5 Valuable Lessons Learned From Building a B2B SaaS Business
As I embark on my next venture, MagicBell, I want to look back at my journey with SupportBee, my first business to business (B2B) Software as a service (SaaS) product. Every business is unique, especially when it comes to the business-to-business arena, which is comprised of a huge number of industries, each with different needs. Nevertheless, many principles of building such businesses are universal - a focus on customers and revenue, for example. However, understanding these principles took me quite a bit of trial and error. The most valuable lessons I learned were the ones no one had told me about (at least in the first few years), so I want to share them here for your benefit, and more importantly, for mine!
Here are five tried-and-true pieces of advice for building a B2B SaaS business, from roll-out to beyond:
Know the difference between early adopters and late adopters.
At the launch phase, it’s a chicken-or-the-egg scenario: you need to get users to adopt your product, but most don’t want to sign up until they know you have other users (who wants to learn how to use new software that will be gone in a few months?). Think of Tesla’s early advocates--it was uncharted territory to drive an electric car as one’s primary vehicle, but the early buyers bought it for it’s potential to transform the auto industry into something more planet-friendly, and were willing to deal with the yet-unknown downsides.
That’s where early adopters are so crucial for launching B2B software; these are the users that will embrace a younger product for its vision, and are also more eager to solve their problems and thus are willing to take on more risk to do so. Another crucial differentiator with early adopters is that they will care more about what the software can do and less about everything that comes with it, like onboarding documentation. In fact, they prefer the personal attention from the founding team, which more than makes up for the lack of the product ecosystem. They are also more likely to engage with you as a vendor and provide feedback to the product team.
Late adopters, on the other hand, will expect a finished product and are likely already using other competing solutions. They care far less about what your product could offer down the line than what it offers right now. At the beginning, it's much better to focus on the early adopters and let the late adopters find a more mature solution. You will eventually grow up to cater to their needs. You can read more about this in Crossing the Chasm.
Understand the cost of customer acquisition--and use it to your advantage.
Growing a business means understanding where your profit is coming from, and where you are leaking dollars. And since business needs customers, it’s very important to understand how efficiently you are budgeting to get them. This is arguably much more important for B2B SaaS business, as the majority of customers will use it long-term and therefore you can spend more on acquiring them.
First-time entrepreneurs don’t usually measure Customer Acquisition Cost (CAC) because they do most of it “for free,” usually in the form of blog posts or networking. And while they aren’t spending actual dollars, they are spending time, and aren’t measuring the return (did the time you spent writing that killer blog post result in a worthwhile number of new sign-ups?). By parting attention to this, entrepreneurs can get a better idea of what the costs are by channel--and therefore the cost of a new customer--and can use that information to scale up the business. Once you know that magic number that lets you gain customers for less than what it costs to serve them, spend as much budget as you can afford to acquire more.
How do you figure out your CAC? That's a complicated topic worth another post, but setting up analytics to track signups and conversion and being able to segment them based on the channel is a great start. It's also a great idea to find the benchmarks in your industry to get a sense of where you stand and how much you can optimize.
There is no average CAC to point to, as it largely depends on the industry. In the case of my first B2B SaaS company, SupportBee, we priced too low and didn’t factor in expansion revenue (which I get to next). And like most other businesses, our CAC changed over time across various channels (for example, more competitors will increase the cost). While entrepreneurs don’t have to have the exact CAC down to a science to start, it’s better to have an idea than to not give it any consideration.
There are resources out there to figure this out, like ProfitWell.
Appreciate the importance of expansion revenue.
Scaling a business relies on increasing revenue so you can continue to invest in infrastructure, and product development. Expansion revenue in this context means the additional revenue you get each month from your existing customers. For example, if a customer is growing their business and wants to add ten new users, that is additional income from that account from what you have been seeing month-to-month.
Why is this so important for B2B SaaS products? Because inevitably, some customers will cancel their subscriptions, whether it’s because they are going out of business or are switching vendors. The goal here should be to get the customers who stay to grow enough to compensate for that churn - your pricing should model to factor in upgrades--a great way to upsell existing customers while also bringing them additional value.
I learned this the hard way at SupportBee, which we originally priced based on the volume of customers’ email support tickets instead of their number of users. Ticket volume don't grow predictably as a business grows. Later, by pricing based on the number of users, we were able to learn something about our customers that we hadn’t before: whether or not they were growing. Profitwell has a great blog post on expansion revenue.
If B2B SaaS entrepreneurs don’t do this, they’ll hit a growth ceiling--and stay there.
Prioritize integration with other tools.
Maintaining a B2B SaaS business doesn’t mean maintaining the status quo--it means always keeping with an understanding of what your customers are using to get work done, and that can look different over time. It’s for that reason that integrations should be a key part of an entrepreneurs strategy.
We all use different tools for different functions; our days are full of emails, Slack messages, updates in shared project management platforms, and calendar reminders, whether it’s to get back to marketing or submit data points to the CTO. As a SaaS provider, you are competing for attention against all of these other tools, and as they say, if you can’t beat ‘em, join ‘em. In short, find out what other tools your customers rely on and integrate with them. For example, when SupportBee provided customers with the ability to integrate with Basecamp, one of the more popular project management software options, we became more valuable to the customers using it. Suddenly, they could have these two daily staples talk to each other.
The great news here is you don’t need to ask permission, or wait for other vendors to throw you some code. Most have APIs you can use to do it yourself and post instructions (and you should do the same!). There are also tools like Blendr that provide integrations platform as a service now. Once you have your integration ready, the next step is letting people know; I advise writing to your integration partner and asking them to add your software to the list of integrations on their website. They’ll almost always do it, plus it provides a link back to your service.
In addition to integrating with tools you know your customers are using, you can also integrate with other tools to test out your viability in a new market.
Finally, integrations can be used as a pricing strategy. Premium integrations--the ones that allow your users to connect your software with big market software like Salesforce--can warrant an additional fee that will be well worth it to them.
Never stop measuring product-market fit.
The prevailing fundamental hypothesis is that all users will have feedback for you on what works and what they want you to improve. If only! But let’s say it’s true--could you, and should you, listen to all of them? No, because then your product will go in 100 different directions and you’ll lose sight of your positioning in the market. As Lincoln once said, you can please some of the people all of the time, but you can’t please all of the people, all the time.
So who should you listen to? The customers who get the most value out of your product. To find them, ask them one question: “How disappointed would you be if our product disappeared tomorrow?” At SupportBee, we actually put this in a questionnaire made up of only five questions. We made sure not to ask them to rate our value to them from 1 to 10, because that can be too subjective. This proved to be a great way to find our brand cheerleaders and a smaller pool of customers who could give us crucial feedback that would strengthen our position in the market and keep us differentiated from competitors. We didn't invent this method. It was popularized by Sean Ellis. For inspiration, here’s a great story of how the CEO of Superhuman found his product’s perfect market fit using this idea.
Entrepreneurs will find it a challenge to get customers to respond to these types of questionnaires, but even just a few responses will make a difference. Be strategic and purposeful about the other questions you ask, like, “Who on your team gets the most value of this product?”. Find out how customers are describing themselves so you know where to look for more, similar customers. Pay attention to the terminology they use to further develop your marketing pitches. The goal is not to spend all efforts putting your product in front of people and convincing them they need it--the goal is to find where the market pulls you naturally. It will be the end of conversations that never convert to deals.
This tactic, paired with a solid understanding of your customer acquisition cost, will make it much easier to scale your B2B SaaS business.
Do you have any tips for me or for other B2B SaaS entrepreneurs? Let me know on Twitter!