Editor's note: While founders love a steep learning curve, it comes with risks. “Learn from others’ mistakes so that you don’t make the same ones. You will still make mistakes but they will be original ones,” Prasanna shared with Upekkha’s latest cohort founder who joined this March. Since the best way to learn is to ask questions, here is a compilation of answers to questions by new SaaS founders:
1) Strategies for increasing ACV
2) Challenges of building an Open-source + Enterprise product
3) SaaS gameplay with real-time examples
4) High-volume & small-scale clients or fewer enterprise clients?
5) What does Inner Flywheel look like for horizontal products?
6) Is competitive intensity a factor of problem choice?
7) How to A/B test for different customer personae?
8) Go-to-market strategy
9) Identifying optimum price a customer is willing to pay
10) Is it better to charge based on product usage or features?
11) Do cultural differences impact the inner flywheel?
12) Equity-burn Ratio
#1. What are the best strategies for increasing ACV (Average Contract Value)?
You cannot charge your customer more than the value of the problem that you are solving for them.
‘Solve high-value problem’
The biggest mistake that founders make is solving a low-value problem for somebody who is not rich. If you are born poor then no problem. That’s your ovarian lottery. Let's say you want to become rich and choose to marry someone poor, still no problem. Then don’t complain that you are not rich. You cannot become a profit-making enterprise unless you solve a high-value problem.
Most founders unfortunately fall in love with a customer segment that is poor or who don’t have profit/cash to invest in technology. Then, they try to solve a problem for that segment that customers don’t care about enough. In other words it’s not a high-value problem that they are trying to solve. Then you cannot complain about your ACV.
In other words, founders end up solving low-value problems which are not the greatest pain points for customers. This will invariably reflect in getting low ACV.
So, if you care about ACV, fall in love with people who have money and solve problems that are of high value. This will amplify your ACV by 10%, 20% or 30 % of the value that you deliver to the customer. This may require you to make a lot of changes on various fronts, like geography, pricing, ICP, location, positioning, the game you are playing.
#2. What are the challenges of building an Open-source + Enterprise product? How can one ensure that enterprise growth does not hurt open-source and vice versa?
Striking a balance between being too early or too late:
Open-source software (OSS) has some components of a freemium model. Here businesses offer value upfront and then monetize for a certain percentage of people. Initially you have a free product and want more people to adopt it. Then you look at monetizing the product for a percentage of people who have the highest value for it.
While playing the OSS game, with enterprises as target customers, you need to first figure out if someone is an enterprise and if you can charge them. The typical levers to identify if somebody is an enterprise from an OSS context are: a single sign-on, security, audits, testing or being on-call. After identifying an enterprise, you need to figure out if you can charge them more for it.
OSS as gameplay is about being a commodity; it is about making something proprietary into a commodity. One has to see if the market is ready for it. A lot of times people open-source something but the market is not ready for it. Since no one in the market understands the product, it requires an immense amount of hand-holding to even implement it. Monetization becomes difficult if not impossible as commodifying such a product requires a lot of personal support.
You have to ensure that you are monetizing something that is a product and not something that requires an incredible amount of handholding. Conversely, if you're commodifying something that needs handholding, then you need to monetise it also.
The challenge in some specific cases is also that OSS products are now adopted by SaaS companies. These are then offered as SaaS products. In that instance, getting a licence revenue is not a possibility or the startup has to make sure the licence blocks SaaS companies from adopting the specific OSS. Another option is to figure out how to make money from the cloud provider. If one goes into the market late there is a chance that the product is threateningly similar. In such cases, one runs the risk of getting blocked from the licence.
At times when one enters the market too early then there is a danger of not finding enough adopters. An extremely tricky balance has to be struck.
