Frameworks Governing SaaS Models
Last week during SaasBiz event that we co-hosted with Count.ly, I gave a presentation on Frameworks Governing SaaS to help entrepreneurs navigate during big shifts happening in SaaS like new go-to-market approaches, changing funnel processes with authentic examples from successful entrepreneurs.
The presentation deck can be found at the bottom, but below is a summary of the primary takeaways.
Big shifts happening in Saas;
- It’s getting cheaper to build Saas companies which is causing to more competition and increasing customer acquisition costs.
- Buying decisions made before they come to the vendor
- Customers experience became so important
It has never been cheaper to build a SaaS company. With the rising number of companies providing every tool, you need to build your own SaaS tool, like open-source software packages instead of paid developer tools and AWS instead of your own datacenter, just to name a few. We are living at a time that a tech blog like Hacker Noon can explain how you can build your own SaaS tool with $0 in a blog post that you can read in less than 20 minutes.
The barrier to entry to the market being low is essentially a marvelous advantage for entrepreneurs who are building their own SaaS company. However, it comes with a downside.
On a recent blog post, Andrew Chen from Andreessen Horowitz argues that “startups are cheaper to build, but more expensive to grow” and compares the cost of different customer acquisition channels with their prior values. Results are in line with his argument.
- Facebook: 171% Increase in CPM (Cost per Thousand Impressions)
- Twitter: 20% Increase in CPM
- LinkedIn: 44% Increase in CPM
Furthermore, despite the increasing acquisition costs customers’ willingness to pay for a feature has dropped by 30% during the same time period.
The second shift is about the buying decision. Now, it is made before the customer reaches out to the vendor. This is probably the most talked shift. However, there is a misconception about this only being applicable to B2C companies. According to Forrester, three out of every four B2B buyers want to self-educate rather than listening to the sales representatives talk about their products and services.
Hence, the products that give the option to try the product out before buying through a free trial or freemium model have less friction and lead to a higher conversion rate.
With increasing competition and customer acquisition costs companies are forced to lower their prices to compete. However, to compensate for the loss in profits, they aim to reach the masses. This, on the other hand, caused major changes in products and resulted in user experience becoming a fundamental part of the purchasing process. Nowadays, your product needs to check multiple boxes before you can sell it. Your product needs to be able to tell about itself, educate the user on its how-to’s, onboard the user, and lastly show what it is capable of to turn a free user into a customer. Charging $5 or $10 per user is not enough to create the user traffic needed to create potential customers via engagement. Those days are long gone. Users want to use the product free before they make their purchase, making the experience your product can offer the most crucial aspect of turning a user into a customer. It would be fair to say that providing users with stellar product experiences are not a luxury anymore, it is a necessity.
Slack is able to convert 30% of their freemium users to paid without even a single person engaging with the customer. This can easily demonstrate the power of a strong product.
Understanding where you are at your growth stage is important to find your right focus
Since we acknowledged the shifts that are currently affecting the SaaS environment, we can now think about how we should guide the scaling processes in regards to the present market settings. As ScaleX, we examine growth in three main stages. The process of growth starts with finding a product/market fit. Creating a product that could satisfy its market is naturally in the first stage of a successful venture. Then, we look for a repeatable, scalable and profitable growth model. Lastly, we move on to scaling the business.
Not many entrepreneurs understand these stages well. According to the Startup Genome Project that covers premature scaling based on data from over 3200 high growth technology startups, 70% of startups scale too early. Furthermore, they go in-depth with their report and conclude that premature scaling could explain 90% of the failed startups. It is also the biggest mistake we see in the early-stage startups we encounter and analyze. They are thinking too long term for their size and go for scaling from the beginning. At such an early, your main focus has to be on creating a product that will satisfy your customer. This requires understanding your customer and their problem. The best way to do that is to listen and get in their mind. As Paul Graham says;
Let’s be real, this is not the first time that you heard anyone say that, “First, you should find product/market fit”. However, there is a reason why it has been repeated year after year. It is an obscure concept to grasp and use correctly.
Types of SaaS Companies
There are various ways to classify different SaaS companies, in this case, we would like to examine the connection between the product and the customer. In order to do this, we are fitting SaaS companies on a spectrum according to their approach to the sales process. Before we do that, we would like to clarify that we aren’t arguing one over another but acknowledging their advantages and disadvantages on a contextual basis. We are going to use two companies that sell the same product, Dropbox vs. Box, but examine the difference in approach towards sales.
