com/why-startups-fail/
- Impact of churn on valuation: http://www.slideshare.net/GainsightHQ/the-incredibleimpactofchurnonthevalueofyourcompany
- Why churn is critical: http://www.forentrepreneurs.com/why-churn-is-critical-in-saas/
- Valuation and Growth: https://blog.intercom.com/a-closer-look-at-saas-valuations/
- Metrics: http://customer-success-resources.totango.com/h/i/202366530-2016-saas-metrics-report
What are the key challenges/problems SaaS marketers/growth people face?
[Acquisition] How do you build a scalable marketing strategy that keeps your costs of acquisition low?
The following sub-questions are based on the priorities for marketers according to the “State of Inbound” report by Hubspot:
- How do you generate traffic and leads? — Importance: 6.5
- How do you prove the ROI of your marketing activities? — Importance: 4.3
- How do you secure enough budget? — Importance: 2.8
- How do you manage the website? — Importance: 2.6
- How do you identify the right technology for your business needs? — Importance 2.5
- How do you target content for an international audience? — Importance 2.3
The following sub-questions are based on the key marketing priority for marketers according to the “State of Pipeline Marketing 2016” report by Bizible:
- How do you generate more leads/demand? — Importance: 4.5
- How do you convert more leads to customers/revenue? — Importance: 3.4
- How to understand the ROI of marketing activities? — Importance: 0.8
- How you reduce the cost of customer acquisition? — Importance: 0.4
- How do you improve marketing and sales alignment? — Importance: 0.6
For comparison, the same report in 2015 showed similar results. The top marketing priority was lead generation, followed by revenue generation and understanding ROI. The primary success metric was opportunity sourced, the second one was “total revenue” and then “total leads”.
This shows how most marketers tend to attribute more importance to the top of the funnel, although most of them are responsible for down-funnel metrics, which better represent the contribution of the marketing function to the growth of the business.
[Retention and monetisation] How do you retain customers and maximise their lifetime value?
- How do you deliver great post-sale service that keeps your customers happy?
- How do you expand revenue from your current product?
- How do you up-sell customers to a more highly featured version of your product?
- How do you cross-sell customers to purchase additional products or services?
- Major challenges marketers face (by Hubspot): https://blog.hubspot.com/blog/tabid/6307/bid/33820/5-major-challenges-marketers-face-and-how-to-solve-them.aspx
- Hubspot full report: http://cdn2.hubspot.net/hubfs/53/HubSpot-State-of-Inbound-Report-2016.pdf
- Biggest marketing challenges for SaaS: http://www.audiencebloom.com/the-biggest-marketing-challenges-for-saas-providers/
- How SaaS marketing is different: https://blog.kissmetrics.com/how-saas-marketing-is-different/
- Why churn is critical: http://www.forentrepreneurs.com/why-churn-is-critical-in-saas/
What are the key challenges/problems that SaaS marketers/growth people face, particularly in the B2B market?
The top priorities for B2B SaaS marketers are, in order, lead generation and converting leads to customers.
B2C SaaS marketers with sales teams tend to put more emphasis on converting leads to customers as compared to their B2B counterparts.
The approach to marketing in B2B SaaS tends to be focused on educating prospects, creating trust and avoiding being too pushy.
For most B2B SaaS companies, marketing teams are tasked with lead generation, sales-pipeline contribution and revenue generation, or what is called pipeline marketing. Let’s take a look again at the “State of Pipeline Marketing” report, which is an annual study of how B2B marketers and marketers from B2C industries with sales teams drive growth. And, let’s compare the answers of B2C companies to the question “What is your marketing priority?” with those of B2B companies.
It seems that B2B SaaS marketers attribute more importance to lead generation than to customer generation. Whereas, for marketers of B2C SaaS with a sales team, it’s the way around.
Unfortunately, the report doesn’t show a B2B vs B2C break down of the results for the question “What is they key metric you use to measure marketing performance?”.
Certainly there are some differences in terms of how to approach lead generation and revenue generation in a B2B market as compared to a B2C market. B2B marketing practices that don’t necessarily apply to the B2C market include:
- Provide a large quantity of information about the product, because business investments are more thought-through as compared to consumer purchases.
- Provide information about the product that is easy to understand for tech and non-tech people as the purchase decision involves multiple stakeholders.
- Stay ahead of the competition and give prospects all of the information necessary to compare the product to competitors, because a business buyer makes research and is typically highly informed about alternative options.
- Create trust, as the B2B buyer is more risk-adverse than consumers and, when in doubt, will tend to buy the alternative offered by the largest and most established company.
- Avoid being too pushy, because B2B purchase decisions take time.