The ecosystem is moving towards cloud platforms that are accelerating the adoption of OSS and offering it as a free service. The challenge is to build something strategic in this ecosystem that is valuable for specific customers. If it is an avant-garde, cutting-edge product, the number of adopters will be very small. There is very little probability of having a community of such adapters. The cloud platform is not going to get into this as there are not enough customers for it. When building an OSS in something which is used by everyone in the world, the commodity cloud platform jumps into it. Building a community around this is still cumbersome as there will be a lot of similar communities. So, it all boils down to the game one picks to play, for instance, category creations vs competing with existing categories. In such a scenario positioning becomes very crucial.
#3. Can you explain gameplay with some real-time examples and its linkage with one or two components in the inner flywheel?
Gameplay in a crowded market: Zoho's approach
One very good example to explain this can be Zoho and their gameplay.
Zoho builds commodity products. Their classic product is an SNMP (Simple Network Management Protocol) monitoring tool that has been around for 30-40 years. Their product is old and has been around as long as SNMP itself. They generate a revenue of around $150-$200mn. The game that they are playing is that ‘I am operating in the crowded market. My customers know more and are very sophisticated in their understanding. They do not need much of my help.’ So their positioning is ‘I am more value for money, I am cheaper, I scale better and even as I scale I am the cheaper solution.’ In this market, they are saying that ‘I am value for money.’ Zoho has infinite customers as almost everyone needs and uses SNMP. However, Zoho’s SNMP has to be as good as or better than the best, while also being cost-effective.
Gameplay in a premium product market: The Whatfix example
In contrast, the game Whatfix is playing is that it is going to people and saying ‘Did you even know that when implementing Salesforce, only 20-30% of your employees actually know how to use it? The rest either don’t know or don’t know how to implement it and so they don’t use it.’
Organizations spend approximately $10mn on Salesforce for at least 20,000 users. Out of those 20,000, only about 3,000- 5,000 actually use it. So, Whatfix asks these organizations 'Do u want to protect your $10mn? You just have to pay us half a million.' Enterprises spending $10mn will not crib about protecting it by paying half a million.
Whatfix understands that most times customers do not know that the implementation problem exists. Whatfix has to educate customers about this problem. It then has to convince them that life will be easier if Whatfix is taken on board to help with implementation. In this market, Whatfix has to convince customers to pay a small price in exchange for a lot of education that is involved in implementation.
Since Whatfix will be approaching Fortune 500 companies and large enterprises, there is no point in saying that they are the cheapest. Instead, they say that they are the best product rather than being a value product.
Gameplay in a niche market: The GaragePlug pitch
GaragePlug, a software solution for workshops/garages, has to play an entirely distinct game. In that market, the target customers (garages or workshops) primarily use pen and paper or Excel. Automation is almost unheard of in this market. Certain big garages may have a very basic SAP, which is mostly used for billing.
In this field, GaragePlug will go and say: ‘I have worked for 15 years with Toyota doing dealer garage optimization. I have software that has the workflow to make workshops more efficient. Adopt my software, adopt workflow and your life will become super easy.’ This narrative is true and it works but it is not an easy sell as it is a niche sell. Most garages are stuck in their rigid antiquated ways and it is a herculean task to convince them. GaragePlug can’t play the same game as Whatfix or Zoho.
The pricing, positioning and other components change according to what game you are playing and where you are playing it.
While Zoho has infinite customer prospects as everyone needs SNMP products, Whatfix has only large enterprises with Salesforce deployment, GaragePlug can only sell to workshops of a certain kind. For GaragePlug, pricing has to be per garage, while Whatfix charges per seat and Zoho charges per device. Both Zoho and Whatfix can charge annually with a 3-year contract while GaragePlug can charge monthly with a quarterly or 1-year contract. Zoho’s positioning is slightly cheaper but good-quality products. While Whatfix needs to convince customers to adopt their product, GaragePlug not only has to convince the users but also handhold them into the transformation otherwise the adoption will not materialize.
#4. Which path to take - high-volume & small-scale clients or fewer mid-market/enterprise clients?
There are multiple ways to build a $100mn business. Talking specifically in the context of the above question, what market you are operating in matters the most. You can take either route - high scale, high volume and low ticket size or low scale and high ticket size. But the crux of the matter is your market choice for that specific route.
