Why we fail at scale: Lessons from studying 10,472 SaaS Companies
CEO and Co-founder, Profitwell
About the speaker
Patrick Campbell is the CEO of ProfitWell (formerly Price Intelligently), the software for helping subscription companies with their monetization and retention strategies. ProfitWell also provides free turnkey subscription financial metrics for over eight thousand companies. Prior to ProfitWell, Patrick lead Strategic Initiatives for Boston based Gemvara and was an Economist at Google and the US Intelligence community.
In this article, Patrick Campbell reveals honest insights from ProfitWell research on the SaaS market, and this gives a jolt to our system. We happen to realize market reality.
Let's start with the Product
Earlier building a product was incredibly tricky from a technical standpoint, but now we can all spend up servers we can spin up developments and products. Essentially, we can build companies, and we can create a product quickly now. Though it's not easy to create a great product it is easy to develop products in general. The fascinating part is that our approach to the product has been set back in the past ten years because a lot of us are focused on producing volume. We get much advice from people that tell us to focus on your customer.
Patrick takes to his research where he and his team approached 1800 founders and asked how many times on a monthly basis, you interact with your customers apart from sales research survey, like to know customer needs and wants. Moreover, the results are surprising, most of us are having fewer conversations with our customers every month. This includes companies that are at scale and companies are doing more than 50 million a year in Revenue, but the implication of this is that we're building the wrong product.
Taking the example of coffee interest among people, what we could find out is that those individuals who care about taste are willing to pay about 30% more those individuals who care about temperature. There's very few who are willing to spend about 20% less. There's very few who are willing to pay about 35% more. Now it's interesting to bring this back to software to find a feature that is high value and has a high willingness to pay, that's a differentiable feature.
From the survey, the product leaders think we are building the product to grow in the first two quadrants, but in reality, they fit in the last two quadrants. Following graph is the comparison between the growth rates of companies that were doing minimal research to those who were doing more research.
So, do more customer research in building the product and adding features that are highly valuable to customers.
Focus on One Product
Traditionally we've heard to focus on one product, and historically that's made sense. Looking at the actual data the single product companies from one to $10M AR are those folks who are growing at a much higher rate. The fascinating thing is if you're trying to get to $10M AR then having a single product does grow at a quicker pace, but when you're going from $10M to a $100M company, the multi-product companies are growing in a much higher rate than the single product companies. Figure out how to build multiple products and how to distribute them. Ultimately those products should grow at a much higher rate, but a lot of us are still listening to that advice - focus on one product. The implication here is as the product continues to grow if you want to be a big business you're going to need to be multi-product eventually.
Distribution got harder
We know the fact that distribution is becoming harder and harder with the explosion of marketing channels in the industry. The surprising fact is that the median expense that goes to customer acquisition in SaaS business is 57 %. We spend an exuberant amount of money on marketing, but not netting the expected results. Customer Acquisition Cost(CAC) is steadily increasing over time, and it has gone up by 60-70% in the past 5 years.
Now what happened in the distribution Market is that businesses lost power. Though we are acquiring customers, the acquisition Channel or the acquisition funnels in terms of growth, it is diminishing in its power. To study this further Patrick and team isolated the three growth levels in business - acquisition, monetization, and retention and improved it in a relative amount to find out the impact on the revenue. The results are retention and monetization impact revenue at 4-8X the rate as an acquisition.
Stats and Advice
If you don't like freemium models, its time to reconsider in your business. Take advantage on the freemium model, 20% lower CAC, then those individuals who aren't using any freemium for a reason, acquire new user at less cost. Next is brand - Brand drives higher willingness to pay. Customers have a greater brand affinity, and their willingness to pay is about 20 to 35% higher than the rest of the group. Not the least to mention, Product needs to be more customer focused, do the research and listen to what the customer says, build the right product for the right customer and build the brand.