Why You Should Kill Your Competitor in SaaS

IMHO and experience, most SaaS CEOs/founders aren’t Killers.  They can’t be.  They’re Builders.  In fact, the two jobs of a founder/CEO are antithetically opposed to zero-sum and attack thinking.  First, at a strategic level, the founder/CEO has to see the future, a positive future, that is 100x bigger than today.  Focused on putting the internal pieces together it takes to get there.  Second, at a tactical level, the founder/CEO has to be super win-win at heart and in practice, to build a team, to manage a team, to drag the squad and the platoon through the war.

So most founder/CEOs want to take the hill, win the war and protect the team.  Killing the enemy dead isn’t the primary goal.  Here’s how we generally think:

If you are #1 in your category and growing nicely, then great, we’ll keep building on that lead.  We have more money, more resources, more customers, more, more, more.  Success breeds success.  We’ll stay #1, the market will grow, we’ll be even more #1-ey.  Probably True.

If you are #2 in your category and growing nicely, then great, you’re scrappier.  You’ve got the better product, by definition, at least for some customers (because otherwise, they’d all go for #1).  You have a clear target in #1.  It’s fun to win against #1.  And #1 can’t beat you in your zone.  And you’ll keep growing and knocking it out of the park.  Probably True.

And everyone can indeed have success and make a lot of money in this #1/#2 or #1/#2/#3 semi-equilibrium.   Look at our case study of Eloqua/Marketo/Pardot.  Everyone did win/is winning.

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Great.  But the thing in is, in most SaaS categories, you can and probably should try to do even better than this.  You should try to kill your top competitor.  Dead.  Because it pays.

There are two reasons, one strategic, one tactical.

  • First, you want to achieve Dominant Strategy as Quickly as Possible and Not Let Your Competitor Achieve It.  More about dominant strategy here.  But basically, when you are in this equilibrium phase with your competitor, you are both picking and choosing.  Playing to your strengths.  Doubling down on the categories where you are winning.  Taking your time with categories and customers that don’t work as well.  That’s great.  But if you really want to Go Big in SaaS, ideally, you want to double down where you are losing, too.  Where the ROI is negative for you, but positive for your competitor.  You want to play in Every Single Possible Category and Win Every Single Customer, even the ones with highly negative ROI.  Because imagine if you had Infinite Capital — you would do this in SaaS.  Because the SaaS multiples on revenue are huge for the big winners.  So the one that can play Dominant Strategy has a huge advantage.
  • Second, SaaS Multiples Highly Reward Killing Your Key Competitor.  Here’s some basic shorthand for SaaS multiples today.  Very good SaaS companies, growing 100% YoY at $10m in ARR, and even 50%+ at $50m ARR, are going for 10-12x ARR today.  The ones growing at half that rate have extremely low multiples (2-4x).  And the ones truly defying gravity — and there are very, very few — the ones growing at 150%+ ARR at $10m+ ARR, the ones still accelerating at $100m ARR — they have insane multiples.  20x+ ARR, more in the private markets.  If by killing (or buying) your competitor, you can push yourself above 100% YoY growth, all the expense, headaches and pain will more than pay for itself.  You’ll kill it in the IPO or acquisition.

Ok, you say, I get it, but if I somehow manage to kill my top competitor, won’t another just pop up like a weed?  Won’t my next largest competitor grow to be my next big threat?

>> The answer is probably No.  Probably Not in SaaS, If (x) You are Post-Scale, say post $20m, or even $10m, in ARR, and (y) if you are in an Oligopical space, like many SaaS companies are.  {Probably Yes if you are in a semi-commodity space, like email marketing, see Scenario B below.}  But in a rich workflow, high functionality space, the market can really generally only support 2 leaders, and maybe 1 follower.  No one else can make the investment to serve the medium and larger size customers.

I’m not saying you should spend 50% of your scarce energy and time on Killing Your Competitor.  Doing this half-baked can be very distracting and dilutive.  Also, be careful when you do it.  Many seem to get the Killer Instinct Too Late — once their competitor is too large to kill.  But it’s worth challenging yourself and your team to see if you can do it, if you are in an oligopical-ish market.  Because if you can, if you succeed, it pays.  Even if it feels … strange.


When Not to Try to Kill Your Competition:

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Published on December 5, 2012

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