Facebook and Google both published quarterly results in the last week. I highlighted 3 lessons for startups from these numbers in my LinkedIn column:
Recurring Revenue Model - These platforms are vital
I will be facilitating a group of Scottish SaaS companies on Tuesday. Our topic is customer acquisition. The two Internet giants are the main platforms for acquiring SME customers. The advertising reach and scale they provide is vital to the SaaS revenue model. The low cost also supports the economics of SaaS for SMEs.
The shift to mobile seems linked to growth in cost per click. This number is falling for Google and rising for Facebook. The Facebook numbers are now high enough to cause real concern. As this post on the bubble shows. But mobile is a more engaged platform. So it may be that cost per acquisition is not rising at the same rate. CPA is the essential number for SaaS Unit Economics.
Emerging Markets - Opportunity and Threat
Facebook also provides useful geographic analysis of its numbers. This chart shows ARPU across for main regions. The split is by where the user action leading to revenue takes place. In other words it is a good proxy for the cost of advertising to customers in each region. You can see it is much more expensive to get to users in North America.
SMEs are a Global SaaS Opportunity
Which brings me to global ambition. SMEs are the dominant business form everywhere. The balance is more skewed in emerging markets. This is a great opportunity for SaaS growth. Providing customers in Asia and Africa with services at an affordable cost. Revenues and lifetime value will also be low. So pay careful attention to user economics.
The opportunity is not mobile first. It is mobile only. But this can also be a source of competition. Mobile first is not news for startups in these regions. The simplicity of solutions in Africa defines great user experience design. The scale of markets in Asia offers competitors real market muscle.
Innovation and Product Development are not Optional
Sitting in Scotland, global ambition is essential for real growth. Success will depend on lesson 3. Innovating and investing in great products are not optional strategies. Bringing your SME customer base with you will not be simple. Your SaaS product needs to keep delivering real business benefits. It must maintain a superb user experience.
Join PAR Equity and hear about Investor Ready
I invest and I offer small business consulting. I am looking for SaaS companies that offer SME customers a great, innovative, mobile product. I will be talking about this more on Wednesday this week. I will be at an Investor Ready workshop at Rookieoven in Govan. The main attraction will be Paul Munn from PAR Equity. Paul will be talking about the things Scotland’s best Angel syndicate looks for. You can register to attend through this page.
If you are trying to build or grow a startup you can pop along to my office hours session, also in Govan. I will be around every Monday between 9.00 and 12.00. You can book a slot here or just come along. If you can’t get to Glasgow, subscribe below for regular updates.
EU Commissioner for Competition Margrethe Vestager made a big splash this week. She announced a formal anti- trust probe into Google. The focus of the probe is the prominence of Google Shopping in search results. Google Shopping if you didn’t know - and I certainly didn’t - is a promoted advertising service. It pops up when you use internet search to try to find goods to buy online. Google makes money by taking a cut from the companies advertising. In Europe 90% of online searches are on Google . So Ms Vestager and her Directorate believe this is an abuse of market power.
I have no doubt Google makes plenty of money out of this service. On the face of it they also have tremendous market power. It is not hard to see how the Danish politician makes her case. The case will no doubt drag on for many years. It opens up some bigger questions. Questions about Europe and Google that are worth looking at.
For example, why is Google so dominant in search in Europe anyway? 90% is a lot higher than 67.5% in the US. The latter figures comes from Comscore. I could not easily find an independent source for the former. More of that below.
There is also a serious question about whether this is a genuine market. The reason I didn’t know about Google Shopping is that I would never think of a search engine for shopping. I just go to Amazon and find the best price. Amazon of course promotes its own products wherever possible. As a consumer this doesn’t bother me. I asked a couple of other people and the answer was either Amazon or eBay. If I lived in China then I would use Alibaba. Search is not the key driver of shopping.
A distraction for Europe
You won’t have to look far for concerns about the motives behind the probe. The most important question in this context is why the distraction? Europe has a terrible track record at the top end of the technology industry. True we dominated mobile for about 15 years before the iPhone arrived. Past glories were also in the news this week. Nokia is taking over Alcatel-Lucent. SAP also has a proud record in enterprise software. That is about it for Europe leading the digital world.
The chance for change
Today we are creating the conditions to change that. London and Berlin are two of the biggest and best startup locations in the world. Deep capital markets back startups in these locations. Elsewhere smaller startup communities are numerous and vibrant. Trondheim for example may have more startups per capita than anywhere else. I know from my small business consulting experience that Scotland is home to some great companies.
Politicians and regulators should be concentrating on enabling the growth of these communities. In late March a different branch of the EU announced its priority. The creation of a Digital Single Market. There is even a Commission Vice President responsible. Andrus Ansip from another Baltic state, Estonia. I am not sure if these proposals are workable or reach deep enough. I am confident this is the direction politicians should be taking.
Be serious Startup Britain
If there is one lesson from this it is that we in the startup community need to do it ourselves. Yet another stray data point this week was this survey from Silicon Valley Bank. It tells us UK entrepreneurs top wishes from whoever wins the UK General Election. More tax incentives and better access to capital. Seriously guys? We have the best regime of tax incentives anywhere in the world. Agencies like Scottish Enterprise boost capital input as well.
I am a serious political geek and even I am bored out of my skull by this campaign. The result may be exciting but the process is not. If you have a startup don’t waste your time. Focus on the product and the market and ignore the noise.
Help me gather SaaS revenue model data
As it turns out this column has been almost a complete distraction. I will get back my focus on the SaaS revenue model for SMEs next week. Feeling better for a bit of a rant anyway!
