There is a disturbing trend lately of SaaS companies going public before they show a profit. (I’m looking at you, Eloqua and Marketo). And what’s worse, the problem is systemic. In fact, in an article for Venture Beat, Jason Cohen clearly sets forth why a typical SaaS company that serves enterprise customers can take four years to produce even a 2.5% profit! If you want to dig into the numbers behind the trend, the gory details are all laid out here.
Mostly, this is due to the extraordinarily high up-front costs of chasing enterprise customers, and the relatively low monthly fee earned even if the chase is successful. That’s why, if Gartner’s predictions come true and the SaaS market grows by almost 20% over the next few years, we think the lion’s share of the gains will go to a special type of SaaS company:
The one that serves small businesses.
Why?
Due to three extremely powerful facts that I’ve become intimately familiar with as I grow a SaaS company serving small businesses:
Reason 1: Costs are much lower and hurdles are far fewer
When you sell to the enterprise, you need to invest heavily in a sales team. And you won’t ever reach a decision-maker right away. Instead, you’ll participate in a long series of meetings and conference calls (if you’re lucky enough to get to that point).
You’ll have to hire a lawyer to help handle extensive contracting and other matters. You’ll need to get a bunch of technical support people to train and service the customer extensively. And once you’ve done all of this, and invested hundreds of hours into the project, you’ll get dropped unceremoniously after someone you’ve never met decides there isn’t room in the budget for you.
Damn, that’s cold.
In contrast, when you sell to small businesses, you can reach a decision-maker right away. You don’t have to do the same level of marketing, sales, technical assistance, and training. You can afford to court a large number of clients at once, and the time and energy invested from first contact to closing is much, much shorter. With a rapid, low-cost sales cycle, the results are simple:
You get paid 1) quickly, 2) often, and 3) profitably.
It’s a lot easier to become profitable with a payment structure like that.
Reason 2: Product requirements are similar across customers
Each enterprise customer, even if they aren’t different from the others, can sometimes demand that everything be customized to their whims. And their whims will change multiple times before the project is complete. Much like the sales dance, you’ll spend a lot of time and effort trying to please your prospect, and it may not pay off in the end.
In contrast, small businesses tend to have more basic needs and simpler demands. They don’t need a unique solution. They need something functional, easy-to-integrate, and cost-effective. For this reason, you can design a solid product and it will fit into a wide variety of small businesses. Instead of having to approach each customer as a redesign, you’ll be able to simply provide a solution that already performs the necessary functions, and customers will like it.
There’s less hard work, and your efforts are more likely to produce returns across a large number of customers, without extra tweaking. That is, small business customers let SaaS companies max out the profitability of each solution they develop.
Reason 3: There are literally millions of prospects
Small businesses are staggeringly numerous. In fact, there are over 5 million businesses with less than 100 employees in the U.S alone. In comparison, the number of companies that have over 1,000 employees in the U.S. is only around 10,000. Therefore, the opportunity presented by small businesses is orders of magnitude larger than that presented by the enterprise.
Taken together, the three facts above present a case for why the next group of successful SaaS companies won’t be riding tidal waves – they’ll just hang close to the shore and ride the small waves in over and over again until they make it.
Andrew Gazdecki is the founder and CEO of Bizness Apps, a do-it-yourself mobile app & mobile website platform for small businesses and Bizness CRM, a CRM designed to make selling to small businesses easy.