Where is the SaaS market going?
The SaaS market is growing, particularly among SMB, and seeing the emergence of two new types of businesses: SaaS focusing on a particular vertical and SaaS providing only an API toolset. SaaS that are successful tend to have a good performance on churn and service upsell. For this reason, we are seeing three trends: SaaS companies are investing in tracking more metrics on their existing customers, spending on customer retention is growing and they are increasingly allowing customers to create and distribute add-on apps, in an attempt to to improve customer retention.
- The global SaaS market reached $49 billion in 2015 and is expected to reach $67 billion by 2018, growing at 8.14% per year.
- North America is still the largest SaaS market, but Asia Pacific has the fastest-growing growth rate.
- SaaS apps adoption is growing among SMBs.
- 64% of SMBs are now using cloud-based apps, based on a BCSG study. By 2017, adoption is expected to increase to 88%.
- Similarly, SMBs last year were using an average of three cloud apps, which is predicted to jump to seven by next year.
- We are seeing an increasing number of SaaS focusing on a particular vertical (e.g. healthcare, energy, agriculture etc…). This new type of SaaS is called “vertical” SaaS, as opposed to traditional “horizontal” SaaS, typified by Salesforce.
- Bigger players are increasingly adopting PaaS functionality to boost customer retention. This means allowing customers to create and distribute add-on apps for the flagship product. Like Salesforce did in 2007 when launched force.com.
- There is a new type of SaaS startups that doesn’t even provide an application but only an API toolset — usable by non-techies as well as developers — that allows customers to tailor services to their needs
- Successful SaaS companies tend to have a good record on customer churn and service upsell. For this reason, they are investing in tracking more metrics on their existing customers. And, spending on customer retention is growing.
How do Sales and Marketing work together in a SaaS company?
It depends on the stage that a SaaS company is at. Established SaaS companies combine together a number of marketing&sales organisational models whereas SaaS startups typically employ only one. There are three types of marketing&sales organisational models.
The self-service model is based on automation: marketing and support are automated as much as possible and there are no sales reps.
On the other hand, in the Enterprise model sales reps are well trained and territory based. Marketing helps them close deals by creating awareness and relationships. Support reps are also well trained and deliver high quality service.
The third model is called transactional and is in between: marketing owns the funnel from awareness to qualified leads and is in part automated, sales reps are trained to close deals efficiently and 1:1 support is complemented by customer self-service tools.
- On the basis of price and complexity, SaaS marketing&sales approaches can be classified in three models:
- Self-service: low price, low complexity
- Transactional: high price, low complexity
- Enterprise: high price, high complexity
- In the customer self-service model, there’s no traditional Sales department, all revenue depends on marketing automation from awareness to close. Also support is automated as much as possible.
- In the transactional sales model, marketing owns the funnel from awareness to qualified leads. The focus of marketing is both on creating high quality leads by educating prospects and creating a high volume of leads, by automating tasks. Sales reps are highly efficient and responsible for closing deals. Support is in charge of meeting SLAs during pre and post sale. And, is complemented by customer self-service tools.
- In the Enterprise sales model, marketing looks after awareness and education but also relationship building and trust. Sales reps are territory based and focused on a narrow set of target prospects. Support is high quality and given by well trained reps and is complemented by educational tools and training.
What is the size of the self-service + transactional (or sales assisted) market vs the enterprise sales market?
The enterprise sales SaaS market is between 40 and 60% of the market.
By enterprise sales I refer to deals that require a sales rep to close.
- Data from 386 AngelList trending startups:
- 59% list one or more package’s price as “Contact us”
- 39% have pricing publicly available (61% don’t have a pricing page at all)
- Data from top 250 SaaS companies in the world:
- 38% list their most expensive package as “Contact us”
- 20% have pricing publicly available (80% don’t have a pricing page at all)
Marketing organisations: http://www.slideshare.net/HubSpot/the-cmos-guide-to-marketing-org-structure
SaaS Sales models: http://chaotic-flow.com/media/saas-sales-models.pdf
How is a Marketing team organised in a B2B SaaS company?
How do marketing teams change depending on the size of the company?
Especially at the beginning, it is important to focus the marketing efforts on acquisition, with the goal of acquiring customers fast and at a low cost. This may be more or less difficult to achieve depending on the complexity of the SaaS product and the purchasing process of the target customer. Complex SaaS products targeting Enterprises will take more time to sell than simpler SaaS products targeting SMBs.
As the number of customers increase, retention marketing becomes more and more important. According to Gartner, a full 80% of all future revenue of a company will come from just a fraction (20%) of the current customers. If you increase your customer retention by only 5%, you can increase your business’s profitability by 75%, says the research department of Bain & Co.
