The Race to $100M ARR
SaaS and cloud providers have enjoyed epic levels of venture capital investment over the past few years. Almost every business plan imaginable has been funded resulting in tens of thousands of new startups entering the market. Some aim to disrupt existing markets while others hope to create new billion dollar categories out of thin air. Some are using traditional sales-led growth strategies while others are letting the product sell itself with PLG.
Some offer subscription pricing with fixed monthly fees while others are monetizing consumption to scale revenue faster. Some are focused on building great software, while others have expanded their business model to include advertising, financial services, and supply chain capabilities.
SaaS Business Model Design – Key Considerations
SaaS and cloud providers aren’t just disrupting traditional industries they are reinventing their own business models. To remain competitive, both startups and established companies, need more challenge themselves more than ever to answer the big picture strategy questions related to:
Go-to-Market Model
- Product-Led
- Sales-Led
- Channel-Led
New Category Creation
- Target Market
- Value Proposition
- Launch Strategy
Monetization Strategy
- Pricing Strategy
- Revenue Streams
- Value Metrics
Strategic Planning
- International Expansion
- Platforms & Product Suites
- Mergers & Acquisitions
Product vs Sales-Led Growth
Today’s software buyer is more tech-savvy than ever. Many don’t need the vendor-guided, consultative sales process that has historically accompanied technology purchases. Instead, modern buyers prefer a more-consumerized sales experience that resembles the way they would purchase a laptop or device on an e-commerce site.
However, not all software applications lend themselves to a self-service buying motion. More complex solutions still require solution consultants to design configurations, value engineers to prove the business case, and account executives to negotiate commercial terms.
SaaS revenue leaders need to decide which type of go-to-market motion is best today and where they aim to be in the future.
- Vendor Discovery – Through search engines, social media, and word-of-mouth buzz (PLG) or through a mix of digital and analog channels including webinars, tradeshows, and analyst referrals (SLG).
- Product Capabilities – Hands-on experience through free trial or freemium (PLG) or vendor-led demos and custom-configured sandboxes (SLG).
- Pricing – Transparent, published on the website and standardized for all customers (PLG) or quoted by sales rep with discounts negotiated one-on-one for each account (SLG)
- Support Experience – Open access to support documentation and community forums for the general public (PLG) or paywalled and reserved exclusively for active customers (SLG).
- Purchase – Buy online with credit card directly from vendor or through app store/marketplace (PLG) or with a contract negotiated by legal teams followed by an invoice with net 30 payment terms (SLG).
Every Product as-a-Service
In the next ten years every major product will become available in a subscription or “as-a-service” model. Innovators in every category of product are shifting away from the traditional transactional product sale of the 20th century towards service-centric models. These new “as-a-service” paradigms are designed to provide higher levels of value to the customer with a goal of building longer-term relationships.
Pricing and Monetization
The majority of SaaS providers revenue is derived from subscription charges for rights to use the software, but a growing number of shifting to consumption or usage-based pricing. Although, investors prefer the 80%+ gross margins that come from pure software, many SaaS and cloud providers also generate revenues from on-premise hardware, professional services engagements, and premium technical support as well.
In recent years, technology providers have adopted more creative ways to generate revenues by offering embedding payments, shipping, insurance, and payroll services. Larger platforms are monetizing their customer community by charging 3rd parties fees to advertise on their platforms or to sell products on their marketplaces.
Revenue leaders at SaaS organizations need to decide on:
- Pricing Strategy – Options include subscriptions with fixed monthly fees, usage-based pricing tied to consumption, and revenue share models that take a small percentage of the dollar value of each transaction.
- Value Metrics – Most business applications price based upon users, but infrastructure offerings like databases, AI/ML, and monitoring services use metrics such as minutes (time), GB (volume), or API calls (transaction counts).
- Discounting Strategies – To drive greater adoption of their services, SaaS providers offer tiered discount structures for higher spend or reward customers with free credits for sustained usage patterns.
- Contract Structures – Some offer customers flexibility to pay-as-you-go month with no long-term commitment, but most want customers to lock into predictable revenue with an annual or multi-year contract.
Strategic Planning
Each year there are dozens of stories about startups achieving stratospheric heights by launching a new category offering that yields triple-triple-double growth. But only a small fraction of these high-fliers reach the coveted $1B+ IPO.
Scaling to $100M ARR and a potential NASDAQ requires a different kind of magic than the initial launch. The company must not only continue to grow from its core, but it also must scale and extend the number of countries it operates in, the number of products it offers, and the distribution channels it sells through.
Often its not just organic growth, but also mergers and acquisitions that are required to stay on track. Strategic considerations for SaaS leadership teams include:
- International Expansion – Many SaaS companies go global on day one, marketing and selling to buyers worldwide via online channels. To truly capture meaningful market share in regions such as Europe, Asia, and Latin America requires a local footprint of sales and support in major countries.
- Product Portfolios – Growing at an IPO-worthy pace typically requires not just one, but a suite of products. The most successful SaaS organizations master the art of land and expand. By programmatically cross-selling multiple SKUs to large accounts they boosting net dollar retention figures into the 110s and 120s.
- Distribution Channels – Most SaaS organizations start off selling directly to businesses online or through their in-house sales team. Scaling revenues often requires developing reseller relationships with systems integrators, embedding technology in OEM products, or selling through app stores and marketplaces.
Spotlight
New Category Creation
New category creators need a fundamentally different strategy than SaaS and cloud providers disrupting an existing market. Category leaders need to get their customers to do things like reimagine how they do business and how they measure success. The effort to build a new market from scratch is substantial, but the payback is huge as many category creators are able to establish a dominant market position.
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