Why You Should Kill Your Competitor in SaaS


This post is by Jason Lemkin from SaaStr


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IMHO and experience, most SaaS CEOs/founders aren’t Killers.  They can’t be.  They’re Builders.  In fact, the two jobs of a founder/CEO are antithetically opposed to zero-sum and attack thinking.  First, at a strategic level, the founder/CEO has to see the future, a positive future, that is 100x bigger than today.  Focused on putting the internal pieces together it takes to get there.  Second, at a tactical level, the founder/CEO has to be super win-win at heart and in practice, to build a team, to manage a team, to drag the squad and the platoon through the war. So most founder/CEOs want to take the hill, win the war, be good to their customers, and protect the team.  Killing the enemy dead isn’t the primary goal.  Here’s how we generally think: If you are #1 in your category and growing nicely, then great, we’ll keep building on that lead.  We have
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money, more resources, more customers, more, more, more.  Success breeds success.  We’ll stay #1, the market will grow, we’ll be even more #1-ey.  Probably True. If you are #2 in your category and growing nicely, then great, you’re scrappier.  You’ve got the better product, by definition, at least for some customers (because otherwise, they’d all go for #1).  You have a clear target in #1.  It’s fun to win against #1.  And #1 can’t beat you in your zone.  And you’ll keep growing and knocking it out of the park.  Probably True. And everyone can indeed have success and make a lot of money in this #1/#2 or #1/#2/#3 semi-equilibrium.   Look at our classic case study of Eloqua/Marketo/Pardot.  Everyone did win/is winning.  And more recently, take a look at the “Postmates Effect“.  With every Cloud leader now a Decacorn, not a Unicorn, even the #3 in a market today can be worth a billion dollars or more.  BigCommerce may be far behind Shopify, for example, but it’s still worth $4b+.  It looks like Wix is a lot bigger than Squarespace, but both are worth billions.  Twilio has 3 smaller competitors worth $1B+. Great.  But the thing in is, in most SaaS categories, you can and probably should try to do even better than this.  You should try to kill your top competitor.  Dead.  Because it pays.  Look at what Zoom did to WebEx.  Look at what Slack did to HipChat.  Look how DataDog really took over its space. Screen Shot 2012-12-03 at 8.38.22 AM There are two reasons to kill your competition, one strategic, one tactical.
  • First, you want to achieve Dominant Strategy as Quickly as Possible and Not Let Your Competitor Achieve It.  More about dominant strategy here.  But basically, when you are in this equilibrium phase with your competitor, you are both picking and choosing.  Playing to your strengths.  Doubling down on the categories where you are winning.  Taking your time with categories and customers that don’t work as well.  That’s great.  But if you really want to Go Big in SaaS, ideally, you want to double down where you are losing, too.  Where the ROI is negative for you, but positive for your competitor.  You want to play in Every Single Possible Category and Win Every Single Customer, even the ones with highly negative ROI.  Because imagine if you had Infinite Capital — you would do this in SaaS.  Because the SaaS multiples on revenue are huge for the big winners.  So the one that can play Dominant Strategy has a huge advantage.  Examples include entering segments (e.g., Real Estate or Healthcare or whatever) where you are weak, or pushing upmarket even if you are strong in SMB.  Etc. etc.
  • Second, SaaS Multiples Highly Reward Killing Your Key Competitor.  Here’s some basic shorthand for SaaS multiples today.  Very good SaaS companies, growing 100% YoY at $10m in ARR, and even 60%+ at $50m ARR, are going for as much as 20x ARR today.  But the ones growing at half that rate have extremely low multiples (2-4x) relatively speaking — 1/10th or 1/20th of that, or less.  And the top ones truly defying gravity — and there are few, but more than just a few years ago — the ones growing at 150%+-200%+ ARR at $10m+ ARR, the ones still accelerating at $100m ARR — they have insane multiples.  30x-50x ARR, more in the private markets.  If by killing (or buying) your competitor, you can push yourself above 100% YoY growth, all the expense, headaches and pain will more than pay for itself.  Your value will go up insanely in the IPO or acquisition.
And a few things here that are easy to implement now:
  • Do buy-out deals.  This is one of the easiest tactics, and Zoom did it aggressively in the early days.  If your competition signs folks up to 3 year contracts, “buy out” their contract by not charging them for overlapping time periods.
  • Pay your reps a big spiff on rip-out deals.  And put a few reps just on this.  Related to the prior point, and expensive.  But pay-up if your reps can get a deal ripped out of the competition.  Even better, put a specialized team on it.  That’s all they do.  Call into your competitor’s accounts.  Back in the day, DocuSign would pay their reps a full sales commission if they stole a deal from us — and then give the product away for free for the rest of the term.  Aggressive?  Yes.  Smart?  Probably, if you have the capital.
  • Have dedicated marketing and campaigns to lost customers.  The best SaaS companies know they can get back deals they lost to the competition.  The very best ones have dedicated, segmented marketing here.
  • Get really, really good at FUD and counter-FUD.  Does your sales team know how to counter ever aggressive point from the other guys?  Does your sales team know how to win on every tough question?  They should.
  • Never lose a key logo account.  Swarm them. I know you already do this.  But go all in.  The CEO should always be involved.  Do whatever it takes.  When you can again, get on a jet.  Deemed a Lost Key Logo as a Total Failure.  The most aggressive SaaS CEOs and CROs do.  Rather than dust themselves off and move on, as most of us do.
  • Build relationships with CEOs at your top competitors.  Sometimes, the best way to kill your competition is to buy them.  Zoominfo did this and is worth $15b+.  This is easiest if you’ve built relationships early.
Ok, you say, I get it, but if I somehow manage to kill my top competitor, won’t another just pop up like a weed?  Won’t my next largest competitor grow to be my next big threat? >> The answer is probably No. Probably Not in SaaS, If (x) You are Post-Scale, say post $20m, or even $10m, in ARR, and (y) if you are in an Oligopical space, like many SaaS companies are.  {Probably Yes if you are in a semi-commodity space, like email marketing, see Scenario B below.}  But in a rich workflow, high functionality space, the market can really generally only support 2 leaders, and maybe 1 follower.  No one else can make the investment to serve the medium and larger size customers.  I’m being a bit simplistic.  New competitors always pop-up.  But it may take them 5-10 years to catch you, and even if they really do, you’ll be so far down the road, it may not matter much.  The top leaders in the last generation of SaaS are all at $1B+ ARR now — from Zendesk to Hubspot to RingCentral and more. I’m not saying you should spend 50% of your scarce energy and time on Killing Your Competitor.  Doing this half-baked can be very distracting and dilutive.  Lawsuits, threats to customers, excessively aggressive sales tactics, etc. can consume too much internal energy and capital.  Also, be careful when you do it.  Many seem to get the Killer Instinct Too Late — once their competitor is too large to kill.  But it’s worth challenging yourself and your team to see if you can do it, if you are in an oligopical-ish market.  Because if you can, if you succeed, it pays.  Even if it feels … strange.

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When Not to Try to Kill Your Competition: Screen Shot 2012-12-03 at 8.35.34 AM (note: an updated SaaStr Classic) The post Why You Should Kill Your Competitor in SaaS appeared first on SaaStr.

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