When you sell subscriptions to a SaaS product that needs to be renewed frequently, it is necessary to prove the value of your product to customers every day. This not only prevents them from churning but also eventually makes them evangelists for your product. This is the essence of value SaaS.
In our latest episode of The Orbit Shift Podcast, we talk to Prasanna Krishnamoorthy, the Managing Partner at SaaS accelerator Upekkha about Value SaaS.
We discuss how founders can cut through the noise and build a sustainable SaaS company including how to find early adopters, which customers to target, how to position and build a website, and how to have successful fundraisers. Edited Excerpts.
You’re talking about a more sustainable, long-term way of building products and SaaS companies. Can you walk us through what you mean by value SaaS and how it is different from vanity SaaS?
Prasanna: Customers are going to choose products that add the most value to their lives. And the beauty of SaaS is that a customer renews every month. So if they don’t like your product next month, you’re not going to get paid. So you better be adding value month on month, week on week, day on day, every hour, every minute. So customer value is really number one for any SaaS business today. When our founders focus on customer value, instead of some vanity metrics, they deliver more and more value to the same customers. They can get paid more and more. Those customers also become the best advocates and the best salespeople for you.
You would have already seen from a B2B context, while you have one customer, inside that customer you may have tens, if not hundreds or thousands of users. And if those users are happy with the value that you’re providing to them, then they are going to become your salespeople. As capital becomes a commodity, anybody can spend money and try to get more customers. But if you don’t have a brand, if you don’t have a community, if you don’t have users who will stand up for you on a forum and say that your product is awesome, you’re not going to be able to sell your product. So the idea of value SaaS is simple: add a lot of value to customers, add more value to the same customers every month, every year. If you do that, those customers are going to help you get equity-efficient growth. If you get equity efficient growth, your employees and you will be happier in the long run.
Clearly, it is a big opportunity. Walk us through the process of finding these early adopters. You talk about a framework by Geoffrey Moore in your book.
Prasanna: Before we talk about the framework, we should think whether we’re solving a problem that is known to exist, or am I solving a problem that nobody knows exists yet? So when we look at it that way and see that we’re solving a problem that has not been solved before, then Geoffrey Moore’s Crossing the Chasm becomes very important. Because you are targeting the innovators, the techies and the early adopters. The unfortunate reality is that in India, the early adopters and the techies, the innovators, are very few and far between. Today we have a lot more startups than we did before. Many of these startups are early adopters. But they are still like literally 1% or half a percent of the number of early adopters and techies in the U.S. And there are large enterprises in the U.S., which have hundreds of millions of dollars of budgets for early-stage tech, because they are always looking to outcompete rivals. Therefore they’re always looking for new tech. So that is one way of looking at the Ideal Customer Profile (ICP). The other way of looking at the ICP is when you’re building something in an existing market, where you’re targeting either the early majority, or the late majority, or even the laggards. These are two different things. When you’re targeting early adopters and techies if you’re building a cutting-edge product. There’s really no option but to go to the U.S. if you’re building for the early majority. Late majority, laggards and you’re building for a global market, then you have to be really, really good at marketing and sales. And you ought to be able to compete with the best in the world because, in the early majority and late majority, there are lots of companies, which are already targeting those folks.
So these are like two different parts of the market. As a B2B SaaS company trying to go global, you can target early adopters or you can target the early majority. If you’re targeting early adopters, you better be really good at product, you better be really good at educational marketing. If you’re targeting the early majority or the late majority, you better be really good at sales and marketing and you better be really good at out-competing the other 600 competitors in that space.
There’s an interesting graph by Christoph Janz, which a lot of people talk about in the SaaS world in which there are bees, there are rats, and then there are rabbits, deer, and then there are the elephants. So as an early-stage startup, where do I slot myself? What’s a good way to think about it?
