The Two Types of SaaS Value Propositions
The Two Types of SaaS Value Propositions
In the context of B2B SaaS, Tomasz Tunguz writes:
There are three kinds of software value propositions. Software that increases revenue, software that reduces cost, and software that promises improved productivity.
The way I see it, there are only two kinds of value propositions in B2B SaaS. Software that improves business performance (increases revenue or reduces cost), and software that solves a pain.
This distinction boils down to the two things that make B2B SaaS so appealing: high margins, and predictable revenue.
Selling performance
Improving business performance seems like an excellent value proposition, especially when the improvement can be easily demonstrated and quantified. Furthermore, price discovery is straightforward: you simply capture a portion of the value you create.
However, in practice-
- You are not selling to the business, but to some person who works in the business. Often, no one in the organization is evaluated (read: promoted or fired) based on the value you add. Alternatively, someone is, but implementing your solution requires additional stakeholders with little incentive to act.
- Many vendors claim to improve performance, but few actually do. After a while, decision makers grow tired of spending time and effort on verifying each claim. No matter how good your solution is, it’s hard to rise above the noise.
- Every dollar you take directly reduces the value of what you sell. As a result, value capture becomes a race to the bottom and high margins are unsustainable.
- The desire to increase performance is insatiable when it does exist. You will be constantly at risk from the competition, since they often only need to be just a little better, especially when switching costs are low. This results in unpredictable revenue.
AdTech and eCommerce app markets are brimming with companies offering pure performance. Few if any dominate their space.
Solving a pain
Customers experience pain when they have a problem, know about it, actively search for a solution, and are prepared to pay to solve it.
When someone in the organization experiences pain and has the authority to buy a solution and implement it, magic happens:
- When a customer’s top priority is to solve their pain, marginal costs are rarely a concern. This makes high margins possible.
- Having solved the pain, the incentive to try a different solution becomes low, if not negative. Unless a new unanswered pain surfaces, the competition must often be 10X better to even be considered. This results in low churn and predictable revenue.
Each of the best SaaS companies in the world — Salesforce, ServiceNow, Workday, Shopify, Wix, Monday, etc. — solves a particular pain. Any claims to improve business performance are derivative, not essential to their value proposition.
Sell painkillers, not vitamins.
This common startup idiom was derived from Kevin Fong’s famous quote:
We divide business plans into three categories: candy, vitamins, and painkillers. We throw away the candy. We look at vitamins. We really like painkillers. We especially like addictive painkillers!
In almost all cases, I see business performance improvement as a vitamin.