There is a sharp distinction between two different SaaS business models that sell subscription services to other companies. Often they are called B2B SaaS interchangeably, however they are profoundly different companies in their cost, skill and revenue stream.
At this time, I
haven't heard any appropriate names. I
am calling one B2B and the other Enterprise.
Using B2B will lead to confusion because both are businesses selling to
businesses. If you have suggestions for
a good name, please comment.
Perhaps the best way
to distinguish between the two SaaS companies is not by their customers but by the
integrations. Enterprise SaaS
companies integrate into mission critical systems and legacy work streams. B2B SaaS are less likely to be integrating
with legacy systems, often innovate new work streams, and integrate with other SaaS products.
Let's look at two
examples that have similar value propositions but different business models.
Enterprise SaaS Example: Accounts Payable Automation such as
Transcepta serves the critical function of paying vendors accurately
and within the terms of the contract.
Picture the Enterprise customer: a 40-year old company that has over
1,000 suppliers feeding their manufacturing lines. To be successful selling to this Enterprise,
you need to offer a high availability system that can accurately handle
thousands of inbound invoices and outbound purchase orders each month - without
fail. You will integrate your solution
to pass data to an existing customized ERP system from the likes of Oracle, SAP
or a small specialty vendor. You may
send and receive some of the invoices via protocol standards like EDI. You can't fail without critical repercussions
to your customer so you will be subjected to security audits, certifications and other tests of
your veracity and ability.
B2B SaaS Example: Again, let's look at Accounts Payable
Automation such as Bill.com. Now
imagine the customer is a 10-year old company who processes 50-200 invoices per month. It's a hassle and you certainly don't want
to handle all this over email and paper but you can, and you probably don't
have an ERP system or EDI. The SaaS
vendor in this case, can focus on a simple user experience, low training
solution with out of the box integrations into the most popular SaaS accounting
solutions.
While you can see that the features from these two vendors have similarities and
differences, the difference to the business model of B2B versus Enterprise SaaS
goes far deeper.
Customer Segmentation:
The 40-year old
Enterprise company has billions in revenue, places thousands of orders to vendors each month
and facilities around the world. The
company may operate in regulated or complex verticals like manufacturing, pharmaceuticals, and energy with
critical global supply chains. The customer knows that working with their IT environment is hard. It's a complex mix of new and old systems, their data is
large, messy and silo'd, and their internal processes are complex. The accounting and procurement team sizes
count dozens of employees.
On the other hand, the 10-year old company has much less legacy IT, fewer data silos, and simpler
processes. The accounting team has a
few people and there may be no procurement team.
The former expects a
customer experience with a multi-month pilot and a signed-off rollout plan that
reduces risk. They need a contract with
teeth in it and both sides bring lawyers to the table. The 'pilot' for the latter may be a 30-day
self-service trial or a freemium offer.
The latter may buy with a credit card and won't negotiate the terms of
use.
Customer Relationship:
The Enterprise needs
you to be there to support them. They
have facilities around the globe. You
are getting baked into their processes.
The cost of failure is high to peoples careers. Once integrated into the customer, the vendor switching costs are high, so the customer churn is low. The customers expect impeccable support that knows
how to deal with the customization woven throughout their processes and
systems. A self-service help portal won't cut it - they need support personnel, or integration partners, in the
right locations and the right time zones to deal with migrations and
hiccups. A great support team is a
strategic asset.
The B2B SaaS sales
effort is low-touch with minimal, if any, sales people in the field. Freemium or self-serve trials are within the customers expectations. Instant gratification is the name of the game. Try it, you'll like it. The solution has limited legacy integration options but may expose APIs that the customer or other vendors can use. Chatbots, self-service and community
support portals satisfy the customer.
Revenue Streams:
Let's start with
B2B, and what an example would look like. B2B SaaS have fast time-to-value solutions that may be cheap enough to buy on a credit
card. Pricing is pre-defined and often published online. The pricing scales by some unit like seat or metered utilization. You can start by buying one seat and
then adding more as adoption spreads.
Pricing is available on a month-to-month basis with discounts for
purchasing a full year. Sales cycles
are days or weeks long and churn is higher, resulting in lower Cost of
Acquisition (CAC), and also lower Annual Customer Value (ACV) and Life Time
Value (LTV)
In Enterprise SaaS,
time-to-value is measured in months.
There is likely to be a non-recurring engineering (NRE) component to the
price to integrate, configure and customize the product to the unique process
of each customer. The price is likely
negotiated differently with each customer along with redlined Terms and
Conditions. Customers are likely to be
agreeable to signing a one to three year contract paid annually in
advance. Months long sales cycles drive up the CAC. Customers yield high Annual Customer Value and
Life-time Value but are fewer in numbers. Though they have fewer customers, payment in advance has the benefits of putting 12-mos of subscription cash in the bank account up front.
In either case, you
can build a great business but be aware which path your customers and market
expects. Most new SaaS companies today
are B2B SaaS rather than Enterprise SaaS.
The reasons are clear, a B2B SaaS company with low-touch sales,
self-service support and little or no legacy integration requires fewer high skill sales and operations people resulting in hopefully a lower CAC. The Enterprise SaaS, on the
other hand, rewards those higher costs and skill requirements with large LTV
and stable, low-churn contracts. While
having customer success advocates are helpful in both models, the Enterprise
model needs less attention on churn reduction.
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