Pricing Plans and Viral Acquisition for SaaS enterprises
Other bloggers, most notably my partner David Skok, have written extensively about building a sales and marketing machine for a SaaS business. This, in our Matrix view, is the true revolution enabled by SaaS — the ability to unseat the traditional enterprise sales process and its multi-year sales cycles, multi-year implementations, and direct enterprise sales forces for a more efficient sales and marketing machine, and an environment where the best ideas and products (and not necessarily the best salesman) wins.
I recently invested in a great fast-growing SaaS startup called Huddle. Here I will lay out an element of their model that I think is working especially well, and one area of challenge for the business.
SaaS enterprises have the blessing and the curse of thousands of niche opportunities. These can be a blessing, because a focused audience combined with a willingness to pay (at some level) for the service creates lots of opportunities to build profitable, small-to-medium sized businesses. The curse is whether or not that niche audience can grow into one large enough to allow the company to be a really significant standalone enterprise.
As a venture investor, it’s critical for me to determine the likelihood a company has of addressing a large enough market. This is certainly for my benefit, but also for the entrepreneur: raising venture capital into your great small SaaS company that could profitably dominate it’s niche has a high likelihood of killing it. (A hosted platform to run scheduling and billing for a dog walking business may in fact be a profitable enterprise, but not create a substantial return to outside investors.) As an entrepreneur I’ve built big venture-backed enterprises that couldn’t possibly have succeeded without capital and medium-sized successes that required just $100K in financing. Both can be great, but it’s important to figure out which train you’re driving.
One element that separates the niche businesses from the ones with potential to be big standalone enterprises is the ability to scale the ASP across customer segments. Many SaaS startups have pricing plans that mean they can rarely extract more than a few thousand dollars from a customer in a year. These can be nice businesses, but it’s challenge to build a really big business, if you have to acquire millions of paying enterprises.
Of course, if you want to be able to earn six figures a year from your biggest customers, in the SaaS world you have to EARN it — there’s much less lock in, and commitment before trial, than in classic enterprise software. I’ve seen a couple of ways people have done this successfully:
Scalable Pricing Attributes
A product that can be used on a workgroup scale initially, but expand to meet enterprise demands, and have a natural price escalation with it. Huddle does this well. You need broad enough appeal and value, as it will be hard to decouple your pricing entirely from the number of people using it. Make sure that the attribute that triggers steps up the price ladder is (a) a rational thing to charge more for, and (b) something that has a very high upper bound. Don’t charge per GB if big companies won’t use a 1000x the storage of small ones.
Your pricing is, in part, a function of your increasing costs, but also a function of your increasing value, and segmenting the customers who can afford to pay a lot from those who can’t. JBoss was able to transform their business when they focused on putting the right scalable pricing model in place. They ended up creating a multi-dimensional scaling model that included things like number of servers, response time for support calls, number of named support people at their end, number of support locations, and which set of JBoss products they were using, in order to successfully get some customers to pay $1M while others were paying just $10K.
Get in the flow of money. It is flat out easier to get paid a lot if you are sitting next to a big flow of money. Investment banks do this in spades — just a few basis points adds up when millions of dollars are moving daily. But some SaaS startups do this too: Marin Software and Kenshoo build enterprise grade SEM platforms that substantially improve the performance of their customers campaigns. And because these customers are spending $100K-$1MM a month on SEM, charging 2-3% seems reasonable, and can quickly scale to $100K+ ASPs.
It’s helpful to get this right in the beginning. Day One, you feel lucky to have a customer, and are not worried about how you’ll get $100K+ out of WalMart someday. But the prices you set and the dimensions on which you charge can prove sticky, and customers can be very resistant to price changes. Try to implement a pricing structure that drives customers up a spending ladder as their usage/dependence on the product increases, rather than having to issue explicit price hikes.
Huddle (like many SaaS startups) relies on filling customer funnel with customers using a free trial or paying a small monthly fee, and then utilizes inside sales to grow penetration and spend with these customers.
