Control Points 2.0

The chapter that revises the model. The old view was that a vertical had one or two control points — one front office, one back. This argues there are many more, and maps where they are.

“In the long run, there are no point solutions in Vertical SaaS, there are only platforms. Own the high ground, own the control point!”

Owning one gives you “unfair access” to the rest of the business and the existing value chain — which cuts both ways, and the chapter says so plainly: if you’re attacking incumbents, look here; if you’ve established a control point, this is where you watch your back.

Three business-model wedges:

• Incremental consumer demand — bringing customers in beats almost any other value proposition, and is doubly powerful because the merchant funds your other products out of the revenue you generated. Taken to the extreme, a vendor that generates demand can charge a take rate on it and price everything else disruptively low. Square buying Afterpay is the bet: consumer credit and a demand channel — “over 100,000 leads going out from Cash App to Afterpay merchants since late December.”
• Funds inflow — credit, insurance, working capital (Capital-as-a-Service). Works as a wedge only under specific conditions: scarce capital, data or trust gaps that make underwriting hard, speed that can be improved, and a relationship trending toward exclusivity.
• The “super bundle” success take rate — the endpoint, where the vendor takes a meaningful share of merchant revenue. But the take rate has to be justified: Shopify versus Etsy.

On changing the consumer experience, the sharpest example is embedded services: TurboTax Live was Intuit’s most successful product launch ever and was still growing 100% YoY four years later. An embedded human becomes a control point when the consultant owns the account and is trusted. Same logic puts LegalZoom at the formation stage — engage a business at its most overwhelmed moment and you get an unfair right to everything after.

Notes

• In the long run, there are no point solutions in Vertical SaaS, there are only platforms. Own the high ground, own the control point!
  • Owning control points give you “unfair access” to the rest of the business and existing value chain
• In Vertical SaaS, we used to think that there were only one or two control points, or Systems of Record. Usually, one control point is in the front office, such as point-of-sale, CRM, or e-commerce. This control point drives sales and serves as the cash register. Another common control point is in the back office, the home of the general ledger to which everything is reconciled. At a more basic level, the control point or system of record is also the most important system and the last to be thrown out before an owner ceases operations.
• If you’re looking for an opening against incumbents to establish a control point, look here. If you’ve established a control point in a vertical, this is where you should watch your back!
• Business Model
  • Incremental Consumer Demand
    • In SMB and Vertical SaaS, bringing in customers beats most other value propositions.
    • It is doubly powerful because by bringing in demand, a Vertical SaaS Vendor (VSV) allows the merchant to fund the purchase of their other offerings (e.g. incremental revenue).
    • In the extreme example, if a VSV can generate demand, it can charge a take rate on demand that allows it to offer disruptively low pricing on other products.
    • For example, Square is making a bet that their recent acquisition of Afterpay, a provider of Buy Now, Pay Later (BNPL), can not only provide consumer credit, but also a compelling value proposition to surface consumer demand.
      • Square CFO Amrita Ahuja added, “We’ve already seen over 100,000 leads going out from Cash App to Afterpay merchants since late December when we enabled this.”
  • Funds Inflow
    • Similar to incremental demand, a merchant can grow more quickly if a VSV can provide credit, insurance, or improved working capital management (i.e. Capital-as-a-Service)
    • To be an effective wedge, the provision of credit is usually accompanied by several conditions:‍
      • Scarcity of capital
      • Lack of data or social relationships and norms that make underwriting or servicing difficult
      • Speed of underwriting or capital movement that can be accelerated
      • A relationship that naturally trends towards exclusivity
  • Success take rate “Super Bundle”
    • The ultimate endpoint for a VSV is to benefit from their merchant’s success with a meaningful take rate of the merchant’s revenues.
      • You have to justify take rate (i.e. Shopify vs. Etsy)
    • In doing so, any incremental product that the VSV provides to grow revenue increases stickiness and retention, and may be monetized by multiple of the VSV’s offerings.
• Changing the Consumer Experience
  • Multi-Party Communication
    • A fragmented value chain exists in many industries, where the product provider is separated from the customer by many layers of wholesalers, distributors, and retailers.
    • We have found that multi-party communication can improve the consumer experience in product information, multi-party collaboration, and iterative purchase experiences such as complex procurement.
    • A VSV can be a conduit for this information between the manufacturer all the way to the merchant’s staff and ultimately the consumer.
  • Embedded Services
    • TurboTax Live, an embedded live accountant offering, was the most successful product launch in Intuit’s history and is still growing 100% YoY four years later.
    • GoDaddy offers free website design support if they see a customer stalling at critical steps of the journey.
    • Embedded services become a control point if the live consultant can provide strong account ownership and serve as a trusted advisor.
  • Formation Stage
    • The formation stage is a unique stage in the customer experience. Starting a new business can be so intense and overwhelming that oftentimes an entrepreneur wants a vendor to give her everything as long as it works and is a fair price. This is a great opportunity for a VSV to establish long term advisory relationships.
    • LegalZoom’s core offering helps small businesses establish a legal entity quickly and economically.  Because of their engagement during the launch of a small business, LegalZoom has an unfair right to offer downstream products and services as these small businesses scale.
• Integrate & Surround
  • Integrate and surround is not an easy strategy. It requires a team, often in low-cost geographies, to build and manage these PMS integrations. It can also require the cooperation of the PMS themselves. We see a couple different Integrate and Surround concepts that companies appear to be pursuing:
    • Channel Management
    • Supplier Network