Transcription
This is the complete guide to moving up-market in SaaS. On this episode of LTV, I’m about why you should consider a move up-market to sell to larger companies, and what marketing and product challenges lie ahead.
Part of what makes SaaS so attractive is the ability to rapidly build a product that generates recurring revenue. It’s entirely possible to bootstrap your way to thousands of monthly paying customers and millions of dollars in revenue, who all require minimal sales and support. It’s as close as you can get to passive income. Inevitably, most SaaS companies hit the same wall sooner or later: Growth stalls, usually around $5M in ARR. There are a few reasons for this: First off is churn. Smaller customers, say freelancers who pay $19/month for your tool, they just churn at a much higher rate than larger customers. And churn eats away at recurring revenue. You face the leaky bucket problem, where you need to bring in thousands of new customers every year to replace the thousands who have cancelled their subscription.
Secondly, customer acquisition cost, or CAC, is going up just across the board in general. Paid advertising is becoming more expensive; more people are ignoring email; and with inbound marketing, it’s getting harder to break through the noise. So if you need to spend more to acquire a customer than they ever pay you back in revenue, well, you just don’t have a business.
So, what is there to do? Enter the move up-market. It’s a common way SaaS companies tackle this problem. Here’s why it can be effective: Larger companies who pay more for your product churn at a much lower rate than small companies at a lower price point. They also bring in substantially more revenue over their lifetime as a customer. Christoph Janz, who’s an investor at Nine Point Capital, he wrote about it in his seminal blog post from 2014, called Five Ways to Build a $100M business. In it, he likened selling to customers like hunting different sized animals. Apologies in advance to animal lovers out there. Bunnies are customers that pay you only about $1,000/year. They’re really easy to catch, and there are a lot more of them, but they don’t have a lot of meat on their bones. Elephants, on the other hand, are big customers who and they might pay you six figures or more per year in revenue, but they’re tough to find and require large teams to bring them down. If you can do it, they’ll feed you for a long time. But, there’s a happy medium, and that’s deer. So he likened the analogy of mid-market customers to deer. So they’re the ones who might pay you five figures a year, say $10-20k. There are a lot of them; they require a bit more work than bunnies, but not that much more, and it’s just worth it in the long run.
For example, if your customer pays you $19/month and they churn at 5% each month, you’ll lose 60% of your customers in a year, and their lifetime value will be only about $342. That means that you would have to spend a fraction of that per customer on acquisition, which is really difficult. On the other hand, if the average customer pays you $250/month and churns at only 2%, they’ll bring in over $10,000 in their lifetime. Suddenly you can afford to spend a lot more to get those customers; you can spend more on sales and marketing, and you don’t need to replace as many each year because less of them are churning out. Taking it further, if you sell your product for $2,000/month or $24,000/year with a churn rate of only 1% or less, those customers will bring in $170,000 in their lifetime. That doesn’t even account for expansion revenue, where your customers gradually pay you more over time. So, if you take that approach, growing your MRR will be much easier with a higher priced product. Add to that, you’re gonna have less competition selling to the mid-market or enterprise, because there are simply fewer SaaS companies targeting those customers. Larger businesses looking for a solution have less to choose from, because there are fewer products built for their needs.
So this all sounds great, but like anything in life, if it was easy, everyone would do it. The reality is that moving up-market is not without its pitfalls and challenges. I know from experience, because Proposify has been gradually moving up-market for the past two years, and I have the battle scars to prove it. The number one challenge is that your business has to evolve from its origins and its original customer base to serve a larger customer. These ones have different product requirements, different expectations on sales motions, and tiering of customer support. There’s also a cultural shift that companies like us would have to undergo during this time to move from a company that is product-led to more sales-driven. This evolution can take years to get right, so be sure this is something you want to do, as it will slow you down in the meantime.
So I’m now going to tackle the key areas where you’ll need to make the biggest changes as an organization, and maybe some ways to get started and dip your toes into the water. So, first of all, let’s talk about product. Product is maybe arguably the biggest thing that’ll need to change as you move upmarket. Up until now, your product took off because it satisfied a need for small business customers with only a handful of seats, or maybe just one seat. Maybe it let them send invoices, manage projects, or store their contacts. They like it because it’s simple, easy to use, and does exactly what they need and nothing more. And maybe they signed up for a trial, used it, and realized its value without ever talking to a sales rep. Once in a blue moon, they run into a glitch and reach out to support who emails them with a fix the next day, and they’re totally happy with that. They happily promote your product to others, especially if there’s an incentive, like a free month of usage in exchange for a review or social share. This is all well and good, but if you hope to sell this to a larger company, at a higher price point, you’ll begin to notice some holes in your product that need to be filled.
