The Pressure to Move Up Market Facing SMB SaaS Startups

ARR15102550100
New Customers per Year1333666713,33333,33366,667133,333

When an SMB SaaS startup is young with quickly growing revenues, more of the same works. A $1M ARR SaaS startup with an average selling price of $750 per year needs to add 1,333 each year on average to double.

Fast-forward two years when the company is at $5M in ARR and the business needs to be adding 13,333 customers each year. At $25M in ARR, suddenly the 100% growth figure demands 33,333 customers.

All this math assumes that the selling price remains the same. For some SMB SaaS companies, generating this kind of lead volume even at scale isn’t a challenge. There are many notable companies whose average selling price at IPO is less than $5000. Xero, Wix, Zendesk are among them.

But many SMB SaaS startups eventually outstrip their initial user acquisition channels whether they be word-of-mouth, content marketing, mobile app distribution, channel partnerships. The customer acquisition techniques either become too expensive, or are simply unable to produce enough leads to continue to grow at aggressive rates.

At this point, these SMB SaaS startups face the choice of staying the course and continuing to pursue the SMB market by developing new channels and broadening the product suite like Atlassian; or move upmarket, increase prices and reduce the total number of new customers required to double revenue.

The arguments for moving upmarket, seeking customers who will pay $20,000-$50,000 per year include achieving some economies of scale: fewer account executives and sales development representatives to drive more revenue; fewer customers success executives to manage an equal amount of ARR; marketing focus on a segment of the total prospect population.

Counterpoints for moving upmarket also exist. Namely, the business must evolve from its origins and its original customer base to serve a larger customer base with different product requirements, different expectations on sales motions, and tiering of customer support.

There’s also a cultural shift that many companies undergo during this time from being a business that is product led to a business that is more sales driven. The further upmarket a SaaS company goes, the more individual customer demands influence product roadmap. Some go-to-market teams are able to balance these demands well using Kenny van Zant’s flywheel model.

There is no universal answer to which direction to pursue: remain in the SMB segment and cross-sell or move up-market, or both. Successful companies have taken both paths. Figuring out the better choice is a key strategic decision for a SaaS startup’s management team.

Modeling the implications of each strategy is the first step. What assumptions have to be true in each case for the business to double? And how reasonable are those assumptions? Then it’s on to experimentation.

Published 2016-09-14 in Strategy 


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