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B2B apps: product doesn’t win, distribution does?

There are more and more great B2B SaaS apps being developed every day. From CRM systems, to point of sale, to inventory, the list goes on and on. Many of these B2B apps are vying for the same customer – small business. And the small business segment is arguably the largest untapped market on the planet when it comes to cloud software. That’s why we are seeing an increasing number of apps and an increasing investor sentiment. So why is it so hard for these apps to achieve real scale?

Xero apps

I recently caught up with Bjoern Herrmann, the Founder & CEO of Compass. His company aggregates and tracks startup and small business data from a number of sources online sources. He calls it “Moneyball for the business world”. The service provides benchmark data on key metrics like new customer adds per month, average revenue per user, and customer life cycle data. All these things are important to any company, but Bjoern has found a niche in an underserved startup market. We like it. If his company can help startups uncover issues or capitalize on opportunities earlier, then these startups have a better chance of winning. Compass’ goal is to accelerate the global pace of innovation and reduce the failure rate of businesses. We at Xero, as many of our customers know, feel the same way about helping small businesses by providing clear insight into their finances to make sound business decisions.

Below are some recent stats that Bjoern shared at the 2014 Small Business Web Summit in February.

  • SaaS is less than 6% of overall software market

  • Almost half of SaaS businesses choose growth over profitability

  • Less than 7% SaaS companies achieve 10,000 customers

  • Distribution is the #1 challenge for these companies

    • 23% rely on direct sales

    • 13% use partnerships

    • 9% use viral tactics

    • 8% use other lead gen activities

    • 7% rely on customer word-of-mouth

Why aren’t we seeing more of these apps break the 10,000 customer mark? The research conducted by Compass uncovers several possible reasons, but the one that stands out is access to a distribution channel.

Many small business B2B apps are up against a large incumbent. David vs Goliath stories tend to exist across all verticals, and the data shows that some incumbents are hard to disrupt because of the ecosystem they have built over decades. Legacy channel partners, consultants, trainers, resellers, and system integrators work against the shift to a new cloud operating model, as the change in model also impacts their businesses. Leveraging these existing channels is challenging so it is up to many B2B apps to develop new channels to market in to. As the data suggests, most of these companies are using inside sales teams to sell directly to small businesses. This is not for everyone as it can be costly. Some are using partnerships which can prove to be effective in a cloud world of open APIs. Others have found a way to use viral methods, but we haven’t seen the rapid adoption like we see in the consumer space. Small businesses don’t sign up for business apps on a whim.

The bottom line is that Compass’ research shows that startups that can capitalize on the best distribution will likely be the winners.

 

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6 comments

Heather Smith
28 March 2014 #

As a writer – this mirrors my profession – I can write the most amazing book – but without Distribution channels of professional publishers who get the book into book stores, iTunes, eBooks, Amazon – I can’t get eyeballs on the book.

There are always exceptions to the rules – but simply getting people to have the ability to purchase your product – is an uphill battle.

In the digital world I know businesses that gave up on $50K investment after the Apple store changed their terms *again*.

So its not just a crate of books on a slow boat to London…

Jamie Sutherland
29 March 2014 #

@heather yes, it is a powerful thing and you are absolutely right about Apple & Amazon. Premium placement and top rankings through these channels is a surefire way to gain eyeballs…but it’s not easy to do. I do think social platforms are helping small firms get the word out about their products and services. We have seen many small businesses gain traction as a result of awareness created through social. channels. Here’s a good article on the topic: http://www.huffingtonpost.com/2013/10/23/social-media-marketing-small-business-amex-open_n_3941926.html

Josh
29 March 2014 #

Really interesting article. The facts and figures echo what we see in the market. As cloud implementers, integrators and consultants I guess you could consider our business as part of the distribution model, but I wouldn’t say we are winning just yet! We seem to share the same issues discussed in this article, perhaps because we are so closely aligned to the SaaS products we support.

Part of the problem is still with the end user, and it comes down to change. The resistance to change is the single biggest issue for us, and I am sure it’s big part of why many apps fail to break through 10,000 users. Xero aside, using the accounting channel has largely eliminated barriers to change, but the other industry specific applications (CRM, Inventory, Point of Sale etc) just haven’t found the same success in a channel to market.

However, to be fair to the end user, many of which have had bad experiences as early adopters, there still needs to be more education in the market as to what is SaaS, and I think some of the applications need to be a little more forthright with themselves and the market. The old adage of ‘over promising and under delivering’ is rife. At the price these products hit the market, the reverse approach would set a much better expectation to the end user.

Paul Volpe
29 March 2014 #

“We at Xero, as many of our customers know, feel the same way about helping small businesses by providing clear insight into their finances to make sound business decisions.”

This is the most exciting thing about the xero platform – providing our clients and us accountants with a platform to help small business in a way never before possible.

The biggest challenge for new app’s is small business owners time and lack therefore, including their advisors – there are so many apps and so little time to filter the average from the worthwhile.

Steve Peterson
31 March 2014 #

Very interesting discussion on SaaS distribution. There are only a few ways to reach out to the potential end-user and unless you are blessed with a large advertising budget, SaaS companies have to rely on a combination of the channels discussed. As a SaaS company, we receive most of our leads from marketplace partnerships with integrated companies such as Salesforce and accounting applications. The end user is already invested in the solution such as Xero and looking to add features which is an easier sale. Being integrated with other software partners also builds trust that the products will effectively communicate with one another and reduce dependence on manual processes.

Selling through partners such as coaches has been tricky as reselling software is not their primary business. Coaches can become excellent referral partners and for the few that totally adopt the accounting application such as Xero, can build a practice around the app.

Lead nurturing tools such as Act-On.com have been an active component of our messaging to drive traffic to our reps and stay top of mind with our prospects.That helps with viral and other lead gen activities.

All of our goals are to identify better ways to serve the Fortune 5,000,000.

Jamie Sutherland
31 March 2014 #

@Josh – You are right about change. Resistance to change is a big part of the transition and is something Xero works to overcome every day. As you say, one of the best ways to do this is through education. Providing real life examples of how our users, both customers and accountants, are saving time and money by shifting to online technologies is something we do a lot of. I’d be interested to hear why you think many of the end-users have had bad experiences and why. Is it with integrations? customer service? or simply the product or service didn’t do what it was supposed to do?

@Paul – There is never enough time in the day, but with many of these apps you get time back. At the end of the day we are all trying to improve productivity for small businesses. But you’re right. Before you get to the point where an app is saving you time, you need to choose it first. What we are seeing is an increasing number of our accounting and integration partners who have tested a number of apps and can help recommend the right app depending on the needs of the small business. More work needs to be done though to help a small business find and decide on the right solution for them.

@Steve – Interesting point about how being integrated to multiple software partners builds trust. The integration first and foremost should improve productivity or save time with a business process. But placement in these marketplaces also helps to build brand and awareness. Driving awareness is something that is very challenging for app providers as the small business market is so fragmented.

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