The dawn of 2017 is a time for reflection, and your SaaS business is no exception. Trends in any industry come and go—and at Price Intelligently we want to take time amidst the wrap-ups and resolutions to figure out what actually worked in SaaS business this past year, and what should stay behind in 2016.
We think some SaaS trends are worth the hype. These trends usually involve innovation, flexibility, and customer-first thinking. The overrated fads that you should leave behind rely on outdated ideas and an unwillingness to evolve.
Know what to pass up on, and say goodbye to any stagnant mindsets. Set your sights on the forward-thinking, customer-centric strategies that will shape SaaS success in 2017.
Good Trend: Vertical SaaS
There are roughly two types of SaaS: vertical SaaS companies and horizontal SaaS companies. Vertical SaaS companies manage the entire pipeline for a single industry while horizontal companies manage one function for multiple industries. And in 2016, vertical SaaS grew faster than horizontal SaaS.
Vertical SaaS companies fill specific niches, and in 2016 they expanded in industries like medicine and health. As companies in all industries trend towards becoming tech companies, vertical SaaS will have opportunities for growth in a wide variety of fields.
What's So Good About It?
Vertical SaaS companies have huge potential to grow in 2017 by nature of being industry-specific:
By focusing on one industry, the product can better serve the customers' needs. A vertical SaaS company can develop a highly-tailored solution for its market. Companies can focus on becoming the “winner” for a particular industry rather than trying to be a jack-of-all-trades tool for various industries.
Word-of-mouth referrals reduce CAC. An analysis by Norwest Venture Partners found vertical SaaS companies had 20-25% higher EBITDA than horizontal SaaS companies, with a lower percentage of revenue on sales and marketing spend. Once one company in an industry finds a solution to replace outdated technology, it's an easy sell to the rest of the industry through word-of-mouth referrals without high sales or marketing expenses.
There is good opportunity to retain and up-sell existing customers. Solving a highly specific industry problem and continuing to provide this value over time can mean lower customer churn. Your customer's plan can also grow over time along a value metric as their need for your solution grows.
2016 has shown that vertical SaaS is growing, and a SaaS company of any kind can learn from what is making these companies successful.
Bad Trend: Freemium as a Revenue Growth Strategy
Freemium plans, or free tiers of SaaS products, continued to be popular in 2016 with heavyweight companies like Skype, Dropbox, and LinkedIn all offering free versions of their services. But freemium is not a reliable model for young B2B SaaS companies to grow revenue.
Freemium can work when you already have a strong business and want to market to a larger audience. For example, video hosting service Wistia monetized backwards by carefully building a pricing strategy and then, 6 years into their business, adding a freemium plan. The key is that they didn't start with freemium to grow their revenue.
What's So Bad About It?
You might think that your freemium plan will hook users with a taste of the product and encourage them to upgrade to a paid plan for the full service. But this assumption rests on shaky ground:
Freemium conditions customers to view your product as, well—free. Freemium plans can lower your customers' perceived value below 40% of the product's list price—that's a greater dip in perceived value than the dips caused by free trials, promotions, and discounts. Once a customer is used to getting a service for free, it's difficult to convince them to pay for that same service.
Using freemium can distract from other business goals. Freemium may help you increase the number of users you sign up, but that doesn't necessarily mean you're solving all of your customer's needs, communicating value clearly, or properly pricing your product.
Freemium is more of a marketing strategy than a way to build revenue. Freemium plans can work as part of a marketing strategy because they can drive word-of-mouth referrals and build brand loyalty. But don't think of it as more than that—just because freemium is technically a “pricing tier” doesn't mean it's a monetization strategy. You can't count on it to build revenue for B2B SaaS because 97% of freemium users will never convert to a paid plan.
Before considering freemium as a marketing strategy, focus on creating a strong monetization plan first and providing the value that your customers are willing to pay for.
Good Trend: Unbundling
Many SaaS startups sold their products in 2016 by “unbundling” the features. Instead of offering fully-loaded services, these SaaS companies allow customers to pick and choose the services they want and pay accordingly.
For example, the data enrichment tool Clearbit unbundled their product by offering multiple different APIs. Customers can pick which APIs they want rather than signing up for all of them. This gives customers more choice and a better opportunity to understand what the company offers.
What's So Good About It?
