Getting to Initial Traction

The Low Viral Coefficient of SaaS, And Why That’s Just Fine

echojason@gmail.com'

Jason Lemkin

We’ve talked a lot on SaaStr about how to get from $1m to $10m, $2m to $5m, $10m to $30m, etc. etc.

One area we haven’t talked as much about is getting from say $100k in ARR to Initial Traction, or $1-$2m in ARR.  A bit, but not as much.

Screen Shot 2015-01-12 at 5.35.14 PMThe reason is while I believe for a Given ACV, everyone sort of scales the same way after Initial Traction … we all find different ways to get to Initial Traction.  To the first $1m in ARR, to do the Impossible.  Some of us are good at outbound, and we literally network and call and email our way to $1m in ARR.  Others are content marketing geniuses and build a mini-brand abnormally early.  Others are great at PR.  Or smothering what few leads they do have with love.

We all hack our way to $1m in ARR a bit differently, albeit from the same general large playbook.

So when someone asks me at say $8k a month in MRR, from say 30 or 50 or 100 customers or whatever … how they can get to $1m ARR faster … I really have only two answers.  One tactical, one strategic.

The tactical answer is this:  Double Down on Whatever Has Produced You Even a Single Customer.  Because since no one has ever hear of you, any possible subvertical, any channel, any keyword, any blog post that gets you just one single customer … will get you at least one more.  And probably 10 more.  So double down your time and efforts on anything that has even remotely worked.

My strategic answer is this:  Whatever you do, make your first 10, 20, 30, 100 customers happy.

 

But..

 

The thing is, this probably won’t help at all getting to $1m in ARR any faster.  Yes, your first customers will refer you to others, get you more leads.  Absolutely.  It will work.  It always works, as long as you make them truly, attitiduinaly loyal.  (More on that here).  The problem is time.

Our friends over in B2C talk a lot about viral coefficients.  How quickly one WhatsApp user gets you another.  How quickly your social map explodes across some new app.

It turns out in B2B it’s there, it’s just usually, a lot slower.

Let me explained how it worked for us at EchoSign.  EchoSign is a somewhat collaborative app, in that when I send you a contract to sign, it goes from one org to another.  One company to another.  That creates a viral exposure and opportunity for the signer to potential register, try the app, play with it, use a Free version or Free Trial and … eventually .. convert to paid.  You can see our early user growth in the chart above.

And we could track the viral conversions quite easily.  From date of first contract send to New Signer, to how long it took for that new account to convert to paid.

The answer was: 8 months.

Eight months from one paid customer to product another, on average.  Sometimes faster, of course.  Sometimes far, far longer.  And often in took multiple exposures (say 3) before someone would really get going and buy.

So for the first year, that was incredibly painful.  Because we had so few customers in the early days, that even after 8 months, they could only beget us a handful.

Screen Shot 2015-01-12 at 5.42.33 PMIt really wasn’t until the end of Year 2 that viral really kicked in.  That’s just the math of a low viral coefficient.  And it didn’t even get good until Year 3, when we finally had a large enough installed customer base, using the product, to become our second largest source of new customers.  Today the best SaaS companies are scaling faster, so you may see material results faster.  Maybe.   But you still have the physics of lower viral coefficients to overcome.

I’d say typically, SaaS apps don’t have enough customers to see the material, economic benefits of viral revenue until they cross $1m-$2m in ARR at the earliest.  You may see hints of it before, and in your leads, but usually, there aren’t enough customers or time for it to move the needle as a material revenue contributor before then.

Now, if you’re building a free B2C app, where you need tens of millions of users to get to Initial Scale, that’s a disaster.

bodydoubleBut in SaaS, when you’re on a 7-10 year journey to $100m in ARR, it actually doesn’t matter that much if your viral coefficient is low when you get the viral customers.  Faster is better of course.  But it’s all still good, so long as it comes and it’s not the only source of new customers.  And when it does come, it comes on materially, and strong.

So what’s my point?  My point is Viral is a Medium and Long Game in SaaS.  It can’t make you in Year 1, usually. Sometimes, e.g., DropBox (muchly) or Slack (maybe).  But not usually. But it can help in Year 2, maybe materially.  And then really take off after that.

But it’s no short term magic card.  Epic in the long run, but potentially immaterial in the early days.  Just plan around that for your so-called “viral” SaaS app.

 

marked up version of viral chart from here

Published on January 13, 2015
  • I think lower growth expectations for more mature companies is a key part of the story. Word of mouth likely won’t bring in 1,000% growth in a year for a new B2B company, but when a more mature company is targeting 100% growth each year a realistic viral growth rate could be a meaningful contributor.

    It could also help that as a company grows it often targets larger customers and potentially has more advocates from each new customer.

  • The same is true for classic desktop software in my experience. It always takes 2-3 years after a new product introduction for a product to really take off! Nothing we’ve tried can really shorten that time significantly…

  • Great observation about the time to get B2B viral traction. After a new customer goes live and you take your first revenue, it probably takes 3 to 6 months to where your customers have enough experience with your offering to refer your product. It then takes a 3 to 6 month to close a typical B2B deal, so the entire cycle time is likely between 6 to 12 months from when the first deal closed — as you said a typical 8 months.

    But I don’t think this issue is substantially about the timing in the life of the company. Yes, very early B2B SaaS companies may have an immature product immature that results in longer time to the first referral, but the prime issue is if you ultimately get 20% to 30% of your new revenue from referrals, that percentage is nearly irrelevant with a small customer revenue base <$1M ARR.

    On tiny initial ARR, the percent growth numbers are nearly irrelevant. Sure, you are growing 1000% the first year, but on a base of nothing. Grow your base so you have a meaningful ARR to build on where an incremental 20%+ in viral will be meaningful.

    By the way, exactly the same phenomenon is true for expansion (upsell) revenue. You got to build a solid recurring revenue base as soon as possible to expand from.

  • Love the magic card! I haven’t seen those in ages.

    There def are some exceptions like you mentioned. Do you think its the ones that are more widely adopted inside an organisation or perhaps have a consumer orientation..

    I use echosign, and I probably only send out like 1 document on echosign a month which is a contract or an NDA. We’re a SMB so I’m not using it as much as say a larger company. Whereas something like slack, I’d use everyday. There would be more companies of all sizes using Slack everyday. Could the frequency of usage be a factor?

    Also, does a product like dropbox have a viral loop because once you send it across you can either download the file or store it in dropbox. I was talking to a friend that has a startup that works with lots of content writers. Most of the people they work with use dropbox, so that naturally forces them to use dropbox as well.

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  • Interesting thoughts on viral growth. While the viral coefficient is currently painfully low in B2B vs B2C, I’d presume that it has been increasing, especially in the last year. I say this because of the increasing number of “micro-businesses” run by only 1 or 2 people. The market and potential customer pool is getting bigger, so hopefully over the next few years we start seeing the affects of viral growth in year 1, instead of years 2 or 3.

    Great article!

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