Full Potential SaaS

The longest chapter of The Vertical SaaS Knowledge Project and the densest — six strategies for a vertical software vendor, from winning a category to extending past it.

The best idea in it is the test for finding a control point. Yuan calls it gravity, and there are three kinds:

• Workflow gravity — the system that all other systems integrate to; where the most users spend the most time.
• Data gravity — the system that creates and holds the most critical information, and is hardest to migrate off.
• Account gravity — the user or sponsor of the system is the highest-ranking person in the customer organization.

Owning multiple systems of record in one vertical compounds: it reduces rivalry for the later platform-and-network opportunities. Veeva is the worked example — CRM for pharma sales reps first, then backward into R&D with Vault (clinical trials, regulatory submissions, quality documentation), then the data applications that manage those processes.

The consumer-extension economics are the number to remember: SaaS captures roughly 50–100bps of GMV for a software subscription; online demand channels take 15–20%. That gap is why the consumer opportunity is “the white whale” — and why marketplaces with large salesforces keep encroaching downward onto the software layer to control supply. Successes are rare: FareHarbor, SiteMinder’s Demand Plus, Olo moving existing customers to cheaper channels, Shopify’s unmonetized shopper database.

Also here: HashiCorp CEO David McJannet’s “TAM Shark” — expansion as constantly circling the biggest, fastest-growing markets.

Notes

• We believe that SaaS vendors, particularly vertical and SMB, that provide a Systems of Record are seeing massive increases in TAM, competitive moats, and economic opportunity.
• With opportunity comes competition, both from within one’s category (e.g. application area) or from adjacent categories within one’s vertical (e.g. industry).
• Super Angels
  • Tim Barash,Kevin Burke, **Henrique Dubugras**, Mike Ford, Marc Fredman, Noah Glass, Andrew Low Ah Kee, Ara Mahdessian, David McJannet, Aman Narang, Sankar Narayan, Githesh Ramamurthy, Jason Randall, Bob Solomon, Connor Theilmann, Dan Wernikoff, and Dai Williams **for great insight and support
• Lead the Category
  • (1) Build a great product, (2) built repeatable and efficient GTM, and (3) pour fuel on the fire
  • Omniture and ExactTarget pioneered this model a decade ago
  • Despite massive capital inflows into SaaS and deteriorating economics, this model generally still works today.
  • For example, when you start to have more data than anyone else, you can flip your product from being reactive to proactive — having the product tell users where to look and how to optimize the system. Both Xero and Shopify have done this well
  • Scale Onboarding
    • Onboarding friction can be unaccounted drivers of CAC and churn.
    • Automate early as “throwing bodies at it” can create process debt that will be difficult to unwind later.
  • Expansion
    • Expansion drives net revenue retention and most of the strategies we are about to discuss.
  • UI and Architecture
    • One example is to plan for an API strategy. It can facilitate future partner strategies and increase the value and stickiness of your offering.
  • Pricing Structure / Strategy
    • You will constantly revisit tactics, but it’s important to have some sense of how your pricing structure might change over time.
• Hyperscale Locations / Feed the Beast
  • So much of winning and future monetization is getting location market share.
  • If your churn and sales economics are sound, keep “feeding the beast!”
  • One particularly powerful unlock is Channel. There are verticals and categories, where influencers in a channel are kingmakers and can help you engage with segments that are otherwise difficult or uneconomical to reach.
  • Xero went as far as offering free practice management tools to help accountants run and grow their business on Xero.
• Win the Control Points: Own Your Vertical
  • At this juncture, it is my belief that you should focus on winning the control points. In vertical SaaS, there are typically one or two control points, Systems of Record. Usually one control point in the front office (e.g. Point of Sale, CRM, e-commerce) – “that drives sales, that grows the business, that serves as the cash register.” And one control point in the back office (e.g. general ledger) – “where everything else reconciles to.”
  • Concept of “==gravity==” helps to identify control points
    • Workflow gravity – the system that all other systems integrate __to __– it’s** **where the most users spend the most time.
    • Data gravity – the system that creates and holds the most critical information and is the hardest to migrate.
    • **Account gravity **– the user/sponsor of the system is the highest-ranking individual in the customer organization
  • Winning the other system of record is not easy. By definition, a system of record is hard to displace and unless the market is greenfield pen and paper, competition can be challenging.
  • If you own multiple systems of record in a vertical, the benefits are enormous:
    • Reduced rivalry for future “SaaS as a Platform and SaaS as Network” opportunities
  • Veeva
    • Started selling CRM to pharma sales reps
    • After becoming the dominant player in that category, Veeva saw an opportunity to move backward into research and development for their life science customers
    • In 2011 Veeva launched Vault, a suite of applications that first centered on the core content management needs for clinical trials, regulatory submissions, and quality documentation.
    • The company then expanded to include a series of core data applications that help manage clinical trials, quality processes, safety processes, etc.
• Expand Headroom
  • Long-term growth is driven by location growth, as there’s generally a finite share of wallet you can access. It’s important to invest in the S-curves of geos, segments, and adjacent verticals that can unlock new location TAM.
• Extend Through The Value Chain
  • Typical patterns include moving from front office software to extend to your customer’s customers, or from back office software and extending to suppliers.
  • Supplier
    • Extension seems to work best by “following the money” and leveraging purchasing power.
  • Employee
    • Companies can use integrated payroll or time & attendance offerings to establish a relationship with the employee
  • Consumer
    • The consumer/demand opportunity is the white whale. We believe that SaaS companies tend to capture ~ 50-100bps of GMV for software subscription, whereas online demand channels can take 15-20% of GMV in categories such as hotels and restaurants.
    • Online marketplaces have large competing salesforces that engage with your merchant customers and have strategic interests encroach on the software layer to try to control supply.
    • This is another example of increasing marketplace + SaaS convergence. SaaS + Marketplace
    • That said, success stories of extending SaaS to Consumer are rare. Some examples:
      • FareHarbor
        • “We’ll build your website and booking engine for free, with no work on your part; you just pay us for payment processing and the customer will pay us a booking fee.”
      • SiteMinder
        • SiteMinder has extended that value proposition to “Demand Plus,” an offering that helps hotels easily expand into new channels to scale demand.
      • Olo
        • While 15-20% marketplace take rates may be sensible for new customer acquisition/discovery, companies such as Olo are looking to move existing customers to lower cost channels through their dispatch offering while taking a much lower percentage of GMV.
      • Shopify
        • Shopify similarly has built a large shopper profile database across all their merchants. While Shopify hasn’t monetized directly, the uplift in conversion rate is likely significant.
• Deepen Functionality / Monetization
  • It’s more a reflection of priorities. Acquire as many customers as you can, win the control points, and you will likely have many of these profit pools locked up to pursue in the future.
  • The most extreme example is the “platform/ecosystem” play, where you monetize third party vendors that want access to the channel your product has become (e.g. Salesforce, Intuit, Shopify. However, most commonly a SaaS vendor will pursue additional monetization with in-house or white-labeled products.
  • Go-to-market will determine the financial leverage of the cross-sell and often the overall success. The core advantage of SMB software here is that often the decision-making is relatively consistent and concentrated across software purchases.
  • Payments
    • I had an opportunity to interview two of the smartest people in the business, Tim Barash and Jackie Reses.

  • Follow the Workflow

  • “TAM Shark”
    • HashiCorp CEO David McJannet describes expansion as “TAM Shark,” constantly circling the biggest, fastest growing (most change/opportunity) markets.