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.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.