In the ideal acquisition marketing team, investments at the top of the funnel are prioritised as they make everything else possible downstream.
In fact, as long as the marketing team has software that lets them filter incoming leads efficiently, an increase of twice as many leads means twice as many quality leads.
As the size of the company changes, also the importance of some areas of acquisition marketing changes. Large organisations invest more resources in understanding ROI and aligning marketing and sales and give less importance to lead generation, as compared to smaller ones.
- Organisation of marketing team by team size: https://blog.hubspot.com/marketing/how-to-structure-marketing-team#sm.000004bffsqms7eoryz0xrifhs4q2
What are the key sectors in SaaS?
There is a high number of horizontal SaaS solutions that focus on CRM across every industry. This type of SaaS solutions are predominant.
However, there is also a new kind of industry specific SaaS solutions that are emerging. In this area, healthcare and education are two of the “SaaS-friendliest” industries.
“The first 10 years of business cloud applications was about horizontal markets — a mile wide and a foot deep. Salesforce is the poster child for horizontal applications focused on customer relationship management across every industry. By now, most of the horizontal opportunities have been covered. The next decade will be about depth. It will be about industry solutions. Industry Cloud entrepreneurs are focused on solving a broad range of issues for a focused customer set, and are creating companies that will be as big, and more profitable, than many of the horizontal cloud companies that have come before them.”
“We identified healthcare and education as two of the “cloud-friendliest” industries.
That research was based on eight accelerators and two detractors.”
“In terms of industries, the highest potential is in the oldest and most tired incumbents — things like law, police enforcement, and many more areas that have not had easy access to new technological solutions.”
Who are the key influencers in the space?
SaaS Investors and VCs
I like to call him the SaaS Guru. Partner at Storm Ventures (invested in Algolia, Pipedrive, Marketo…) he also co-founded EchoSign. He’s also behind SaaSTr, a resource-full website for SaaS people.
VC at Matrix Partners — after having founded SilverStream software, among other things, David Skok also writes a cool website full of resources, ForEntrepreneurs.
VC at Redpoint Venture, also writes very insightful article on tomtunguz.com (really you should read the.whole.thing)
Lincoln Murphy is known for being a SaaS marketing genius and a growth hacking expert. He currently puts his knowledge to work at Sixteen Ventures and GainSight.
Works at Point Nine Capital, and has invested Zendesk, Geckboard, Algolia, 15five. His blog is regularly updated with cool articles about SaaS.
General Partner at Social+Capital VC. He’s board director of an impressive list of SaaS products, among which Slack and Intercom. His tweets are definitely worth reading.
Partner at Bessemer Venture, a leading VC in the SaaS industry, Byron invested in Twilio, Sendgrid, DocuSign, Intercom (and more).
Managing Director at Foundry Group (early-stage IT VC), Brad Feld is board member of great SaaS products such as Mattermark of Moz. He also co-founded startup accelerator Techstars and FYI, writes books about startups.
CEO and co-founder of Close.io. His blogposts on Close.io’s blog are pretty enlightening.
Co-founder of AppSumo, Noah Kagan also writes http://okdork.com/ along with many other articles and guest posts elsewhere. He knows a thing of two about SaaS marketing.
Marc Benioff is the CEO of Salesforce.com. That pretty much sums it all up. He also tweets a lot.
After launching CrazyEgg and KissMetrics, Hiten Shah is a pretty fruitful writer, blogger and social media addict. He writes about SaaS here: http://hiten.com/
His latest tweets are about ping-pong. I think it’s crucial for the SaaS industry, but if you disagree, no worries, he’s also the CEO of Intercom.
David Heinemeier Hansson
Creator of Ruby on Rails and former CTO of Basecamp, David write a lot, mostly on tech issues, also on startups (in his book Rework): http://david.heinemeierhansson.com/
Slack is the SaaS to follow these days (and to use, by the way) — as is his CEO, Stewart Butterfield.
Sean is behind GrowthHackers.com, that I read and use (almost) everyday, and Qualaroo. He’s a must-follow.
The CEO of Box tweets a lot about SaaS and cloud issues. According to his Twitter bio, he also loves another 4-letter words that contains 2 “A”s. I’ll let you discover what it is.
Writers and thinkers
Writes great SaaS-related articles on TechCrunch
Mike Butcher (@mikebutcher) | Twitter
Author of Predictable Revenue — which is a book, but you can find many other resources on its website: http://predictablerevenue.com/
Writes and blogs about SaaS on http://diginomica.com/ and on ZDnet.
Writes interesting posts about SaaS — and other topics — on his blog http://www.justinpirie.com/
What are the best resources?