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3 minute read / Apr 17, 2013 /

The Defining Characteristics of Successful SMB SaaS Startups

At first glance, SMB SaaS companies, those who sell Software-as-a-Service to small to medium businesses, may seem like any other software company. But they are quite a different breed.

Successful SMB SaaS companies have reinvented their businesses eschewing the expensive enterprise sales model in favor of end-user centric marketing, support and product development. These businesses often look more like consumer startups than enterprise startups. It’s all because of the nature of the market.

Market Dynamics

SMB SaaS companies sell to a highly fragmented market. See the table below comparing the enterprise and SMB segments by number of firms, employees and payroll.

Co. Size Firms in k Employees in M Payroll in $B Employees/Firm Payroll/Firm in $M
1 to 500 5,749 56.2 2,085 10 0.36
Greater than 500 17.5 58.2 2,771 3,326 158

Source: US Census

There are about 17,500 enterprises with greater than 500 employees compared to 5.8M SMBs. The average traditional enterprise software company sells to firms with 3300 employees whose average payroll is $160M annually. On the other hand, SMB SaaS companies sell to firms with 10 employees and $400k in annual payroll. Clearly, these are two very different segments.

Encouragingly, the market size for enterprise software is roughly equal to the market size for the SMB market: about 57M potential seats in each. Of course, the true number depends on the market segment: sales, HR, payroll, expense management, etc.

Shifting from Customer Acquisition from Field Sales to Customer Support

As a result of the fragmentation, SMB SaaS companies need to reach and market to 1,000 times more companies than their enterprise counterparts. Obviously this requires a new sales process.

No White Papers; Just Mass Media Marketing Typically, this sales process leads with a product that excites users and triggers word of mouth sharing, and blog posts, and news articles. Direct sales, powered by quota carrying, relationship building salespeople, aren’t profitable at this scale. Instead, mass media channels must be used: press, mobile app stores (iOS & Android), web app stores (Chrome, Google Apps, Intuit and Force).

Customer Support Becomes the Sales Team This huge number of customers imply every customer support rep must handle hundreds to thousands of customers per year instead of ones or tens of customers typical with enterprise focused companies. Customer support becomes an inside sales team. They drive upsells and cross-sells through webinars and blogging and support emails.

End User Centric Development The product development cycle also differs. Without enterprise customers, there are no enterprise commitments. No promises to customers about releasing features on particular dates or paid upgrade cycles. It’s all subscription. Take it or leave it.

Product Offers a 2 Step Value Proposition The most successful SMB SaaS products typically offer a 2 step value proposition: an initial value proposition to the end user and a longer term value proposition to a manager/decision maker.

Expensify offers simple expense reports to the end user just by scanning receipts. To the controller/VP of Finance, Expensify offers better compliance with spend policies, a huge challenge for most companies of any scale. Similarly, Salesforce offered easier to use CRM to salespeople and better metrics for the sales manager. Yammer offers employees a better communication mechanism to end users and offered the IT department compliance controls.

Product Closes the Loop and Reinforces the Efforts of Marketing and Support The end user value proposition drives press and word of mouth sharing. This increases marketing budget effectiveness. Effective SMB products also prequalify customers through the Product Qualified Lead.

Know Thy Market

By first appreciating the radically different nature of the SMB market and second by shaping the business to meet the demands of that market, startups serving SMBs can grow and scale and become hugely successful. But it all starts with a good understanding of the fragmented nature of the market.

Read More:

The Two Key Ingredients in Great Connected Consumer Products