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Is SMB SaaS Harder?

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JASON LEMKIN

I think it’s harder, but when done right, it’s wonderful.

One model is a SaaS company that is 80%+ focused on SMBs. I’ve invested in Automile and Pipedrive here as two examples which are doing very well. The key here is you need extremely high NPS/CSAT and very powerful brands to make the customer acquisition costs palatable. You can’t spend $2,000 acquiring a customer here. And you have to be very, very careful on sales efficiency if you use a sales team, because the reality is quotas will be lower. You don’t have the same margins for error, and sloppiness, that you do at higher ACVs and deal sizes.

A blended model is easier to pull of in many cases, and wonderful, i.e. where say 10–30% of your revenue comes from SMBs. That’s what I had at EchoSign, and what companies I’ve invested in like Algolia and Logikcull have. The wonderful thing is the SMBs become your greatest brand advocates because of their sheer number. Algolia today has 3,000+ customers that don’t comprise a majority of their revenue, but because they have a 70+ NPS experience, champion the company everywhere. Put differently, if you can leverage a long tail, it can have huge marketing and customer generation benefits.

Unless your customers are insanely happy and are your vocal champions, it can be tough. SMBs churn at a much, much higher rate, and you are forced into a very narrow customer acquisition cost band. In the end, most SaaS startups go upmarket.

But when you can get it to work — it’s magic. SMBs are the biggest segment of all, and many of the best software companies of all time were built selling to them.

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Published on August 16, 2017
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