A key risk going forward is the ability to continue to stock the top of the funnel cost effectively to fuel the sales and marketing machine. This is risky if you expect to grow your business quickly. I think of these marketing channels to fill the funnel as veins of gold in the rock: you find one and mine it until it’s gone, and then go looking for another. Some will be rich and lasting, others quickly exhausted. Huddle had success in ways you do early, with the founders out evangelizing and touching customers directly. Channels such as PR, partners/channel, affiliates, AdWords, SEO, podcasts, social media, inbound marketing can all be used and will have varying success depending on your product. Most of these have been adopted to the business market from consumer web companies with great success.
One of the most compelling transplants from consumer marketing is viral marketing. It’s a compelling goal for your business, both for its price (free!) and the great depth of the vein. It could be valuable for spreading within an organization (growing penetration/spend), but even more so to bring new customers into the funnel. However, few SaaS startups have driven significant adoption to date through viral means, and success has been much more common at the lower ticket, user-level adoption (almost consumer) SaaS business. DropBox has spoken eloquently about getting viral religion, and is a great success story, but is largely a consumer product. My partner David Skok has written a must-read reference piece on viral marketing.
Huddle has built a great online collaboration product that enables project management, document sharing, calendaring and a full suite of collaboration services to occur between enterprises (as opposed to Sharepoint, which is strictly behind the firewall). The fact that the tool is for collaboration between enterprises presents an unusual opportunity to spread virally to new customers. A PR agency managed their client interaction with Kia Motors using Huddle, who liked the product and mandated the tool globally for all their PR agency relationships. If some of those agencies like the product, they will hopefully spread it on to other customers. The same behavior happens internally within big customers such as Proctor & Gamble, where one workgroup will use it to coordinate a project, and others will adopt. It will never be viral in the Zynga sense of the word — k factor >1 — but it will generate customers and qualified leads through the normal course of product use.
The challenge for Huddle is what David Skok refers to as “Viral Cycle Time”. The software generates real productivity gains for workgroups upon adoption, as users abandon inefficient email exchanges for true collaboration. But it can take months for the more recalcitrant team members to adopt the system, and until the whole team is on board the value of the product is diminished or undermined entirely. The resistance would seem to be caused by the general inertia and ubiquity of using email, and resistance to learning something new.
A breakthrough in reducing the viral cycle time (implicitly linked to the rate of adoption by workgroups, which I think is gated by the rate of adoption of the slowest members of those groups) is essential for the company to realize its growth ambitions. There are a number of steps recently taken or in the works to address this:
- Integrate more seamlessly into current workflows. Extensions are available so you can save files directly from Excel or Word into your Huddle workgroup, for example.
- Reduce barriers to sharing by streamlining the process of inviting new people to a workgroup
However, for the company to grow revenue to the tens of millions, the product needs to spread more quickly within the customer (to turn team sized customers into enterprise customers) and bring new customers into the funnel.
Anybody have good lessons learned on how to do this?
The Huddle team might ask you for “lessons learnt” instead, since the company was founded in London and a majority of the customers are still in the UK. The business has a high profile in the London startup scene, but is just getting introduced here in the US. One of the founders, Andy McLoughlin, has just taken up permanent residence in San Francisco, and with the new investment, the company is building out their US operations here. Collaboration is a big market (Sharepoint sales >$1B) with a lot of competitors in various guises. Huddle distinguished themselves from their competitors across a number of dimensions, including:
- Capability and passion of the founders and team rank as highly as the best teams we see coming out of silicon valley
- Focused on building collaboration suite from day one, not a temporary pivot from a filesharing or project planning business, which may be abandoned as quickly as the last idea
- True enterprise focus. Working with and listening to the corporate and government CIOs to deliver the enterprise reliability and security they require for their sensitive data
- Metrics-driven marketing approach
- Focus on paying customers, not gaudy numbers of non-paying users. They were reluctant to give me a free account because I didn’t put it in the term sheet.
The bar is definitely higher for me to do an investment in a foreign startup. It certainly helps that I travel to London regularly for Betfair board meetings, but in this case, we found a company that cleared that high bar and are thrilled to be a part of building it.