A lesson in SME SaaS With Pipedrive

    What makes the new wave of SME-focused SaaS companies tick?

    By Michael Cullen

    As pointed out by Jason Lemkin in an article from July 2014, “If you look at the SaaS companies that have IPO’d to date, you’ll see one common theme: almost all sell to Large Enterprises”. This statistic has remained relatively unchanged as SaaS founders and investors alike continue to favour products that solve big problems, for big businesses, at six figure per annum price points. Nonetheless, there are those that see significant opportunity in the lower end of the B2B SaaS market, often in categories where would be incumbents or major competitors have drifted upstream towards the enterprise in search of higher ACVs.

    In order to gain a better understanding of what makes the new wave of SME-focused SaaS companies tick, I caught up with Martin Henk, Co-Founder and Head of Product Management at sales CRM start-up, Pipedrive, and the VC who led the company’s $10 million Series A funding round in May 2015, Alex Ferrara of Bessemer Venture Partners (BVP).

    Background to Pipedrive

    Pipedrive was founded in Tallinn, Estonia in 2010 by two sales consultants who were teaching action-based selling but struggling to find a CRM tool to use and to recommend to their clients. They tried a number of tools but didn’t like any of them, and struggled to implement and achieve real, engaged user adoption of those that looked good on paper.

    So they teamed up with some talented developers, of which Henk was one, and started to build their own product. According to Henk, having developed a MVP and gotten sales to 10 customers a month, Pipedrive “sent a team member to Silicon Valley for two weeks who ended up staying for three months, getting Naval Ravikant from AngelList involved in to promoting the company, and eventually getting Pipedrive into AngelPad.” Coming out of this prestigious start-up accelerator program, sales had increased to 100 customers a month and the company had reached profitability.

    The company went on to raise seed rounds of $700,000 and $2.5 million respectively and dramatically increase the pace of its growth, investing further in the product along with its sales and marketing efforts, and establishing an office in Silicon Valley.

    Identifying a market opportunity

    The question you may be asking at this point is how did this team see an opportunity to build a successful business in the already crowded CRM SaaS category that is dominated by major players like Salesforce?

    According to Ferrara, “We (BVP) have always been excited about CRM. It’s a huge market. Salesforce is a $40-50 billion market cap company but it has been around for a long time and has moved up market to selling predominantly into large enterprises, so we have seen a gap develop at the lower end of the market.” Ferrara underscores the sheer size of the CRM market opportunity with a stat about Salesforce, pointing out that at $5.5 billion in annual revenue, the CRM giant’s churn rate of about 10 percent amounts to $550 million a year in annual opportunity for companies like Pipedrive.

    In essence, it would be possible to build a big, successful company on just a portion of Salesforce’s churn without ever having to compete directly with them for a new customer.

    Differentiating your offering

    The size of the market opportunity is clear, but what is it that gives Pipedrive the right to take a chunk of it? In such a large market, it is impossible to be “all things to all men” and it is crucial for a start-up to develop a clear focus and nail a niche, as Aaron Ross puts it. So what is it that differentiates Pipedrive?

    Henk is unequivocal in his answer, which in itself shows a clarity of strategic positioning – “There are hundreds of CRM tools out there but Pipedrive is the only one specifically made for action-based selling. So for small companies that sell something expensive that takes a long time to sell, and where there is a lot of human-to-human interaction going on and many steps involved to get it sold – Pipedrive is the best tool out there for that specific thing.”

    Pipedrive hangs its hat, therefore, on being the best product out there for a specific needs-based requirement for action-based selling in the SME market. It also differentiates in terms of its usability and end user adoption. As Henk puts it, “Our biggest competitor is still the spreadsheet. If there is too much data-entry and too many controls, users will stop using the tool and revert back to the spreadsheet.” For this reason, Pipedrive has focused on creating a highly-visual, simplistic sales pipeline tool that will help SME sales teams to be better at their job.

    Breaking SME SaaS

    Identify the opportunity, build a differentiated product that the market will value and adopt, and start to scale your business. Sounds easy, right…? Wrong. In his trademark analytical fashion, Tomasz Tunguz explains that SME SaaS companies sell to a highly fragmented market and need to reach 1,000 times more companies than their enterprise counterparts.

    The first thing for a SME SaaS founder to understand, then, is that their market is radically different to the enterprise SaaS market and, as a result, almost everything about their company will need to take this into account. It became apparent from speaking to Henk and Ferrara that, in this market, the unique characteristics of the SME customer must be at the core of each element of the business, from features and functionality to sales and marketing and everything in between.

