This post is by Kyle Poyar from Openview Labs
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SaaS is now ubiquitous. Salesforce, which turned 20 in March, surpassed $13 billion in annual revenue this year. Everywhere you look there are dominant SaaS companies with thriving products. That’s certainly true in developer tooling (AWS), sales and support (Salesforce), MarTech (Adobe), commerce (Square), HR tech (Workday) and even vertical markets (Veeva). This begs the question: how much room is left for emerging startups? Benchmarking data shows that it’s harder than ever for new SaaS companies to gain initial traction and reach the expansion stage. More and more startups are vying for traction against extremely well capitalized SaaS powerhouses. Not surprisingly, most struggle to break through. The median growth rate of startups with $1-2.5M in ARR fell from 100% to 64% in just the last year. SaaS companies now report 9 competitors on average, up from just 2 back in 2013. Those on the front lines know that
competition means greater saturation of traditional marketing and sales channels, increasing customer acquisition costs (CAC). In fact, the cost of acquiring a customer has gone up by 65% in the past five years, according to a ProfitWell survey of 800 companies. It now takes a war chest to be visible everywhere it matters: content, search, social, review sites, analyst reports, podcasts, video, events… I’m exhausted even thinking about it all. Search, once seen as a low cost way of driving demand, has lost its effectiveness as the amount of digital content has exploded. Meanwhile, marketing teams from every competitor fight to rank on the same top keywords, driving costs per click through the roof. Do we even need to get into outbound prospecting, the hot marketing channel of a decade ago? If the public LinkedIn shaming of hard-working SDRs is any indication, buyers feel increasingly fed up with the onslaught of unsolicited emails and phone calls from dueling software vendors. Tools like Outreach – which recently reached unicorn status – make it exceedingly easy to contact potential prospects across all channels at scale. As every SDR gains access to these types of sales engagement tools, response rates will no doubt continue to dwindle. Competition not only increases CAC, but it simultaneously decreases customer lifetime value (ouch!). We’re seeing three drivers of lower lifetime value: feature commoditization, less pricing power (price wars), and worsening churn. Remember when the ability to integrate with another software product was a premium feature, reserved for enterprise-grade packages? Now it’s table stakes. If software users can adopt Zapier to connect 1,500+ apps, what reason do they have to pay you thousands of dollars for that built-in capability? It’s not just integrations that have gone to $0. Features have lost 70% of their value in just the last five years, according to an analysis of 900,000+ data points from ProfitWell. As the pace of releasing new features has accelerated, it takes less and less time for competitors to copy your latest product innovation. This commoditizes features and exacerbates price wars, eroding pricing power in the market. We’ve even seen the rapid commoditization of entire product categories. While we’ve come to expect price wars from disruptive startups, these are even coming from dominant SaaS powerhouses looking to protect and expand their moat. HubSpot, for example, launched a 100% free CRM product in 2014. If that weren’t enough, they’ve since added free live chat, shaking up an otherwise rapidly growing product category led by Intercom and Drift. Tldr: it’s gotten easier to start a SaaS company, but harder to get real traction.
Here’s what you can do about itYou’re not going to win by playing the same game as larger, better funded competitors. What if you didn’t have to play that game? How people use and buy software is changing, which creates a new go-to-market playbook: product led growth. Product led growth – where the product is front and center in how a company acquires, converts and expands users – offers the potential for disruptive growth by championing the user, not just the buyer. Today’s SaaS powerhouses scaled with a dated playbook: sales led growth. They pinpoint a budget holder in an organization, often a functional leader at a mid to large company. Their messaging makes it clear that they’re helping a buyer solve an organization-wide pain from the top-down. For example, Concur aims to “simplify travel, expense and invoice management for total visibility and greater control,” directly speaking to the finance exec and not the individual who’s actually booking travel and submitting expense reports. The buying process is therefore quite complex and time consuming. Steps include including discovery calls, demos tailored to the prospect’s use case, solution validation, customized proposals and back-and-forth negotiation. Power is shifting away from executive buyers and we’re seeing the rise of the individual user. You’ve heard this trend called a number of things, both positive (“consumerization of IT”) and negative (“shadow IT”). Zoom’s S-1 describes it particularly well:
“71% of employees want their companies to provide the same level of technology as they use in their personal lives…Employees are increasingly the primary force for IT modernization at work as they bring the latest technologies from their personal lives to their jobs.” – Zoom S-1Let’s unpack this phenomenon. When we look at the typical sales led SaaS company, they’re great at solving organization-wide pains. That regularly comes at the expense of the individual user. Salesforce is a prime example. They are amazing at helping organizations understand the health of their sales pipeline and keeping all their sales data in one central location. Ask yourself: how many sales reps love using Salesforce? I challenge you to find one. If anything, Salesforce creates additional headaches for the reps. They’re constantly worrying about being called out by the ‘CRM police’ and have to spend hours of their time every week just on manual data entry and required CRM updates. Individual employees no longer have patience for bad (or, let’s face it, even mediocre) user experiences. They feel emboldened to bring their own preferred tooling to work, even if that tooling isn’t sanctioned by the broader organization. Individuals are opting for products that solve their specific pain, offer an amazing user experience and allow them to get started for free. There are usually tens or hundreds of these individual users for every one buyer, meaning that individual users can create a groundswell inside an organization that ultimately leads to an enterprise-wide purchase. This is how purchases now get made even at large companies with thousands of employees. Brian Halligan, the CEO of HubSpot, explained how this buying process plays out inside his 3,000+ person company during a talk at SaaStr:
“Everything we buy… starts with a little project at the edge of the organization. Some developer’s tinkering with something. A couple of salespeople, a couple of marketers, and then it ends up on the CIOs desk as, ‘Boy, we’re using this stuff. We’ve got to buy it.’ [Software buying has] been turned on its head, and so you need to market and sell to humans and enable those humans to put it to work for you.”Expensify, the expense reporting app, has cleverly tapped into this new buying process. While competitor Concur sells top-down, solving organization-wide pain points, Expensify does the opposite. Expensify focuses all of their efforts on the individual user, whether that’s in their messaging (“you weren’t born to do expenses”), Super Bowl ad (featuring 2 Chainz) or pricing (freemium model with paid plans starting at only $4.99). By winning the individual user, Expensify is able to assemble an army of happy users inside of an enterprise. These users do the work of selling on Expensify’s behalf. The result: Expensify has signed up enterprises like Xero, Atlassian and GitHub all without quota-carrying sales reps. A similar strategy has propelled Zoom’s jaw-dropping 118% year-on-year growth (profitable growth, I would add). Zoom genuinely delivers on solving the user’s pain (“I hate video conferencing”) and boasts an NPS score of 70. User happiness is the central element of Zoom’s growth flywheel: happy users invite people to Zoom meetings, more people discover Zoom, invitees create their own Zoom accounts, they invite people to Zoom meetings. They’ve made the process of adopting Zoom as frictionless as possible, allowing people to join or host meetings for free. In fact, 55% of Zoom’s customers that spend $100k+ actually started with a single non-paying user according to the company’s S-1.