Why Is SMB SaaS The New Darling Of Investors?

Written by Borya Shakhnovichand first published on Forbes

As the tech landscape and market have evolved with dizzying speed over the last decade, we have seen the emergence of a pair of unlikely bedfellows: SaaS companies and SMBs.

Seemingly overnight, there has been an explosion of SaaS companies servicing the SMB market — and to much success. Just over a month ago, Freshworks, a purely SMB SaaS company, went public and currently touts a market cap of?over $8 billion , while Asana, another such company that went public last year and has only recently begun to venture upmarket, has a market cap of?over $17 billion . The massive success of SMB SaaS companies is undeniable, even if still nascent, and is simultaneously disarming the SaaS world.

Not even a decade ago, the SMB market was one that tech companies — and the VCs funding them — historically turned a cold shoulder to. Their argument was always the same: SMBs are too diverse, their problems too varied, the ROI too low and the churn too high.

What, then, unlocked this market for SaaS companies? Product-led growth.

This go-to-market strategy puts the onus on the product to drive growth and places the power in the hands of the end user. With the consumerization and democratization of tech, and the subsequent acceleration of tech literacy, individual users have become an entry point into B2B markets like never before. They increasingly are the ones going out in search of software solutions, no longer waiting for business executives or CIOs to be courted into expensive contracts. Moreover, these users don’t want to be sold on the idea of a product’s value; they want the product to prove its own value — and quickly.

Market cap for product-led growth-oriented companies reached $687 billion in 2020, a staggering increase from their $1 billion market cap in 2012, according to?Bessemer’s 2021 report . And in the last three years alone, we’ve seen the number of publicly traded product-led growth companies?jump ?from 13 to 30, with the likes of Monday.com, SimilarWeb and ZoomInfo Technologies among the recent wave of IPOs.

The pioneers of this model have also seen the significant fruits of their labor: In 2021, Slack was?acquired ?by Salesforce for $27.7 billion and HubSpot and Atlassian’s stock prices have increased by?103% ?and?58% , respectively.??

It’s clear that product-led growth is more than just hype; it’s a strategy proving how well suited it is to meet the current moment, dominated by the end user.

So why does product-led growth work particularly well for the SMB market? Let’s break it down.

Gaining Access And Assessing Value?

Foremost, SMBs are made up of people that have real problems to solve but are underserved by traditional channels. The product-led growth model gives SaaS companies a way to provide SMBs with a great customer experience and to meet them where they’re at.

The product-led growth model is all about putting the product directly into the hands of the end user and removing any friction along the way — that means products are easy to find online and users don’t have to jump through hula hoops, paywalls or salespeople to get to them. SMB end users, completely unaided, can access the product (or part of the product) through self-service free trials or freemium models to assess whether the product suits their needs before ever having to pay.

Keeping Price Points Low?

SMBs, typically strapped for resources, are looking for affordable solutions and product-led growth companies offer them just that. These SMB SaaS companies are more successful the wider their customer base is, and their strategy for achieving this relies on setting their prices low. (The more a product-led growth company succeeds and scales, the more comfortable it will be keeping prices low, too.) This gives SMBs access to software that provides a needed solution but doesn’t break the bank.?

These companies also tend to be transparent about their pricing and offer subscription models that give users a range of options and price points.?

High Churn, No Problem

For SMB SaaS companies successfully employing a product-led growth strategy, predictability is key.

This model has given companies an efficient way to reach the broad and diverse SMB market, which investors traditionally steered clear of for fear of high churn (e.g., customers changing their minds or going out of business). Now, investors see SMBs as a large total addressable market that is mostly unpenetrated by SaaS companies.

In many ways, it all comes down to numbers. Say a company is getting 15 million visitors to its website each month; 5% of visitors start a free trial, and of those, 1% become paid customers. The company can use this pattern, which becomes increasingly accurate over time in predicting new monthly customers, to project future earnings. Ultimately, when you are working at such a scale, your ability to secure new customers each month becomes surer, offsetting the impact of churn.

Flexibility Wins

While SMBs are looking for products to fit their specific needs, many SMB SaaS companies are creating flexible solutions to tackle the operational and technical needs of a wide, diverse market of end users.

These software products are fundamentally horizontal and are designed to match the SMBs’ varied workflows, processes and conditions, not the other way around.

Propelled By Feedback???

More than any other market in the B2B landscape, SMBs are made up of the type of end users for whom product-led growth companies are designing their products. This means SMB SaaS companies have a front-row seat to target users’ behaviors, needs and feedback — and at a significant scale. The feedback loop becomes tremendously useful for accelerating learning, iteration and experimentation, especially when it comes to the product.

Product-led growth is not a perfect model, nor is it the be-all-end-all GTM strategy for every market or every product. But it has undeniably broken down the barriers between SaaS companies and SMBs in a way no other strategy has before — and we’re seeing, quite clearly, that both are better for it.

Source: https://www.forbes.com/sites/forbestechcouncil/2022/01/04/why-is-smb-saas-the-new-darling-of-investors/?sh=17b8e21a373f