Box prefers a top-down approach for sales. They hire salespeople to go have meetings with enterprise accounts to secure higher contract value. However, Dropbox prefers a bottom-up approach with product doing most of the sales using lower ASP (average sales price). This is reflected in their spendings as well, while Dropbox’s Sales & Marketing budget is 26%, Box’s Sales & Marketing budget is 63%.
One of the advantages of being a product that is “bought” is that you can take advantage of product-led growth. For this, your product needs a low ASP, adoption before purchase, individual user use case and retail/self-service purchase. Product-led growth relies on product adoption before the point of purchase. Let’s not forget that every product of a company has a different strategy. The best possible example for this is HubSpot since they started their Marketing Suite product with the “sold” approach, and with time introduced different products with the “bought” approach such as their Sales Suite.
Companies can embody either bought or sold approach. However, this doesn’t mean that they have to stick with it. Every company might need to migrate to the other approach at some point. Salesforce started to sell directly to the consumer using their website back in 1999 using a bought approach, then they have moved up-market to serve enterprise clients while switching to a sold approach instead. We mentioned Slack as one of the best product-led SaaS companies out there. However, there is a counterintuitive aspect of having a product-led approach. After you accomplish a certain level of domination on the market using a bottom-up approach, you end up adding top-down approach to your toolset and go enterprise even if you have %30 conversion rate from freemium to paid like Slack. Going upmarket brings better ACV (average customer value) and less churn for the company. Slack is essentially after optimizing those metrics, realizing that their product-led growth for smaller customers is covered.
SaaStr explains it using Slack’s S-1 Document:
“Slack has gone Enterprise. Way Enterprise. Today, Slack has 575+ customers paying more than $100k a year, which important now accounts for 40%+ of its revenue. That’s way, way up from just 22% of revenue from $100k+ deals in 2017.”
We have talked too much about Slack, so it is only fair if we dig deeper to see what they have changed as a product-led company. Most probably your company uses Slack or one of your friends is using Slack within their company. How did companies got introduced and decided to purchase Slack?
The most common way of introduction is that one employee discovers Slack. Tries it out and falls in love with the product. She, then recommends it to her friends within the company and then employees ask their managers to buy Slack for the whole company.
If Slack was old school, they would recruit salespeople. They would try and hopefully get a meeting with the CIO of the target enterprise. Then the management team of the company would start the sales process that includes back and forth negotiations with Slack’s sales team. At the end of the process, employees would have to learn and use Slack as it becomes the go-to tool for in-house communication within the company. It is fair to say that this is the opposite of what we have now.
But what has changed, how did we get here?
For these shifts to happen, four main aspects of the buying process changed:
- Infrastructure: From on-premise to cloud
- Cost: From 6–7 figure deals to freemium
- Buyer: From C-Levels to Executives to Employees
- Distribution: From the fully-fledged sales team to product-led SaaS
Blake Bartlett from OpenViewPartners explains Product-Led Growth as:
“Product led growth (PLG) is an end user-focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion, and expansion.”
This end-user focus shifted the focus from, solving executive problems, which is “providing ROI” to solving employee problems, by “providing user-friendly easy to use tools”.
How to distribute a product to end-users in this new era?
This is why SaaS sales and marketing needs a new mindset.
In 1898, Elias St. Elmo Lewis developed a model that mapped a theoretical customer journey. Beginning from the moment a brand or product attracted a consumer’s attention to the point of action or purchase. He created a four-stage process: Awareness, Interest, Desire, and Action (AIDA). This became famous with Alec Baldwin’s Always Be Closing punchline in Glengarry Glen Ross .
If you are a Saas founder and looking for a way to grow your sales, you would most probably hear funnel and repeatable sales already which became famous with Salesforce. All these methodologies are derivatives of AIDA.
All the shifts we have discussed so far is changing the customer journey and business models which requires us to think differently.
People used “the funnel” method to visualize the AIDA. However, the funnel is, as our friend Jacco van der Kooij Winning by Design puts it; “outdated — because it was designed from the seller’s perspective, not the buyer’s.” Now, the funnel is giving way to its successor, the Flywheel.
Flywheel gets its name from the inventions made by James Watt and James Pickard to enable the Industrial Revolution. The flywheel is explained as “a mechanical device specifically designed to efficiently store rotational energy (kinetic energy).”
Using our analogy, the flywheel is a system different from a unidirectional funnel which was focused on the seller, by putting the customer in the middle and applying pressure from different points, Service, Marketing and Sales. Now, in the flywheel model, it is important to reach an understanding of customer journey shifts from a transactional model into continuous since, in the world of SaaS, the competition is ever increasing. Flywheel’s beauty is when you get going and move the flywheel, it is easier to go faster as it doesn’t suffer from the bottlenecks the traditional funnel method does, making it simpler and easier to acquire new customers.