If you are doing business in a value-conscious market where your margins are small, you have to make it high scale to achieve greater growth. Contrarily, in an efficiency or innovation market, your ticket size can be high but the number of players will be less.
Independent of market geography or the Ideal Customer Persona (ICP) you are targeting, your path will be meaningless.
The founder market is also of great significance in this context. If you as a founder have expertise in sales then you may like to go for fewer customers and larger ticket size. Conversely, if you have marketing expertise, then it is better to go mid-market or lower than mid-market to take advantage of your area of expertise.
Many times founders go by the market without realizing their strengths or playing to their strengths. This becomes a recipe for disaster and the business is not likely to do well. If you are good at sales and can get close to a 100,000 customers you don’t need to raise capital. You can still choose to raise capital but then things are in your control. If you have done marketing in the past and play the marketing game well then you can really set the community on fire.
#5. What will the Inner Flywheel look like for horizontal products like Notion or Airtable?
Land & expand on global market
Fundamentally, from the Inner Flywheel perspective, these businesses will still be looking at the USA market or a global, developed world market as their geography of choice. From an ICP perspective, their gameplay is to land and expand.
They are looking at founders or team leads, who are influential in their team, to start adopting. They can land and expand from there. Such startups will look at positioning themselves as cutting-edge and much better than old-school. They will offer products that power what advanced users want. They have to set cheap or free pricing because land and horizontal products are available at low prices or are free.
Once more people have adopted, they can add more team members and start the paid option. The referral game is good also because you can invite guests who are not paying. These guests can become referral users. The problem that these businesses are solving is low ticket users. The problem that they are solving is a knowledge management problem, which is a low ticket problem. No one is going to be convinced to pay $10,000 per month. An individual will probably adopt at $10. Once it reaches an org stage, where there are 1,000 or more users, then people in the company will perceive it as worth $10,000.
#6. Is competitive intensity a factor of problem choice?
'Competitive intensity is part of the gameplay'
All of the choices, including problem choices, are made keeping focus on the customer. Gameplay is where all of this comes together in the ecosystem. Are you choosing a commodity space where there is lots of competition? Are you choosing a category-creation space where there is no competition? In all this, which game you are playing becomes the crucial factor.
'Founder-market fit is also very important here'
If you are very good at marketing and sales, then fight a competitive battle. If your forte lies in product and not in marketing or sales, then you have to choose the battle accordingly.
Problem choice, market choice, ICP, gameplay - all these will have some elements of competition in them. Competitive intensity will also be defined by the ICP that has been picked. For example, in sales-tech there is intense competition. For every category, a product exists.
#7. What if we need to test with 2-3 different ICPs? How do we A/B test (which involves tweaking offering + product)?
Pro-active conversations with customers
You will have to do lots of conversations with competitors, with people in the ecosystem, solution providers, service providers, people doing services in that space and more. Talk to lots of different ICPs to figure out which one has a real critical problem that you can solve. Figure out where unit economics will work. If it is a low ticket or low urgency problem, then there won’t be a GTM that is cost-effective and you can’t get into the market and scale.
If you are good at marketing, then go for horizontal, low-ticket problems. Consecutively, you build land and expand into the product so that you can move into a mid-market segment. There is scope for you to make a lot of money here, just like Notion.
A/B testing will not be quantitative. Rather, it will be a qualitative A/B testing. At Upekkha, you will be talking to a lot of ICPs. We will give you a framework to figure out which ICP will work. It will give you an opportunity to start making some choices.
#8 What are the principles, approaches, examples of GTM strategies?
Learn from the mistakes of others:
From a B2B SaaS context, there are various GTM strategies, like inbound, outbound, new category creation, competing for an existing category, trade shows, sales (a little less after covid) and more.
Every startup at Upekkha is doing one or the other kind of GTM. There is an oeuvre of experience that you can refer to from founders who have graduated from the program. This will give you a head-start. You can learn from their experience and avoid making the same mistakes they did. You will make mistakes along the path but these will be original mistakes rather than the mistakes they already made.
