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The 3 biggest problems facing SaaS in 2021
The last few years have seen an explosion in the number of SaaS companies—according to Crunchbase there are now 22,000 globally, with 15,000 headquartered in the US.
From consulting with 25 of them and talking to dozens more over the past couple of years, I’m seeing this explosion has created 3 problems:
An acute shortage of GTM talent—driven by placing too high a priority on candidates having prior SaaS experience.
Escalating customer acquisition costs—driven by the increased cost of talent and by the declining performance of saturated B2B marketing channels.
Lower switching costs—every industry use-case now has multiple vendors and with data portability the norm and budgets established, its easier to change vendors.
An acute shortage of GTM talent
Until recently, 99% of SaaS companies placed a very high priority on candidates having prior SaaS experience for anything other than entry-level roles. There was a widely-held belief that selling and marketing SaaS required a particular set of skills around cold calling prospects, helping them realize they had a problem, showing them that the software solution could be rented instead of owned, and helping them find the budget to pay for a solution.
The existence of 22,000 SaaS companies suggests that these skills are no longer that particular nor should they be the priority. Buying decisions have been delegated to departmental leaders, who get bombarded with emails, phone calls, ads and marketing content all day long. Renting software is the default choice for any non-core technology and software budgets exist in every department of the enterprise, from HR and finance to sales and marketing to product and engineering.
But companies still need marketers who can define customer segments, create relevant messaging and put said messaging in front of said customers in creative and engaging ways. And companies still need salespeople who can connect with stakeholders, identify pain points, prescribe solutions, create urgency and drive deals to close. And companies still need account mangers who can nurture and grow customer relationships over time.
The talent to fill these marketing and sales roles has to come from outside the SaaS industry. Here are 3 strategies I’ve seen work:
Get creative in sourcing candidates. Instead of searching for a salesperson who is currently doing the exact same job at another SaaS company and throwing money at them to move over, look for candidates who understand the customer from an adjacent industry and are hungry to learn. For example, adtech salespeople understand what motivates marketers to choose vendors. The only real difference between adtech and SaaS is that there is no vendor loyalty in adtech. Similarly, benefits brokers understand what motivates HR and finance leaders. The only real difference between benefit plans and SaaS is that benefit plans are highly commoditized and more heavily regulated. You can find examples like this for most buying scenarios.
Prioritize stage experience over domain experience. For best results, startups need people who are comfortable with the growth stage the company is currently in, or earlier stage. Not later stage. I always crack up when recruiters ping me about gigs where the key requirement is to have taken a company from $100M to $1B in revenue, even though the company is only doing $40M and hasn’t figured out how to get from $40M to $60M, let alone $100M to $1B. Someone who has seen $15-35M is going to succeed far more often than someone who joined at $150M. There is also a larger pool of leaders with early stage experience than with later stage experience, because the pool of early stage companies is so much bigger. Domain experience is nice but can often be more of a liability than an asset if it comes with the baggage of being unwilling to challenge industry norms.
Create a GTM architecture to make candidates successful. Companies have never been able to scale by trying to hire superstars for every role. There never were enough superstars to go around and there are even fewer now. Instead, lay the groundwork for success by building a clear ideal customer profile, buyer personas, discovery questions, target account list, a set of processes for demand generation, prospecting, closing, onboarding and growth and a set of metrics to measure performance against the process. Not only does it help newcomers become productive faster but it also makes it easier to identify where individuals are struggling and provide targeted coaching.
Escalating customer acquisition costs
Customer acquisition costs have skyrocketed, driven in part by the acute talent shortage driving up compensation. A $35M ARR SaaS client recently asked me if I thought $400k OTE was ok for an enterprise AE with a $1M quota. Wut. Across the board it seems that the days of paying $250K OTE for $1M quota are long behind us.
Acquisition costs have also been driven up by the declining performance of saturated marketing channels. Cold calling worked for a hot minute for Salesforce in the mid 2000’s because a) SaaS was a novelty and b) people answered their work phones. Email still works but only if its highly relevant and personalized. Adwords works but only if you are targeting SMBs. Facebook works but only if you have existing prospects to retarget. LinkedIn works but only if you care about leads that don’t convert into sales.
Here are 3 strategies I’ve seen work in countering this:
Be realistic about your ideal customer profile—your target market is always smaller than you think, however technology has made it easy to fool yourself otherwise. After all, if you can prospect at scale, why not do it? Well it turns out there are lots of reasons, not least burning your TAM through declining response rates and getting blacklisted for spam. If you have 100 customers today, identify the 1,000 prospects that could turn into your next 100 customers and focus on them.
Be more thoughtful in your outreach—do more research on people before you contact them and use the research to create a personalized message. You can paint a pretty comprehensive picture of most people with a few Google searches. Just be a human.
Find new channels—the best channels are often hiding in plain sight. This obviously requires creative thinking to question the status quo and repurpose existing communications platforms. Another strong reason to get creative about sourcing candidates!
Lower switching costs
The sheer number of SaaS companies tells us that there are now multiple vendors in every industry, sub-industry and use-case. Pick any category on G2 and you can scroll companies for days. The martech lumascape is so packed I can’t even read it anymore. Throw in the data portability of the cloud and the fact that software budgets exist and it’s easier than ever to switch vendors.
This increased competition means that customer retention is under more pressure than ever. And this cuts to the very heart of the SaaS investor proposition—that if you put in the heroic effort upfront to win a customer, you’ve got ‘em locked in and you get to lap the Monopoly board for the next few years. If retention goes, so goes the dream.
Yet very few SaaS companies seem prepared to handle this. The bigger ones tackle it by upselling new products into an account to make switching harder. That’s great if you are a giant like Salesforce or Adobe, but what about if you are a single-product company in a competitive category?
The only scalable way to combat churn is to demonstrate recurring impact—show your customer how the product they bought from you is making an impact on their business. But most SaaS companies are crap at this. They win and onboard a customer and then forget about them until 3 months before the renewal unless the customer has a support question. They task a Customer Success team with overseeing the onboarding, support and renewal, or have the CS team do onboarding and support and have a separate team do renewals. To spice things up they then have the original AE or a dedicated AM join the party to sell more products. How anyone thinks this is an optimal customer experience is beyond me.
If we want to think about what to change to get ahead of this, we can learn a lot from the online marketing industry, which went through a similar transition. 15 years ago, online marketing looked a lot like “traditional” SaaS, with a lot of upfront work to persuade marketers to move budgets from print and TV into digital. As marketers realized they could get more efficiency from online advertising, their digital budgets increased substantially, as did the number of vendors in the space.
This brought with it increased competition and lower switching costs. Vendors were forced to demonstrate recurring impact in order to retain spend and forced to innovate their solutions in order to grow spend. Fast forward to today and the renewal and upsell cycles have become a continuous activity run by an account manager who is goaled on revenue along with the rest of the GTM org. Having lived through this transition in the online advertising industry, I think the CS function in SaaS will have to end up evolving in a similar way, with CSMs growing into account managers.
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