How does your product’s value scale with your clients?
Most SaaS companies have to decide whether they want to sell to Enterprise, Mid-market or SMB companies. In this post I’ll share a simple value-based framework for figuring out which buyers will maximize your addressable market.
First, a huge shoutout to Tomasz Tunguz for doing great work showing that the total revenue across SMB, Mid-market, and Enterprise-focused SaaS companies is roughly equivalent and the total number of employees at each of these companies is also in the same ballpark.
You can maximize your addressable market by determining how your product’s value scales with your client’s company size. There are 3 types of products:
- Marginal value to the user increases as company size increases
- Marginal value to the user stays constant as company size increases
- Marginal value to the user decreases as company size increases
1. Marginal value to the user increases as company size increases
These are often products whose value involves logistics and coordination. The same reasoning that underlies Metcalfe’s law causes complexity to grow exponentially as companies grow. A great example of this is Mulesoft who’s initial ACV is over 6 figures. Their product helps integrate tools across an organization. Each additional tool has to integrate with more tools than the one before it did, so the marginal value of Mulesoft increases as an organization has more tools.
2. Marginal value to the user stays constant as company size increases
These are often products whose value involves decreasing costs, or increasing efficiency of different tasks within a company. The marginal value is constant. For example, products that help their clients recruit employees, such as LinkedIn. These companies provide consistent value with each new employee they help recruit.
3. Marginal value to the user decreases as company size increases
These are often companies that are turning a fixed cost into a variable cost. One example is RingCentral, who’s main value is setting up phone systems for SMBs. Another example is WeWork, they made it so SMBs and freelancers no longer have to pay high fixed costs for office space.
Total market vs GTM
When determining which clients to target for your go to market you want to play to the strengths of your team. If you all come from an enterprise sales background you might be fighting your DNA to target SMBs. You also want to see if there are gaps in the market. If a huge player is dominating the Enterprise side of the market there might be an opening for someone to serve Mid-market or SMB companies. However, that might not have the largest total market size.
Companies might start with SMB or Mid-market companies because they are easier to penetrate or there is a gap in the market, but then move upmarket if the total market size is larger with enterprise companies. For example, I would put internal communication software (Slack, Microsoft Teams) under category one — therefore I think they provide the most value to enterprise companies. For every addition employee there are more colleagues they can connect with (standard network effects). However Slack started by signing on small companies at low ACVs. Now they are moving upmarket and over 40% of its revenue is from Enterprise contracts.
Conclusion
When determining GTM, play to your strengths and respond to the market. But when determining where to aim as your company grows — think about how your value scales with your customers.
