Many startups launch focusing on the small business (SMB market). Given how large this market is, it can be a compelling target. There are 30M small businesses in the US alone. In addition, SMBs don’t have big purchasing departments and corresponding long sales cycles. If you reach the owner and solve a need that she has, you’re in!
I love the SMB market. Many of my previous startups have addressed on it. Most notably FreshBooks, which has built a very large customer base here. However, I have seen over the years that most startups that launch with an SMB focus eventually go up market serving larger customers. They do this because while the SMB market is huge and sales cycles are short, each customer is small and not worth much. So, you need a lot of them in order to build a big business. Acquiring lots of small customers in a cost effective way is difficult.
Without further ado, here are the only two ways that I know off to truly scale SMB SaaS companies:
1.) Ridiculously low cost of customer acquisition:
Surveymonkey, Evernote and Dropbox are a few examples here. Each has built a huge customer base selling a low cost product. Yes, Dropbox now has a business offering for larger customers. But the bulk of their base is prosumer/ SMB.
These three examples all have something in common: A viral product. Every person who receives a survey from a Surveymonkey customer is another potential customer. When we create folders in dropbox, we automatically share them with other people, who in turn become users.
In addition, each has a freemium pricing model. Letting users try before they buy and giving them a very long try period is super important with SMB. These are small customers and they spend their pennies wisely.
2.) Have multiple offerings to sell each customer:
If you only have one low cost product to sell then you have to keep acquiring new customers to sell that to in order to grow. However, if you have multiple offerings then you can cross sell your other products to existing customers, allowing you to grow revenue with no incremental cost of acquisition.
Check this out this extract from Godaddy‘s IPO road show deck. It perfectly illustrates this point. Godaddy has grown average customer revenue from $73 – $594 by selling them more and more things over time. In the process they have transformed their unit economics and unlocked growth. The more a customer spends with you, the more you can pay to acquire them. The more you can pay, the faster you can grow.
There you have it. There are many sub tactics, not covered here, but at a high level these are the only ways to truly scale SMB SaaS companies.