If you want to create your own SaaS business then there are a few things that you need to think about. After all, starting a business requires a great deal of time, skill and patience. You need all three if you want to be really successful.
Hail the Whale
If you look at the chart, you will soon see that five years ago, it would make sense to use an elephant as the biggest animal on the chart. The main reason for this is because if you grow consumer software, you may be tempting to use SMB SaaS. Referring to the chart, you will see that there are two bigger animals on the follow up post. The whale is now one of the most deserving animals on there and although there are only a few companies that have an ARPA of $500,000, there are a few companies who have a whale presence.
Most public SaaS companies don’t really report data that has been broken down by different customer segments, but it’s safe to assume that Zuora, Salesforce and other companies actually do get a lot of their revenue from customers who are seen as whales.
Y is Now X
This is a smaller but a somewhat technical change. The original chart shows a number of customers who are on the X axis and the APRA on the Y axis. It is much more customary to use the X axis as the dependent value. It’s been switched around when compared to the previous post and it has also been updated here too. Some animals are much more equal when compared to others. One thing that has been learnt over time is that there are five ways for you to build a business, but that doesn’t mean that every single one of them are as promising as the other.
The key takeaway when you look at the animal framework is somewhat simple. If you want to get $100 million in annual revenue then you need to use customer acquisition channels that are highly scalable. If you don’t then you will never get the number of customers you need at the APRA. The issue then is that customer acquisition channels are either scalable, or profitable, but not many are both at the same time. It seems like the ARPA regions are easier to scale when compared to others.
A lot of people have hit a growth ceiling in the segment that they are in right now. One of the underlying reasons for this is that if they want to get large then they need to keep their overall churn rate close to zero. This does not tend to be an issue but if you are selling to other small or medium businesses then there is a high chance that your outbound marketing is not working. Your ARPA probably won’t be large enough and this can limit your addressable market to companies that are more or even less looking for a solution that is similar to yours.
Most SaaS companies do not have a ACV of $50k or more. The vast majority of the 61 publicly traded companies that are out there tend to be elephant hunters. Only 15 have an ACV less than around $5k at the time and when you look at the IPO, you will see why. A recent analysis of all the private SaaS companies out there has also suggested this.
Out of 369 companies, 50% focused on rabbits, or animals smaller than that. Only 30% focused on the medium sector and 6% focused on low ACV. If you choose to be a rabbit hunting company then you shouldn’t be discouraged by this. The numbers that are taken from private companies need to be taken with a good pinch of salt, and even if there is a cluster in the mid-market, you can still get there with a low ARPA.