Despite the above, I have not spent the entire week reading news articles. I have been trying to build up some information on the SaaS market in Scotland. This is not as easy as it sounds. In part this reflects a dearth of information on non US startup and tech markets. Hat tip to Tech.Eu and Arctic Startup for their consistent efforts to remedy the problem.
SaaS specific material is even more of a challenge. This is the most important startup financial model. But it is tough to isolate SaaS focused data. See my quick guide to SaaS reading and check out Tom Tunguz for US public company SaaS data. That is about it.
I am digging into the data for Scotland. There is a big risk that my efforts will be rubbish so I could use your help. If you are part of a SaaS business in Scotland or know of one (or more) please fill in the attached survey. It is dead simple and real quick. I will then triangulate with my own sources. Thanks for bearing with me.
A quick look at the numbers
Tom Tunguz is one of the gods of SaaS insight and blogging. This week he published The Innovators Dilemma for SaaS Startups. His basic argument is that all SaaS companies start by targeting the SMB market. In time they feel forced to move up to the Enterprise market. As always the post is well written and supported by some thoughtful data analysis. There is no question that this is a common path for SaaS businesses. But the revenue model doesn’t need to be this way.
Let's take a quick look at the numbers in the post. The benefits of moving up to enterprise rest on two broad assumptions about the startup financial model.
1. Inbound “sales” reps selling to SMBs generate less ARR per $ of revenue than outbound sales reps.
2. Churn for SMBs is double the rate for Enterprises using the same product.
Low churn is about pain not loyalty
I have two big problems with this basis of argument. Take churn. The “stickiness” of traditional enterprise software is not based on loyalty. It has everything to do with the pain and cost of implementing big systems. Everyone hates to change because it is a horrible experience. The business benefits are never realised. SaaS changes this by definition. If your software is a genuine service it will not be hard to install. It will be configured not customised. You will not have a long contract commitment. And your balance sheet will not be heavy with intangible “assets”. Remove the costs of switching and the churn numbers will even out.
The old sales model is dead
The enterprise sales model is rooted in old ways of doing business. And it is people heavy. The inbound (or inside) model is changing the way business buys products. From software to homewares, customers have different expectations. The twentieth century world gaves us sales reps, account executives, quotas and bonuses. It was no fun for the customer. Most big enterprises created an expensive defensive wall (called procurement) to deal with it.
Migrating to new ways of buying software will change all this. The fundamental unit of sales growth will no longer be sales people. User engagement will drive value for both new and existing customers. The dynamics of the cost to win and serve markets will change. There is no reason why this should favour the enterprise.
Disrupting the value chain
The value chain for business software will be disrupted. At root this is a form of disintermediation. The current relationship between big software and big business has many layers. At the outset there is a sales/ procurement layer. Once in operation various parts of corporate IT interact with the software vendor. Account teams, support groups and even development touch the customer. In each part of the relationship, consultants, advisors, resellers and specialists proliferate. This creates enormous distance. A gulf between the people who build enterprise software and the front line users.
Cloud, APIs and the sharing approach to software development will change all this.
SMBs are the future SaaS Revenue Model
This is great for the software business and great for customers. It means great software becomes all about delivering value to the user. Much less about how its sold. It creates the opportunity for products users love to succeed.
I love small business consulting because it gives me the chance to work with great startups. I prefer the more holistic view of the SaaS opportunity articulated by Christophe Janz. There are at least 8 ways to build a $100bn SaaS business from Whales down to Microbes. All are valid they just need different revenue models to succeed.
SMBs can be the rule not the exception
At the end of his post Tom Tunguz highlights a couple of exceptions - Xero and Intuit. These are great companies. I believe they are the start of a trend not exceptions to the rule. Successful SaaS businesses are making beautiful software more affordable for SMBs. It is my business to help SaaS startups take advantage of this SMB opportunity. If you would like to know more, get in touch or subscribe for updates.
LTV or Customer Lifetime Value or CLV is one of the key SaaS Metrics. It is a simple and powerful measure which is essential to the startup financial model. There are slight variations in definition but only a few essential elements. A quick primer/ reminder:
Keep it Simple - Use the Definition that works
Search for LTV and you will find a surprising number of articles with titles like “Why is your LTV wrong?” or “Mistakes everyone else makes in working out LTV.” There are a lot of nuances to LTV. My view is simple. Use the formula which makes most sense for your businss. Getting value out of the metric is about listening. Not about picking holes in the detail.
Learn to Listen if You Want Answers
What can LTV tell you and how can you use that information? For many businesses the measure is a way of evaluating marketing strategies. Others use it to forecast revenues and profitability. It also provides a window on the customer lifecycle.
All valuable insights. All available if you learn how to listen. Startup consulting and startup tools offer ways to answer these questions. Trouble is lots of people think the metric is telling you. To get the benefit you need to be more subtle. Think of it like listening to feedback from your boss. The body language, context, timing and language are essential to understanding the message.
SaaS Metrics for SMEs - What is LTV saying?
3 Smart Ways to Use LTV
Some SME SaaS specifics to watch for when listening to LTV:
LTV is a great source of insight into your business. It is not a single source of truth. Every customer is an individual.
Be smart about LTV by doing three things: Listen to the signals and make strategy decisions based on what you hear. Treat every customer as an individual and make sure your interactions stay personal. When you lose a customer or fail to convert a free trial, be nice. There is every chance that customer could be back. If you want to know more about using LTV as a tool for listening to your customers and making better decisions, subscribe below. Good luck.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.