    With that in mind, here are some useful lessons from the Pipedrive and BVP school of SME SaaS.

    1. Offer 80% of the functionality at 20% of the cost

    Product development differs greatly between SME and Enterprise. A good place to start is to identify the features that end users actually use in the enterprise equivalent of your product – offering 80% of that functionality at 20% of the cost is likely to be a compelling offer to the SME.

    Buyer bargaining power is also reduced by the fact that you have many small customers rather than a small number of large customers, so there are no commitments to particular customers to release specific features, no paid upgrade cycles, just a configurable, multi-tenant environment that’s the same for everyone.

    2. Adopt a marketing-driven, low CAC growth model

    Having previously invested in companies like Wix and Shopify, Ferrara asserts that “marketing-driven, low CAC models are really quite powerful if you can get them to work”. It may seem obvious but it’s important to note that at 20% of the price of an enterprise solution, it is very difficult to justify a field sales team to sell SME SaaS.

    As with any company, the relationship between CAC and ACV defines its profitability and greatly influences the viability of certain sales models (see David Skok). For this reason, a highly marketing-driven, low touch, low cost approach to new customer acquisition is crucial in the SME world. That said, as Henk illustrates f
    rom Pipedrive’s early experience, “Relying on organic growth alone is like
    sitting in the back seat of a speeding car- it’s a lot of fun but it’s very unpredictable. Investing in sales and marketing brings a higher CAC but it also comes with a steering wheel and a gas pedal.”

    The trick, therefore, is to find a balance which allows predictable revenue growth based on investment and other growth levers while keeping CAC to a minimum.

    3. Tailor your purchasing and set-up process for SME end users

    “The decision to buy Pipedrive is mostly made by end users”, said Henk when asked about the purchasing process. “They don’t have time to figure out really granular, complicated pricing. No hidden fees or tricky business makes the buying decision much easier.” This is typical of what Tomasz Tunguz calls the two-step value proposition of successful SME SaaS products. Pipedrive offiers value to the end user in its simplicity and ease of use, and to the sales manager with its visibility and control over pipeline. SME buying decisions are often bottom-up as opposed to top–down in the enterprise – your pricing model (Pipedrive’s is a flat €12/user/month) and purchasing process should facilitate this.

    The set-up process in SME SaaS should also facilitate end-user driven adoption. As Ferrara emphasises. “A lot of people adopt Pipedrive because you can get up and running very quickly and get value from it straight away.” A simple, low-friction purchasing and set-up process is key to acquiring SME users who may not have dedicated procurement or IT people to make the process easier.

    4. Offer best practice as well as software

    Speaking of not having dedicated people, it is highly likely that in an SME the person you are targeting with your specialist sales, marketing, accounting, or HR product is not a fully-dedicated specialist in that area.

    People in SMEs, particularly founders, wear many hats and people who may not be very experienced in sales end up running sales organisations. Henk believes that Pipedrive caters for this: “First time business owners who don’t consider themselves sales people really benefit because they not only get the right tool but they also get the best practice, and we nudge them towards doing the right things and taking the right actions.”

    5. Build a team with SME experience

    If you haven’t done SME SaaS before, and at scale, then you should consider hiring people who have. As Ferrara, who has taken up a position on the board at Pipedrive commented, “We wanted to bring in somebody who had scaled a business to $100 million plus in SME and we found Steve Oriola who had done that at Constant Contact as a senior executive there, so we hired him in as the CEO.” SME is a different animal and all the experience in the world in consumer or enterprise will not fully prepare you for it – adding senior people to your team who have done it before is a must.

    6. Maintain your SME focus

    Given the significant differences between the SME and Enterprise SaaS business models, an attempt to move up market should not be taken lightly as it will require fundamental changes in every part of your business. Similarly, any attempt to straddle both markets at the start-up stage of a business, is likely to detract from focus and ultimately end in failure. As Henk summarises Pipedrive’s objectives, “We’re not desperately trying to go up market and go after bigger and bigger companies each quarter. We’re much more interested in serving the SME market all over the world and being a truly global, SME-focused company. Ubiquity of use is more important to us than having a small number of huge customers. Pipedrive is very specifically meant for small business and we want to grow big with many, many small businesses.

    • Martin Henk and Alex Ferrara will be speaking at SaaStock 2016, Europe’s premier B2B SaaS conference, on September 22 in Dublin.