Prasanna: Let’s take a step before that. The way that founders should work is to identify a problem that needs to be solved and identify the value of the solution. So when founders pick the wrong problem or they pick a problem that’s too low value, not urgent enough, or not important enough for the customer, that’s where the challenge lies. So the question that you asked is about price. Price has to come from value. So if I solve a problem for you, how much are you willing to pay for it? If it’s a trivial problem for you, you’re only going to pay me a few dollars. But if it’s a pressing problem for you might pay more and pay quickly. If it’s not a pressing problem and not a large problem, then you’re probably not going to buy anything. So you really want to find a problem that is really painful for me, and is something that I will pay a lot for. Now, you have to look at what we call founder market fit. Say you’re really good at sales, you can build relationships, talk to anybody, you’re really good at hunting, and finding leads, then you have to be picking very large problems, right? Because you are going to be able to convert only a few, as a founder. You can’t convert a lot. And if you’re going to convert a few, you might be better off converting a few very large customers rather than a few very small customers. On the other hand, let’s say you hate talking to people, you don’t want to get into any sales calls, and you cannot talk to strangers. Let’s say you’re really good at writing, then you have to take a marketing lead approach. This means that you have to convert lots of customers. But when you take a marketing lead approach, you can’t convert a very high-value problem because the buyer will have lots of questions and the ecosystem will be complex. I don’t really want to talk to the community, but all of these things bring me customers who will buy by themselves, without me helping them too much. In that case, the value of the problem cannot be more than $100 a month or $1,000 a month because those are the price points at which somebody will just swipe a card, buy stuff without talking to me. But if I’m really good at sales and I’m really good at finding people, what their problems are talking to them, convincing them that they need to solve this problem and you need to buy my solution to solve this problem, then I can’t do 10 of those sales in a month, maybe I can do 10 of those sales in a year. And if I have to build a business with that, then I should probably pick a problem which is at least $10,000 a month.
You talk about a five-step framework, to quickly talk about the five-step framework, which is to create a customer persona, define the promise, select a category, build trust and articulate the promise. A big part of your message is carried on your website. Can you give us a few tips on what an ideal website should look like?
Prasanna: When retail outlets were first coming up, people didn’t know how to arrange a display in the front of a clothing shop. But today, if you go to any clothing shop, it’s completely optimized. Almost all clothing shops will have very similar displays outside. Because as customers, just by looking at the display outside, we know what clothes they have. We choose whether to go in or not based on the clothes that they put outside. And they’re doing that in a deliberate way to attract certain kinds of customers and not attract certain different customers. In the same way today, SaaS in an existing category, your customers are looking at your website while they are looking at five other websites of other competitors in the same space to figure out which one to buy. So if you are too different, and if you’re trying to do something completely wacky, then your chances of converting that customer are very low because they’re looking at five websites, and they’re trying to figure out, is this for me? What does it get me as a benefit? Can I try this myself? Or am I going to take a demo? Who else uses this? How is this different from others? If all these things are not on the website in an incremental manner the customer is going to go away. So anybody building a SaaS product and an existing category has to have these nailed. Don’t try to redo it. Don’t try to be smart. Write words that a fifth-grade student will be able to understand. Without these components, it’s like you’re putting a storefront for clothes in a mall, but you don’t have any clothes on display, you’re trying to say I love the color red, and I love the color orange and we make the best materials. And I’m looking at three other stores and I’m thinking I want to buy a shirt. I don’t know whether your shop sells curtains or shirts.
Yeah, I love this analogy. How important is it to be transparent and simple about your pricing?
Prasanna: Pricing is something that you should start with. The moment you know that the problem you’re solving is $100,000, you also know that it has a lot of ancillary parts to solving it. That $100,000 problem will need five different things to come together to solve it. And those five things could be some training, some data migration, some integrations, API integrations with other tools, some different dashboards, and reports or customized dashboards and reports. And finally, it also needs the product. Now, these five things are going to come together to make that product work as a solution for that particular customer to deliver $100,000 of value to that customer in that particular year. Now, there’ll be different proportions of this for each customer and you can’t predict that upfront without knowing the customer’s situation. And that’s where if you put out pricing saying, hey this is $20,000 in the customers’ minds, they may not be planning for the training, the integrations, the data migrations, and the report configuration. And they’ll say hey, you said $20,000. Now you’re telling me, I need to pay for all these things as well. Oh man, that sucks. You’re not transparent. So that’s the issue with picking a pricing model that will work for bees and rats and rabbits and putting it for elephants or whales. So when you come to bees and rats and rabbits, most likely the buyer is the business owner. They just want to try something and see if it works. They’ll pay with their credit card and move on in life because they have other problems to solve. Most of the time, the biggest problem for any owner is how do I continue getting new business. It’s not what this software does. So in that case, they want to make sure that they’re not going to get burnt down the road. But the beauty of it is also that only a single user is likely to use your product. So there may not be any other tools that you need to integrate with. Or if you are integrating with other tools, they may be standardized tools. So you need to have three, four, or five integrations and or whatever number of integrations are required in your space and you’re done. There is no training required because the tool is very simple. It just does one thing, there’s only one user doing it. There’s no data migration because this person doesn’t have any old data to migrate. In that case, you can give a price which is very, very transparent. So to me, the question about pricing, and transparency around pricing is really about the value that you get.
Walk us through the process of getting to your very early customers.
