How to Win at SMB SaaS
Five things I’ve learned from our portfolio companies:
Net retention is everything. The average SMB SaaS company sees churn rates of 3-7% monthly. This means — mathematically speaking — that the average SMB business cannot scale. The only way to grow is to be non-average.
If you can get gross churn rates down below 2.5% monthly, then you may have a business. 1.5-2% is much better. Sub-1% is otherworldly and is an indication that you’ve built something very special.
How do you build stickier products? A few ways:
Building important integrations or interoperability
Taking over billing / transactions / revenue management
Becoming known as the industry-standard product for a certain type of client
An ROI that is tied to revenue (e.g. you help SMBs attract new customers) will usually be much stickier than a product that promises “efficiency”, at least in SMB
Appealing to vanity (if your product makes an SMB appear more professional or more prestigious to their clients, it can be emotionally challenging for your customers to rip out your solution)
Focusing on the highest-retention segment of customers you can find
After adding in upsells and expansion, if you can achieve net retention rates of >100% in SMB then you have a chance to build a home run company.
Sales cycle is (almost) everything. Winning in SMB requires lots of sales volume, and that means your reps (if your GTM includes salespeople) need to get high-likelihood-of-close opportunities all the way through the funnel as fast as possible so they can move on quickly to the next batch of deals.
Besides improving selling ability & your solution’s product/market fit, some ways to decrease sales cycle are:
Focusing on client segments where there is 1 decision-maker for whom buying technology is not completely outside their job responsibilities or self-conception
Making a personal and emotional appeal in your sales pitch (“this product will help your business” isn’t as good as “without our product your business will fail” which isn’t as good as “without our product your business will get clobbered by your competitor in the next town over, and everyone will know what happened, which will be so embarrassing for you”… though probably better to imply these things than to say those words verbatim)
Experimenting with monthly quotas as opposed to quarterly
Tightening up qualifying criteria to build shorter, better-qualified prospect lists
Achieve and defend a premium price point. In SMB you have to deal with a level of price-consciousness that does not exist in the enterprise. For a SaaS business’s economic model to work, it really helps to push ACVs as high as possible. Some ways to do this:
Focus on a premium subsegment within your target market (such as luxury real estate agents, instead of the entire universe of all agents). Often you can kill two birds with one stone here, since these sorts of clients tend to have lower churn rates in addition to a higher propensity to spend.
Expand your product scope so that you encompass an entire business function within an SMB. It’s better to be a "growth platform” than a "marketing tool” — a “growth platform” can justify an SMB's entire marketing budget, whereas a tool is just another tool.
Conveying, whether through functionality, price, branding, white-glove support, or elsewhere, that you are the “best” product in your given market.
An ROI that can be expressed in either dollars added or dollars saved. The more profits you can drive for your SMB clients, the higher price point you can justify.
Honestly, it’s often enough to merely double or triple your price and see what happens. For certain products in certain markets, setting a high price in order to communicate product quality can become a self-fulfilling prophecy. For example, I remember when Pendo came out in ~2015 with a very expensive price point, and everyone I knew seemed to want to buy it for their SaaS company because they inferred from its premium price & messaging that it must be an amazing product. Is it *actually* an amazing product, as measured by its functionality alone? This is still unclear to me.
Just to tie these last two points together — if you have a product with a comparatively high ACV and a fast sales cycle (which implies lots of transaction volume), sales growth can be spectacular; add in low churn on the back-end and you have the Holy Grail of SaaS.
Seek scale advantages in your go-to-market where you can get them. The problem with knocking down SMB clients one-by-one is that your upside is limited: Sure, maybe your LTV/CAC for each account is 3 or 4, but that’s not quite as exciting as enterprise land-and-expand where a 14-day trial can morph into a $1M+ key account. Looking hard for scale/upside opportunities where you can find them can really pay off.
One of the major ways this can manifest itself is multi-location pricing. Often SMBs are arranged in chains or multi-location ownership groups (think of businesses that own and operate 5-10 gas stations, or a chain of spas with locations in West Hollywood, Santa Monica, and Malibu, etc.). Frequently these groups buy just like individual SMB accounts, so when you sell into these accounts you get much more bang for your salesperson’s time. Often there is a sweet spot where a group isn’t quite large enough to have a headquarters, CIO, buying group, enterprise-level requirements, etc but is large enough to get you 3-5 locations with the same effort it takes to close just 1.
If you have a prospect list that allows you to identify these groups ahead of time, this is a fantastic segment to attack first. It may be very worth your time to invest in building such a list.
In fragmented industries, use existential risk to your advantage. Many SMBs exist in markets with lots of horizontal integration, where larger conglomerates snap up smaller players in order to obtain scale advantages and outcompete the “independents”. Often the independents feel intense financial and social pressure to “sell out” despite their desire to remain independent businesses. And if they’re not worried about better-funded, larger-scale competitors, they’re often concerned about something else (e.g. Amazon).
In these instances, marketing your solution as “on the side of the independents”, “the tool that allows small businesses to stay independent and competitive for longer”, or “bringing enterprise-great technology to even the smallest companies in the market” can be incredibly resonant and effective brand positioning.
Thanks to Justin Welsh and Jeff Kuo for helping me brainstorm and edit this post.