SaaS: The Nuances of a Mid-market Pivot

Introduction

Over several years of operating SaaS companies and consulting over 150 SaaS companies, I have had a few hard lessons when focusing on markets. There are always hard choices as a CEO of a start-up and one must sometimes make one hard choice i.e., optimize the company for short-term cash flow, or long-term valuation that will fix the cash flow. Enterprise sales cycles are long and have several nuances, it becomes tempting to accelerate sales velocity by pivoting to mid-market companies, but these come at a price often unaffordable.

Pivoting from enterprise to mid-market for SaaS companies may seem like a strategic move on the surface. Yet, the road isn't as straightforward as one might think. Here’s a deeper dive into the intricacies of these pivots which could misfire.

Market Differences

Grasp the core differences and distinct traits in the two markets i.e., enterprise and mid-market. Enterprises have long and extended sales processes with a multi-stakeholder decision-making environment. They demand tailor-made solutions, and integrations into existing systems, and emphasize regulatory and security compliance while expecting top-tier customer support.

The mid-market has comparatively quicker decision-making and sales velocity, they favor standard, streamlined, yet functional products and one must fuse quality with affordability.

A product that fits enterprises and gives them 10X value for invested dollars does not guarantee value preservation in the mid-market, it could drop to fractions of the value to enterprises given scale differences challenging the ability to charge premium pricing. Mid-market desires enterprise-grade solutions but at price points closer to consumer products given how they treat their dollars.

Consider an advanced SaaS product for global corporations. Where a global entity will invest in expansive features and bespoke integrations, a mid-tier firm will seek a more straightforward solution that doesn’t break the bank. Trying to pivot to mid-market will overwhelm the capitalization of the start-up as margins may not fund the CAC creating a downward spiral of additional capital needs diluting the cap table.

Adapting to Varied Market Approaches, Cost Structures, and Investment Priorities

A market pivot from enterprise SaaS to mid-market will require changing sales strategies, rethinking pricing models, fixing capitalization, etc. Juggling two go-to-market motions will stretch the startup thin, risking inefficiencies in the short term, pricing pressure, and eventual dilution. If the product is the right fit for enterprises, then risking long-term valuation or dilution may not be worth the trade-off against short-term cash flow.

Although this is a hard choice and even research confirms that mid-market firms show faster logo growth compared to enterprises, the ASP (average selling price) is under constant pressure and ongoing challenges with cutting corners on the product to maintain margins in the longer term.

Longer Time to Product-Market Fit

Treading across two markets also means a longer journey toward achieving that golden product-market harmony. Serving multiple markets to optimize velocity and cash flow constantly changes the pristine value of the product to a specific market segment leading to iterative product changes and costs. When sales velocity cannibalizes the product value chasing cash flow, the product-market harmony is in constant flux elongating time towards PMF.

Speeding up sales might prompt some to slash prices. While it may seem like a short-term win, it can dilute the product’s perceived worth, also taking a toll on the product’s market positioning and brand promise. I have seen that executives and founders coming from a professional services background are typically more susceptible to compromising the PMF for cash flow. They seldom realize that every logo is different and that every dollar while green does not create PMF or the same value.

Deciphering the Mid-Market Enigma

It is not always the case that a product is not suitable for both market segments and can preserve its value, but it is rare and fraught with material financial and execution risk.

There are grave consequences trying to sell a Lamborghini to the mid-market customer when all they want is a car to go from point A to point B

Experience has taught me that some pivots only make sense at scale, executing a pivot for cash flow almost always ends up in lower valuation and dilution. It is also easier to orchestrate a pivot from mid-market to enterprise, but not the other way around.

An enterprise-grade SaaS product may be a game-changer for enterprises or conglomerates. But mid-market businesses, while valuing its prowess, might be prepared only to invest in its basic version if the price is right. A misfired pivot can quickly turn a premium product into a commodity if the value does not resonate with the mid-market.

Concluding Tips

Several examples of companies have tried pivoting for quick cash flows and diluted the investors and founders being eventually sold at sub-optimal valuations. Here is a quick summary of some tips:

• If you have a certain level of capitalization, you must be at a certain price point to make sure margins can fund the CAC.
• Sales velocity risks lowering product value and destabilizing product market fit.
• Optimizing cash flow versus optimizing for valuation are two different things, cut cost and trim operations if you must – but stay disciplined.
• It is easier to pivot from mid-market to enterprise than come down the other way, they require distinctly different approaches to the product.
• Pricing always determines what you can and cannot do in the company, changing the price will pressure your capitalization.
• Logo growth is important, but only in the right market and at the right price point.
• High variability in the pricing across segments also stresses the product value and elongates the path to product-market fit.

Success lies in understanding the unique attributes of each segment, staying agile, and maintaining the price of the product's value proposition. Start-ups must pivot for the right reasons e.g., product-market fit, higher value delivered at optimal price to the right customer segments. Pivoting for cash flow is riskier than staying on course to maintain value.

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