For almost a decade, I worked closely with multiple B2B SaaS startups that focus on the enterprise segment. Enterprise SaaS businesses have a unique set of growth challenges after they've achieved product-market fit. They've also been relatively isolated from the flurry of growth hacking that’s dominated the consumer and high-velocity SMB sales motions ...until recently.
Over the last 18-24 months, I’ve started to see significant changes in how enterprise SaaS startups think about customer acquisition, product, pricing, and growth strategy. Two new models are emerging within the enterprise SaaS segment that are fundamentally changing how enterprise SaaS products are distributed. So as we start 2019, I thought I'd share some of the growth challenges enterprise SaaS businesses usually face, the new models that are emerging and the implications for current and future startups in this space. Let's dive in.
There are ~11K enterprises with 1000+ employees in the US (based on data from Linkedin). For an enterprise SaaS company trying to build a $100M business, that usually means they need an annual contract value (ACV) of $50K or more and a market share of 10-20% (see Christoph Jan’s 5 ways to build a $100M business for more on this). Currently, field sales is the primary mode of distribution for SaaS startups with ACVs of $50K or more.
If you’ve ever tried scaling a field sales team, you’ll immediately recognize the challenges:
1. Expensive lead generation: Field sales strategies typically need to engage senior executives at the prospective client. Getting the attention of senior executives at large enterprises is notoriously hard. That often means building lead volume and quality at the top of the sales funnel is expensive.
2. Long consultative sales processes: Consultative sales processes at large enterprises typically take 6 - 18 months because you need to work through several stakeholders - Procurement, IT, Legal, Marketing, HR, etc. Hiring sales executives with the experience and skills needed for a consultative sales process is also time-consuming and expensive. It takes 6-9 months before you know whether a sales executive is successful. And you’re back in square one every time a sales executive fails (with several quarters of valuable time and thousands of dollars down the drain).The result? Slower growth and higher CACs. That’s often why scaling enterprise SaaS startups is so capital intensive.
The result? Slower growth and higher CACs. That’s often why scaling enterprise SaaS startups is so capital intensive.
Over the last decade, the mass adoption of mobile phones, the popularity of consumer apps like Uber, and the increasing share of millennials in the workforce have raised the bar for what’s expected from enterprise SaaS software. No one wants to go through 4 hours of training to understand how to use enterprise software anymore. Salesforce, Workday, and other traditional enterprise SaaS solutions are often seen as clunky...even hated by employees who use it every day. Intuitive, fast, mobile-friendly user experiences have become table stakes even in the enterprise (see Enterprise Software section in Mary Meeker’s Internet Trends Report for more on this).
Changing customer expectations and the challenges associated with scaling enterprise SaaS businesses through field sales have led to the emergence of two new models:
Enterprise SaaS startups are starting to build consumer-like products and are replacing field sales with other distribution channels. But it is almost impossible to change the distribution channel and product without also needing to change the model and the market (See Brian Balfour’s 4 fits framework for context).
In the bottom-up model, initially, the target market is an employee in an analyst, developer, coordinator, project lead or similar "doer" role. The product is simple, delights users, and often has consumer-like virality (and low CAC) built into it. The pricing model usually has a free tier and paid tiers are low enough that they can easily be added to expense reports. Employees can get started within a few minutes and are supported by strong customer success programs.
Armed with proven examples of usage within the enterprise, volume discounts, and options to upgrade to enterprise-grade compliance, administration, analytics, and security capabilities, sales teams are able to quickly engage with executives at the target, sign enterprise-wide contracts, and expand usage across the company. Slack, Twilio, and Atlassian are all amazing examples of this approach.
At the other end of the spectrum, enterprise SaaS startups are wrapping software with services and delivering a full-service solution. And they are doing this at scale through partners. This model is particularly relevant for product categories where it is not possible to apply the bottom-up model. For example, core systems of record can almost never be changed without the approval of multiple executives. Startups pursuing this model first acquire a few enterprise clients through field sales. Then they partner with vendors delivering services at these initial clients. Once a win-win relationship is established, these partners can help the startup distribute at scale. Typical partners include marketing agencies, consulting firms, and system integrators.
In the full-service model, the product must solve a problem that partners are frequently encountering when delivering services. It must also make life easier for the partner. For example, this could be adding administrative interfaces for the partner to easily manage multiple clients, exposing expert configuration options for partners via APIs, and sometimes even allowing complete white-labeling. While the product may not be simple to configure or use out of the box, it is still easy for the enterprise since it is wrapped in implementation and maintenance services offered by the partner (see Jason Lemkin’s Q&A on why enterprises prefer to buy these services).
The pricing model almost always includes tiered commissions or revenue sharing. While some partners may white-label the product and bundle it into the service they deliver to the client, most seem to prefer to stay independent and keep the SaaS product, associated costs, and liabilities separate from the services they provide. You will need a good territory assignment strategy to prevent channel conflict. Named account lists, region or industry based assignments are most common. It usually helps to keep partner pricing in parity with your field sales team. Veeva and Showpad are examples of the full-service model.
If you’ve founded, invested in or joined an enterprise SaaS startup that is yet to find product-market fit (typically fewer than 20 paying customers/$2M ARR), here’s what you should consider:
1. Build simple products (for the bottom-up model): Even if the problem only exists in companies that have thousands of employees and 100s of millions in revenue, are there ways to simplify the solution so it can be bought by someone who’s in a non-executive role (junior management, associate, analyst, developer, etc.)? How could they start small and easily expand usage? Could you leverage the internet sales channel (usually the lowest CAC)? These would be key considerations as you work towards product-market fit. Companies like Segment take this approach.
2. Consider the SMB segment: Could the problem and solution your enterprise SaaS startup delivers be revised/scoped down to work for the SMB segment? SaaS startups serving the SMB market typically see higher growth rates. SMBs are not as risk averse as enterprise clients, have far lighter organizational processes and may not even have separate procurement or legal teams. All that means faster sales cycles, lower CAC and the ability to use inside sales or internet sales as distribution channels. Companies like Salesforce and Slack started in the SMB space before building out enterprise capabilities. Could you do the same?
If your enterprise SaaS startup is well past product-market fit (typically over 100 paying customers/$10M ARR), here’s what I’d recommend:
1. Add partnerships (for the full-service model): If you are past product-market fit and have several enterprise clients, you likely have a field sales team in some shape or form that is driving revenue growth. If capital is a constraint, as you consider scaling, it may make sense to explore channel partnerships. You can start by looking to bring partners to deliver services that mutual prospects or clients are requesting. You can leverage your existing field sales team to build partnerships too. As you explore partner relationships think about the capabilities needed in the product to enable the partner. Also, think about the most appropriate ways you could prevent channel conflict between partners and your direct sales team.
2. Just stay the course: If you already have the funding needed (or know you have preferred access to capital) to build out a field sales channel and have product-market fit, then you have already solved for two of the biggest problems enterprise SaaS startups need to address. In this case, it probably makes sense to just stay the course and scale as quickly as you can.