Generally speaking, the features you’ll usually build on or improve are as follows: So there’s permissions. You don’t usually need to think about this when you’re only serving a small customer with a handful of seats. But, a larger account with bigger companies, they need to control what people in their account are able to see and do. They need to lock down access at a granular level. Next is security. Large companies are much more concerned about advanced security than smaller companies. They often want two-factor authentication, where you have to log in from two different devices to make sure the right person has access. They have IT departments who are involved in procurement; they’ll want to jump on the phone and talk to your CTO about hosting infrastructure and security practices, GDPR, and data storage; all these different things. If your CTO hasn’t been thinking much about security up until now, or doesn’t have those practices documented, you’re going to lose these deals to the dreaded IT guy. Next thing is workflows and workspaces. Generally speaking, large customers want to make their organizations more efficient, which is more complex at scale. How does your SaaS product look when there are hundreds of users, maybe spread across multiple teams or territories, creating thousands of documents, projects? Are there triggers in place that make that more automated so your customers can configure so things like approvals happen much easier? All that needs to be thought of when you’re selling to larger companies. Integrations. Large customers use other SaaS products for their complex needs. Some are well-known enterprise tools, like Salesforce, Sharepoint, Box.com, or Marketo; others may be more obscure platforms, or even custom-built in-house tech. Guess what? Your product has to integrate seamlessly with them; and integrate really deeply, not just at a surface level. Finally, admin tools and reporting. With your larger customers, there are always different types of people within an organization using it. The people who administer the account, maybe they invite new users or delete users, or they manage permissions, or configure settings, they’re not going to be using the core features day to day. They’re gonna want different things than your “regular” users, who log in every day don’t necessarily want. They’ll want visibility into what’s happening in their account. You’ll also notice that features your small customers love are completely unneeded by the bigger customers. For example, at Proposify, our payments feature, that enables you to get paid through Stripe when a customer signs your proposal, our smaller customers love that because it’s one tool that they can use to get paid faster and they don’t need to think about using another product for that. Whereas our larger customers don’t have any need for that because they have more complex processes around billing and things that involve other departments. They just don’t have a need for that.
As you can see, there’s a lot of tech that needs to be built in order for your SaaS to appeal to an up-market audience. If you can build what they need, they’ll be more willing to sign that multi-year, five-figure contract. Much like with building for smaller customers, all of this requires an intense focus on the customer, understanding who they are, and what they need. Your product teams will need to sit in on sales calls, talk to customer success, and they’ll need to really deeply understand the needs of mid-market or enterprise. There’s less room to go wrong when you’re building for these customers. Unlike with SMBs, you can put out raw, buggy, or unfinished features to your whole customers and wait for the feedback to roll in. These large customers have more at stake and less patience for errors. This whole idea of “move fast and break things” just doesn’t apply really when you’re selling to mid-market and enterprise. So, what you’re gonna have to do is test out new product ideas and beta features with small groups of customers first, get feedback and improve before shipping it out to your largest customers.
So that was product; now let’s move onto positioning. Positioning is a deep topic that I could spend a lot of time talking about, but I’ll keep it simple. The way you’re positioning your product to bunnies will have to change substantially when selling to deer or elephants. The basic reason for that is the buyers at these organizations have different needs, care about different things, and buy software differently. $10K/year for a software product isn’t going to break the bank for them, but they won’t give it a passing thought, or invest their time with the procurement process, unless it’s solving a big pain that their organization is experiencing. It’s impossible to get their attention if you’re just selling a simple tool that solves a small or minor inconvenience. It has to speak to a deep problem that their company really cares to solve. If you’re a solution to a problem costing them millions, you can easily charge six-figures for it. If they go on your website and it looks like it’s made for tiny customers, they’ll just move on. Great marketing isn’t just when you understand your customer; it’s when your customer feels understood by you. When they go to your website, they have to feel like “this company gets me, they made this just for me.” Positioning involves knowing who your perfect customer is, who are various buyer personas within the organization and what do each of them care deeply about, what problem your product solving, and how customers are currently solving it and why your product better than the alternatives. Then, once you know that, you have to articulate why your different in a way that resonates with them. Like a lot of things, positioning is never set it and forget it. You should review your positioning at least once per quarter to see if any new data came to light that informs how you’re positioning yourself.
Let’s talk about pricing. Much like with positioning, pricing is a deep topic but often doesn’t get enough time and attention within companies. They’ll usually set it and forget it, maybe experiment with it now and then; they’ll throw a new plan at the wall and waiting to see if it sticks, and then months will go by and they’ll investigate to see if it’s working. I’m going to do a whole other video about our pricing changes at Proposify and what we went through, but here are a couple of tips to keep in mind as you move up-market. So, number one is, don’t cap your own pricing. A big problem we had as we moved up-market was that our largest tier of pricing was capped at $3,000/year, which we thought was a lot of money at the time. We also offered unlimited users on the large plan, thinking that the value for money too good to pass up for these customers. The problem here is that your pricing should be designed to grow with your customers - meaning, as your customers grow, so does the amount they pay out; don’t cap yourself. A customer with 1,000 seats can’t possibly pay you the same amount an account with only 20 seats is going to pay you. With changes to our pricing structure, we’ve now been able to close $10, $20, and even $60K deals, which were completely unheard of before we opted into a per-seat price. I’m not saying you should, or have to, change to per-seat pricing, but for us, that was the value metric we had to change to for our customers.
