The Four Pillars of Disruptive Innovation in B2B SaaS

Disruptive innovators target the needs of underserved or overlooked customers, typically in low-end or niche markets. They differentiate by offering products that are cheaper, easier to use, and have lower costs of ownership. Then, they continue improving and taking over market share from incumbent players.

Clayton Christiansen called this pattern “Innovator’s Dilemma” because incumbents struggle to invest in new technologies or business models that can disrupt their existing market and impact their top line and margins. Recently, Adobe acquired Figma for $20Bn to defend its Creative Cloud business. Figma is a great collaborative tool. However, it also disrupted the pricing model going to market with product-led growth and pricing plans that start a free offering. Priced at $55 a month, Creative Cloud could not move down the market to respond without erasing a significant part of its revenue and margins.

New entrants pursue the same strategy in Marketing Automation, CRM, Customer Support, and multiple other SaaS Categories. They are cheaper. They use product-led growth to drive time-to-value for customers while also bringing efficiency through lower customer acquisition costs. They bring consumer-grade user experience to offer products that are easy to use and master.??

There is a fourth lever that is rarely used, rearranging the entire value proposition, including pricing, toward the outcomes customers hope for when they hire the product. In 2015, Vungle guaranteed their advertising customers a minimum revenue (LTV) from every cohort acquired through Vungle. Marketers were spending money to acquire customers but had little confidence whether they would see a positive return on that spend. This value proposition and pricing strategy change has significantly reduced advertisers’ risk. More importantly, it changed the optimization dimension for the Vungle product team. Previously, the focus was on maximizing the number of app installs, regardless of whether these customers retained well. The new model focused on the quality of installs, matching ads to customers who are most likely to become long-term customers for the advertiser. This innovation led to a period of explosive growth at Vungle.?

Most tools that we buy were conceived as tools. They are very “hammers” and “screwdrivers,” but it’s on us users to figure out how to best use them to build things of value to us. Their pricing reflects that. We pay for contacts in the database, regardless of whether they become customers over time. We pay for data consumed, not for insights from the data or value created as a result of these insights. When you look at most of the pricing models, they are usage-based. Switching to outcome-based pricing helps align the new entrants to their customers' needs and offers a fourth lever that can be used to disrupt the incumbents. Furthermore, most incumbents are structurally unprepared to answer to a value proposition and pricing that aligns with customer outcomes.?

Some examples:

Salesforce charges customers based on the number of users and the features they require. New entrants should focus their value propositions and pricing on increasing the efficiency and effectiveness of the sales team. A value proposition should be built around North Star Metrics, including the total value of closed deals and the average attainment rate per sales executive.?

Zendesk charges customers based on the number of agents they need and the level of support they require, such as phone support and 24/7 support. A new entrant can build a value proposition that focuses on improving overall cost efficiency and improvements in customer satisfaction. There is even the opportunity to move closer to the desired outcome by measuring the improvements in customer retention for those who interacted with support. This is a great opportunity to deploy AI to understand the main attributes of interactions around each problem type that help predict retention.

HubSpot charges customers based on the number of contacts in their database, the number of users, and the required features. A new entrant could focus on the value proposition that helps customers grow their number of marketing and sales-qualified leads. Again, AI can help determine what interaction is the best, when and where it needs to happen, and what the message's content should be to move each potential customer forward.

Incumbents pitch their outcomes in the case studies they send to prospects. However, no one is willing to put their money where their mouth is and align their pricing to the outcomes they promise their customers. Building an outcome-focused value proposition and pricing will provide product direction and align your organization with your customers in a way that disrupts incumbents and creates a moat. It will refocus the entire organization on outcomes, from content marketing focusing on playbooks that help customers get the most out of the platform to customer success, becoming real product experts specialized in unlocking customer value.