Quote Info

Characteristic 1: Product Is Core to the Operation of the Business The product is essential to the operation of a customer’s business. For example, Zuora enables subscription billing; Expensify manages employee expenses; ZenDesk builds customer support systems. Customers can’t function without it.

Characteristic 2: Cost/Value Proposition is Straightforward The product is either cheaper than the alternative: hiring an engineering team to build and maintain a custom implementation of the product;

Or provides network effect benefits otherwise impossible to find: LinkedIn’s network effects drive the adoption of LinkedIn’s applicant tracking system;

Or offers sophisticated technology that is difficult to replicate: Infer builds machine learning models on top of sales data to improve company performance. Not every company has ML expertise.

Characteristic 3: Finances Its Own Growth
The company benefits from negative working capital and shorter time-to-market.

Negative working capital means customers pay at the beginning of a month or quarter or year to use the product. These customers pay to improve the software over time by providing cash up front, reducing the cash needs of the business. Because customers are paying to improve the product, rather than buying a “production-ready” enterprise product, the company can go to market much earlier in their development.

At the outset, the company targets the less sophisticated SMB segment which doesn’t demand the compliance, heavy security and integration features needed by enterprise customers. This also decreasing time to market and provides revenues and product feedback in the short term.

Characteristic 4: Efficient Sales Model
The company is able to recoup its cost of customer acquisition, be it online marketing or inside/outside sales, in less than a year. Ideally, the company offers 12 month contracts and the company can be profitable on a customer before the customer has an option to churn. Hand-in-hand with this idea is strong customer retention.

Characteristic 5: Market Leadership The company is already a market leader, is on the path to becoming the market leader, or is operating in a segment with little viable competition. In SaaS, sales and marketing execution are critical to the success of the business. Competition increases customer acquisition costs and increases sales complexity.


Tomasz Tonguz

More Growth Strategy Stats

The average SaaS business generates 16% of its new Annual Contract Value (ACV) from upselling to existing customers

Net-revenue churn improves with larger Average Contract Value (ACV), likely due to more structural churn among SMB customers and higher switching costs associated with larger contracts

In 2017, IBM generated 37.8 billion U.S. dollars in global IT services revenue, making it the largest IT services company in the world in terms of net sales

26% of SAAS companies with at least $15MM in GAAP revenue had a revenue growth rate + EBITDA margin of 40% or higher.

SaaS businesses face significant losses in the early years (and often an associated cash flow problem)

Smaller SAAS companies reported more frequent use of third-party providers as their primary application delivery method, while the largest companies were more likely to use self-managed servers

Increases in revenue growth rates drive twice as much market-capitalisation gain as margin improvements for companies with less than $4 billion in revenues

Best-in-class SaaS companies achieve 5-7% annual revenue churn – equivalent to a loss of $1 out of every $200 each month

Between the SMB and Enterprise customer types, the top-quartile performers not only have net-revenue churn that is 14% to 23% percentage less than the average performers but also have net-revenue churn that is negative in an absolute sense

SAAS companies that are focused mainly on enterprise sales have higher levels of professional services