Alright, let’s talk about sales. This will be the biggest shift in culture that you’ll need to make as you move up-market to sell to deer and elephants. Up until now, customers would find you through a Google search or clicking an ad, view your website, then sign up for a free trial, and then if they got value from your product, they began paying you. It doesn’t work like that in the mid-market and enterprise. Leads expect to be able to talk to a salesperson. They want to be demoed; sometimes they want to buy proof-of-concept; they’ll sometimes want professional services, custom service level agreements. All of this requires people and time, of course. You’re going to need to build out a sales team and sales processes, which is incredibly difficult to do, especially if you’ve never done it before. Here are a few lessons I’ve learned in the last couple of years about that. Always start selling yourself. Founders are usually the best at selling their products in the beginning. Because they know their customers really well, they know why they built it and, let’s face it, people tend to listen more to people with “founder and CEO” in their title; it’s a bit of an unfair advantage. Now, you’ve got to lay the groundwork that will help the salespeople that you eventually hire to fill your shoes. You’re figuring out what works and what doesn’t. When it comes time to hire salespeople, start out with a couple. You’re going to want to hire a couple scrappy salespeople to help you figure out the process. The advantage with two is that if one is getting results and the other isn’t, you can dig in and figure what the successful rep is doing differently. If both are failing, there’s probably something deeper at work, i.e., you don’t have product-market fit. As your reps find success, you can slowly hire more and will probably need to break out sales roles into specialties, like business development reps who just prospect and qualify, and account executives who demo and close. They’re going to have to deal with multi-threaded deals. What I mean by that is, with these larger deals, you are never selling to one person. It takes a village to buy software, apparently. At Proposify we’ve identified the following buyer personas during the sales journey, and these examples are fairly standard across the board in terms of roles: So you’ve got your champion; this is the person who was looking for a solution, they found you and they want to buy your product. Getting them sold isn’t the hard part; it’s getting them to sell it internally up the chain. The next role is the decision-maker. These are the people who hold the budget and the ones who have sign-off authority. They might be C-Level; they might be VP, and they often won’t sit in on demos; they want their direct report, the person who your champion is to sell them on it. Influencers are the people who help or hurt your deals, but will never use it. They may include legal, privacy, or, as I mentioned before, even the dreaded IT guy. Implementers are the people responsible for getting your product rolled out within the company. They’ll work closely with your customer success team, more on that in a bit, but will still be involved near the end of the sales process. Users. We finally got to the actual people who are going to use your product day in and day out.
If all of that seemed really complex, it’s because it is. Your salespeople need to understand how to navigate multi-threaded deals and create a sense of urgency so prospects buy and sales cycles don’t take too long. Let’s talk about proof-of-concepts. They are a necessary evil, and I hated them at first, and in fact still do, but many customers won’t roll out your product to their entire organization until they’ve had a chance to try it on a small test group. Enter, the proof of concept. Another name for this could be a land and expand deal. These are smaller deals for a limited number of seats, for say, a 3-month period. If the POC goes well, then they’ll sign the annual contract for the full amount of seats. With these larger companies, you’re going to be dealing with manual payments. Customers at the $10K and up price point often put it on a credit card, or get automatically billed, which means you’ll need to invoice them, accept a manual payment, like a check or bank transfer, and collect on it. This adds yet another layer of process and complexity. With up-market audiences, multi-year deals are a thing. Because procurement is time-consuming, many larger customers are fine with being locked into a two or even three-year contract; they’re fine with this especially if they get a locked-in price. This can help mitigate churn even more so, although it’s not quite revenue on the books, so I tend not to care about multi-year deals if it means the rep had to heavily discount to get the deal closed.
And finally, customer success. It’s just as important as sales. Customer success are the ones who will onboard, renew, retain, and expand those accounts. This is a mission-critical function of any business serving the mid-market and enterprise. I’ve made two videos already about customer success, so if you’re curious to know more, go and watch them. But, let’s just summarize. Moving up-market has a massive upside, and can transform your SaaS business into a scaling empire. But fewer startups do it for a reason; it’s difficult, adds more complexity, and requires more people and processes to do it right. Hopefully this episode helped you understand more about what’s involved. If you’ve liked this episode, it would mean a lot if you shared it, or leave a comment below to tell me what you think, and thanks for watching. This episode of Lifetime Value is brought to you by Proposify. Proposify improves sales productivity so your team spends less time creating proposals and more time selling. Start your free trial at Proposify.com, and be sure to hit the subscribe button so you never miss a single episode.