Prasanna: The first 10 customers are always really, really hard. And it just has to be done by hook or crook. We can’t be too prescriptive about how to get the first 10 customers because it depends hugely on the type of customer that you’re getting. And the product is going to change a lot if you are not a domain expert. On one front, there are founders now who have built deep domain expertise, and they’re starting this product. Based on existing customer relationships, they already have 10 customers in mind. So this is pre-sold to the first 10 customers. So in that case the learning or the iteration may not be that high. But in other cases, founders say this is a problem worth solving. Let me try it. I will build something then I will try to build marketing, then I will try to find positioning and stuff like that. And those journeys are much more iterative, where you have to learn from every customer. One thing that I do see a lot more people do these days is obviously content and community. Every company is becoming a media company. So content is supercritical. And more and more important as the days go by. Communities are the other moat. If you can build a community of users, of people who have the budgets, who have the money, who have the problems, and then you can figure out what problems of theirs if you solve, they’re ready to pay you. So you might have a rough space. But within that what you need to build might be something that you figure out on the basis of the community’s feedback. Most of the value in startups today has become getting a repeatable set of initial 10 customers who don’t know.
You describe inside sales as the process of catching, coaching, and closing. Can you walk us through what that means?
Prasanna: Suresh of Kissflow came up with that. The catch, coach, and close model says: go fish in the right place, go fish for the right prospects so that you catch the right prospects in your net. That is they come to you, and they’re looking for what you have. And they understand that you are solving a problem that they have. Now you understand that prospect and say look you have this problem. This problem is usually caused by these kinds of reasons and can be solved by using these kinds of things. You don’t try to sell them that but you try to tell them that this is the root cause of it and I am a domain expert in this particular area. And therefore, in the coaching phase, you might even let go of some of the prospects because someone else can solve it better. But you still need a flip there to make the buying decision and that needs an emotion. And that part of it is where a lot of engineering founders miss. There is an individual on the other side of that call. And that individual is making that buying decision as much on emotion as on pure logic. And that emotion for that person could be that they’re in a lot of stress because of a particular problem in their business, and your product can solve that problem. And it’s that emotion that usually triggers the purchase behavior. A lot of times as founders and as salespeople, we are able to sell better because we are emotionally attached to the products that we sell. And that excitement that we have about the product that we are selling translates to the buyer
From your point of view, what approach should founders take to raising funds?
Prasanna: We start from optionality. Most times founders are building businesses to make money. They want to make a lot of money, number one. Second is they want to make sure that their team makes a lot of money. And third, they want to make sure that their customers get a lot of value out of the whole thing. And finally, they also may want to build a very large business because if you build a large business, then a lot more employees, lots more customers can be impacted by you. That’s the order priority they might have. Now the challenge is that the only thing finite in the universe is equity. There is only 100% of equity. So the mistake that we see a lot of times is that founders give away too much equity too early to people who need some 100x growth in your business. So that stakeholder now needs you to get to $100 million revenue versus you might be able to build a great business, which has a $10 million revenue. And in the Indian context, if you have $10 million of ARR, you might be making $3 million of profit or $4 million of profit. So this is, by any means, a fantastic business, because let’s say there are three founders. At the end of it, each founder is probably going to be worth something in the range of a few tens of millions. You might have 10 or 15 employees or 20 employees who might make a million dollars each working with you for four years or five years. So by any means is a great outcome. So this misalignment between the expectations of different stakeholders is what causes founders to fail. Our recommendation usually is for founders to take very little capital until they’ve achieved a revenue flywheel where they know that the customers are getting more and more value over time from their products. And they know that customers are able to get them more and more customers over time. This is what we call the Value SaaS flywheel. And if you’re able to get annual upfront from these customers, then you’re done. Because basically, they’re paying you one year in advance, they’re paying you money which is typically 70-80% margin. And if you do it well, you’re getting customers through referrals. So your CAC on those customers is nearly zero. You can reinvest that entire money into building a better product, paid advertising, or whatever it is that you need to reach more and more incremental customers. The mistake that founders make in many cases is that you are burning nonrenewable equity for CAC. But out of 100 startups, only 10 startups are going to be in a situation where they can afford to continue burning equity to get more and more customers because only 10% of startups grow more than 2x, 3x year on year. Most startups in the world will grow 50% year on year or to 2x year on year. For folks who are growing 50% year on year to 2x, if they burn equity every year to get more growth, they’re going to run out of options, because at some point investors will own more than 50%. The employees are not necessarily going to make money. The investors will make money first. The founders will make money second. The employees will make money last. So for SaaS founders who are selling B2B globally, my advice would be to stay in control, keep your options open.
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