#9. How do you identify the optimum price a user is willing to pay for a problem when there are no direct competitive references?
What it will cost the customers to solve the problem if you are not there?
One option is to look at what it will cost the customers to solve the problem if you are not there. The reality is that customers will find a way to solve the problem whether you are there or not. For example, from a hiring perspective, someone might be spending on a contractor or a talent recruitment agency. This can become your first benchmark.
Look for budget allocated for the problem
The other option is that you go and ask. In many cases, your customers will tell you if they have a budget for this problem. This percentage of the budget can be yours if you have a product to solve that problem.
#10. Is it better to charge based on usage of the product or based on features of the product? How can we convince customers to pay annually?
Throw in something extra:
If your customers are paying monthly then convincing them to pay annually is fairly simple.
In case of Indian customers, offering some discount will mostly work. Some may not move from monthly to annual, because they are paying variable amounts every month. In that case, one choice is to move to a credit system where they can pay credits. Credits can be rolled out over a quarter, which customers can pay upfront.
Global customers can be motivated to move from monthly invoicing to annual pay by throwing in something extra. Their cost of capital is 3% if they are mid-market or enterprise. Even if you give a 5% discount, they will convert happily.
Incentivise the salesperson
The transformation from monthly to annual billing, and getting more customers to pay, is also about incentivising the salesperson. If the salesperson is incentivized based on the cash they bring, then their behaviour automatically changes. They will only pitch annual and customers will start paying annually.
Both enterprise and mid-market companies are used to paying annually. Therefore there won’t be a problem here. Monthly payment can be an option where you want to land and expand on individual people who are swiping on credit cards. Once monthly payment starts, the org can be offered a discount to move to annual payment.
#11. How do cultural differences impact the inner flywheel? For example, the Indian market seems less pro-automation compared to the US.
This is less of a culture issue.
There is a lot of manpower available in India so the value for automation is not very high. A person can replace software at a cheaper rate in India. In other words, if software is doing what a Rs.17,000 worth B.Com graduate is doing, then businesses will resist automation. If you can replace 10 B.Com graduates, then probably an organization will pay you Rs.50,000 or a lakh. If you are replacing only one of them, then it’s not worth buying it. However, a junior accounting graduate gets paid around $40,000-100,000. If you can replace one of those people, you can happily charge $50,000. The value of automation comes into play here.
It is not culture but rather pure economics at work. There are some cultural distinctions between the USA and Indian markets. However, when you have cheap resources, there is no value in automation. Moreover, lots of Indians who are in the USA buy automation in that market. So it is economics rather than culture which induces them to make such a choice.
#12. What do SaaS startups need to know about the Equity-burn Ratio?
Equity-burn Ratio is the percentage of the equity that you burn to get to a certain revenue.
Avoid burn - Some examples
Let’s consider some examples of capital-efficient startups and their equity dilution pattern.
Upekkha startup iMocha raised $150K and got to about $700K in revenue. They burnt only 10% of their equity to reach $700K. Further, they burnt 17% equity to get to $3.5mn. Their equity-burn is very low. They grew almost 5X of what they raised in venture investment.
Another example is SocialPilot, another Upekkha startup, that has not burned any extra capital.
Next is the example of Appknox. Before Appknox joined Upekkha, they had already burnt $600K to make $200K of revenue. But after joining Upekkha, they applied Value SaaS fundamentals, didn’t raise any capital and profitably got to about $1.8mn.
It's important to note that these enterprises kept their equity burn significantly low.
One of Upekkha’s startups ended up burning as much as 25-30% of their equity even before they had any revenue. They had managed to raise capital simply because they came out of Freshworks or Zoho. They were on track to a million dollars in revenue and with $5mn in the bank, they knew they could raise that revenue. But they were clueless about how to reach the next level. They had already exhausted 25-30% of their equity. To get to the next level, they would have to burn an even greater chunk of their equity. This would mean that founders would be left with peanuts on their plate.
Compiled and edited by Minakhee Mishra
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