Seven Rules to Create a Great SaaS Business Model
Consider this your SaaS growth / SaaS company / SaaS business model strategies cheat-sheet.
Straddle the line between enterprise software and consumer software
Keep refining your pitch until a 24 year-old can sell it over the phone
Rule #1: Choose a smallish, well defined market and dominate it
Smallish? Isn’t that heresy? No. PayPal targeted E-Bay power sellers. Facebook was for Harvard students. HealthStream, where I have a lot of personal experience, was for U.S. based acute hospitals. It’s much better to have a deep presence in a single market, even if that market is small, then a shallow presence in lots of markets. Don’t be seduced by TAM size. You can use imagination to grow your TAM from a solid base, but you need the base first. Did Zuck know he was building the world’s most efficient and dangerous audience targeting system when he started? Maybe, but it doesn’t mater. With imagination, that’s what Facebook became.
Rule #2: Solve a known problem within a larger vision
I remember the first time I ever used Google. There were lots of search engines at the time. My brother told me to try it. “You’ll never use another one,” he said. He was right. We knew search was terrible and holding the internet back. Just before I tried Google I’d tried AlltheWeb, a site that let you create a visualization for how sites and terms were related. My most tech savvy friend was very excited about it. It made no sense to me. I could understand Google's prioritized list. Now Google is both the regulator and merchant of search results. They’re like a government that collects taxes and provides services. That’s a mighty big vision from “Where can I find cheap Ray-Bans?”
Rule #3: Achieve must-have status — no ROI required
A required ROI is a sign of weakness in your product/market fit. Underwear does not have an ROI. Neither do email, cell phones, or internet service. There are two ways to become a must-have: government mandate and peer pressure. If it’s embarrassing not to have your product, as it's becoming for hospital systems to not have SalesForce, you become a must-have as surely as if you had a government mandate. If you don’t have a good regulation driving the adoption of your service, make it as embarrassing as possible not to use you.
Rule #4: Straddle the line between enterprise software and consumer software
Enterprise software prioritizes feature breadth over quality of features. Think EHRs - they do everything, and no one can do anything with them. Consumer software does one or two things really well. At HealthStream we created a system that did a limited but critical set of use cases really well. Our core users were delighted by it. “You mean I only have to do that once! OMG! This is going to save me so much time!” Push for well defined use cases with limited features targeted to very specific users. An “enterprise” system should be a lot of little apps tied together with shared data and snappy reports.
Rule #5 Don’t sell to CIOs
SaaS and cloud-based are not the same thing. SaaS is simple. SaaS is “I can do it myself.” SaaS is an outcome rather than a technology. Airtable is SaaS. Typeform is SaaS. Zapier is SaaS. You don’t need to sell to CIOs to sell SaaS. In fact, you should avoid CIOs. Steve Jobs famously said he never wanted to sell to the enterprise because he didn’t want to be beholden to 500 jerks. CIO’s write big checks, but you can get a lot of little deals done with SaaS for less cost per deal and get adopted across an enterprise through stealth rather than with an expensive frontal assault. CIOs don’t buy simplicity and convenience; they buy things that help them build empires.
Rule #6: Keep refining your pitch until a 24 year-old can say it over the phone in a first conversation and set the hook for a long sale
Keep it simple. Dumb it down. Don’t make them think. All true, and all completely misunderstood. What these phrases really mean is, “Think so deeply about your product that you can explain why your prospect needs it in a way where the prospect says, ‘Of course that’s right.’" This is very, very hard to do. It takes patience and experimentation. It takes rigor. This is not, “Throw spaghetti at the wall,” though sometimes you get lucky with that approach. It’s also a moving target. SalesForce does this today with their tag line, “The World’s #1 CRM.” If I want a CRM, I’d be a dummy not to buy theirs. They couldn’t say this when they started. Back then it was “No Software,” and if you were a sales leader who hated his CIO, what could be better? At HealthStream it was, “You know that classroom compliance training you’re doing? We can move it on-line.” All three tag lines are stupid simple, and all three have dramatic implications for business as usual. See Rule #2.
Rule #7: Keep selling more stuff to the same people
HealthStream started by selling one content library and reports that supported it. Now it goes back to the same people to sell them new libraries over and over. HubSpot holds features back where you can see something that will help you, but you have to pay more to get it. It’s an annoying habit for what already feels like expensive software (Hubspot), but it seems to be working for them. It’s so much easier to grow an existing customer than to find a new one. That’s the fact SaaS is built on. Yet lots of SaaS products have no way for you to grow with them other than to add more users. User-based pricing models misalign incentives between the software maker and the software users. We’re seeing more licensing models come up in SaaS that aren’t user-based. This feels like the right direction. Now you have to find whatever metric aligns you with your customer’s success. If SalesForce licensed its product based on a percentage of the buyer’s revenue growth, would they make more money? Maybe. But then CIO’s wouldn’t buy it.
Read more about what skills you need to do all this in our post A New Definition of Product Management.
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