The main reason for the need to change is underlying at the shift from perpetual license (software license that authorizes an individual to use a program indefinitely) to subscription.
In perpetual license world, if you were selling a $100,000 license
- You would charge $100,000 when you win the customer in the first year, plus 20% service fee
- You would also charge 20% maintenance fee afterward
- You would get 60% of revenues when you win the customer
- You have to make sales from scratch each year to make the same revenue, growth would be hard.
In the subscription world, if you sell the same software as above for 45–60% of the price that would be successful
- You would charge $45,000- $60,000 each year
- You would also upsell and/or expand your account
- You would have a base revenue each year and would be easier to grow
- You would get 80% of the revenue after winning the customer.
The most important difference between the two models would be also your company’s value; while perpetual models valued around 1–2x of the revenue, currently subscription models valued between 8–14x of the revenue.
How do we do that, how do we enable flywheel?
We decrease frictions in the processes and give the power to the user. We supply the customers with documentation, thus the ability to educate themselves about our product while also allowing them to try and experiment with it. We design the product with great simplicity to allow the onboarding rather quickly and most important of all, we delight the customers we already have.
In this high competition world, word of mouth is the best marketing tool of them all.
Why should you care?
- 57% of B2B purchase processes are completed before buyers ever reach out to vendors
- 81% of buyers trust their families’ and friends’ recommendations more than companies’ business advice
How did non-US startups do it?
Example #1 — Opsgenie (Acquired by Atlassian)
When Berkay Mollamustafaoglu and his co-founders Abdurrahim Eke and Sezgin Kucukkaraaslan started Opsgenie back in 2012 as a Mobile IT Management Software company. Berkay’s customer research was to engage in forums where the potential customers were. He went on forums to understand the problems the customers were facing and questions they were asking and build an understanding about the customer’s mindset. For example one of the important discoveries was how the customers were searching and using to define the product. Opsgenie was using “Mobile IT Management Software” to define their product, but after checking Google Trends and Keyword Planner, they realized customers were searching for “on-call or alert management”.
Putting all of the inputs from both customer interviews, forums and research on Google, they decided to position themselves as an incident management software. Considering existing solutions for incident management, they decided that they had to differentiate themselves. Opsgenie strategized their differentiation using the top 5 features the customers wanted from their competitors’ software but haven’t built yet and built those into the product in 6 months term. One example from those features was Opsgenie’s Mobile App. Competitors’ customers were receiving alerts via SMS which cost 35 cents in Europe and 10 cents in the US. Users were complaining about this cost and wanted a solution from Opsgenie’s competitors but they were slow to answer this request. By listening to the users, Opsgenie built their mobile app to send these alerts via mobile notifications which practically costs nothing and gave themselves a competitive advantage by removing friction for the users.
Following finding the product/market fit, they focused on building momentum to get the word out. Opsgenie then integrated with open-source monitoring tools which were widely used by potential customers, which they got the insight from their activity on the forums. Opsgenie got their first major boost from a Tweet by an industry influencer, about their mobile app which was an important differentiator that made people talk about Opsgenie.
Giving people topics that can make them talk about your company is the best thing you can do to grow.
Example #2 — Zeplin
Zeplin was founded by 3 developers and 1 designer. They worked in another company developing mobile apps. After they left the company, they wanted to build a solution for a problem of their own. Because it was their own problem, they thought their product would solve the problem in the market. However, the first product Zeplin developed did not meet the expectations of gaining traction. So the founders have contacted around 400 potential customers who they found and approached on LinkedIn, which resulted in more than 200 interviews. They used the outcomes of these interviews to understand the customer’s need to make their product better. Furthermore, they optimized their changes meaning they spent more time on what the functions that the customers need. After the changes to the product, it got attention from beta users and became a wanted product, even before their launch. Zeplin then launched on Product Hunt and became the #1 for the whole week.
Now, they have tens of thousands of customers. Only last July, almost 7 million designs from Sketch, Adobe XD, Figma and Photoshop CC were exported to Zeplin by thousands of product teams including Airbnb, Slack, Dropbox, Starbucks and more.
You can find our slides, here.
I always get asked about book or resource recommendations :) Here is the list for starters :
- High Output Management by Andrew S. Grove
- The Culture Code by Daniel Coyle
- Thinking, Fast and Slow by Daniel Kahneman
- Loonshots by Safi Bahcall
- Scaling Up by Verne Harnish
- The SaaS Sales Method — Sales as a Science by Jacco van der Kooij
- How to Get $10M in ARR and Beyond by Jacco van der Kooij
- Jobs to be Done by Anthony W. Ulwick