Unbundling lets both your customer and your company get exactly what they want upfront:
It makes pricing according to value a natural strategy. Customers can pay for exactly how much of the product they want to use and the company provides exactly the right service for that price point. Pricing on a scale of product usage means customers get more choice in what they pay.
It makes up-selling part of a natural plan expansion. A 2016 study by Totango found that for over 81% of surveyed SaaS companies, less than 20% of revenue was from up-sells and plan expansions. Expansion revenue is an underutilized growth lever. Unbundling creates natural opportunities for expansions as customers find they need more from your product and can build upon customizable plans.
It allows you to differentiate your product as markets become more competitive. Many markets in 2016 are increasingly saturated, and will only get more competitive in 2017. Our study found that you probably have between 8 and 10 competitors—and counting. Unbundling allows your customers to learn more about what each of your services really provide, which can help differentiate your company.
As SaaS becomes more nuanced and competitive in 2017, your customers probably aren't looking for cookie-cutter solutions. Separating out your services creates the most customized user experience.
Bad Trend: Overemphasizing Product/Market Fit
Finding product/market fit is a good thing... right? At SaaSFest 2016 Brian Balfour pointed out that it's useful as a starting point but you can't stop there. If you do, you could overlook key growth components.
In addition to product/market fit, you also need to understand what channels you will use to connect with your market and what marketing and distribution models you will build. Product, market, channel, and model are interdependent. You need to consider how all of them relate to each other in order to properly communicate with your market about your product. Successful marketing doesn't come naturally just because you have product/market fit.
What's So Bad About It?
The emphasis on product/market fit can be damning if you let it eclipse other aspects of your growth strategy:
You forget about channels and models. Finding the right channel is essential because many high-growth companies rely on one channel for 70% of their acquisition early on—so you want to make sure you're focusing on the right channel for you. Then you need to build marketing/distribution models that are right for those channels.
You try to find people who need your product instead of building a product to fill a need. Putting your product first puts you in the wrong mindset. You should sell to a market that needs your product by creating a solution for that market's problem. First identify your market and identify that need.
Overemphasizing product/market fit could make you complacent. Achieving product/market fit doesn't mean you'll keep it forever. Markets have changing demands over time, channels become oversaturated, and models become overused or redundant. You can't rely on achieving a good product/market fit once and then stop thinking about your audience and method of distribution.
Don't completely ditch product/market fit in 2017. But view it as a starting point and think about how it works with other growth and marketing components.
Good Trend: Customers Rule Everything Around Me
There's no doubt that in 2016 SaaS companies have put the customer first. More than ever SaaS companies want to make sure their customers are successful and happy.
Customer relationship software Zendesk found that 62% of B2B customers purchased more after a good customer experience—so good customer relationships pay off. Companies that know this are increasing focus on metrics that measure customer happiness and success. Totango's report found that over half of surveyed SaaS companies have increased spend on customer retention from 2015 to 2016.
What's So Good About It?
SaaS has the potential to default to impersonal. But making the effort to keep that human connection sets you up for future success:
You'll learn how to usurp your competition. SaaS guru Hiten Shah pointed out that “Your competitor's most unhappy customers are your greatest source of learning.” Research specific reasons why customers are leaving competing products to learn about market demands. Responding directly to these demands will make potential customers feel heard and appreciated and will help you develop the best possible product.
You will generate more referrals. Good communication helps build good customer relationships. A happy customer is more likely to refer your company by word-of-mouth, so you'll increase retention and acquire new customers.
You'll develop a better pricing strategy. Surveying customers is the key to developing a value-based pricing strategy. Finding customer's willingness to pay by communicating with them directly will help you set price points that encourage conversions but don't leave any money on the table.
In 2016 SaaS companies realized that if you lose sight of your customer's needs, you're not helping your customer or your company. This trend is no passing fad, and should remain at the heart of SaaS services through 2017 and beyond.
Take An Innovative Attitude With You Into 2017
Trends in the SaaS industry in 2016 have shown that SaaS companies need to embrace innovation to stay alive. They need to be open to new perspectives. They can't rely on first-generation SaaS strategies or tired playbooks.
At Price Intelligently we believe that 2017 is going to be a huge year for SaaS to become more personalized, more value-driven, and more effective in solving customer's problems. Now that you know what to embrace and what to leave behind, go out and shape the new year in SaaS!