B2B SaaS is more about Product Market Fit than we admit

B2B SaaS is more about Product Market Fit than we admit

I think Product Market Fit is poorly understood in B2B SaaS. I believe this is a big reason many companies struggle; I wrote about that here.  There are three ideas I keep coming back to when I think about B2B SaaS and PMF. The three are interrelated in a bunch of ways forming a delicate tension between tactical and strategic focus. I find it fascinating.

1 - In B2B SaaS, the quality of ARR is more important than the amount of ARR. 

Growing top-line ARR at all costs is old thinking.  Sometimes the deals that are the easiest to get also churn just as easily.  That is low quality ARR. Sometimes the deals you fight the hardest to keep are not worth it; also low quality ARR.  High quality ARR can be detected by tracking the progress of two key metrics: Sales efficiency and average lifetime value of a customer. Sales efficiency should be consistently improvement over time. This means it is becoming progressively easier and less expensive to acquire, close and upsell customers. Similarly, the lifetime value of the customer (the total revenue you expect to earn from the average customer over time) should either be steady or improving, certainly not going down.  If you are in this groove, your ARR is valuable. The future cash flows are real and can scale and your company can argue that it is indeed worth a good multiple on that ARR. Also, if you are in this groove, it is because you are in a state of good Product Market Fit. 

2 -  High quality ARR is more about PMF than it is about competitive advantage. 

In a lot of cases, it’s not about who has the best technology, the broadest feature set or the most complete end-to-end platform.  You may have invested to provide a vastly more sophisticated product than another company pursuing the same problem, but if they have a better PMF, they will ultimately beat you.  Competitive advantage and technological advantage only matter if it results in your customer’s adoption of your product in a sticky way.  A lot of companies that had a first mover advantage in an up-and-coming space eventually lost out to second and third generation players who released sharper more refined products focused on specific issues first. Perhaps those newer companies solved part of the problem better and demanded less behavioural change from the users, perhaps they focused on integrations over features, perhaps they attached themselves to the needs of different economic buyers. I would argue those later players benefitted from better PMF while the early ones unfortunately got bogged down and spread thin chasing ARR and defending against competitors.

3 - PMF is a state not a stage.

The problem is this: we are told PMF is a stage you achieve; a hurdle you and you team cleared because the ideas were good and you listened to your early adopters. And once that stage is achieved, it’s just a question of funding the growth till you exit. I hear numerous famous CEOs say things like “and then in February of 2012 we achieved PMF and closed our A-round and then we focused on growth till we were a 500M company... “  If this story was ever true, it is likely outdated nowadays.  Once you have PMF,  you need to obsess over keeping it.  It is an operational state of your business, just like profitability; just because you had it for a while does not mean you will have it forever.  To maintain PMF you sometimes need to change your product, change your customer, change your position or change your target market.  Why?  Because the value-dynamics of B2B SaaS are no longer all about moving on-prem solutions to the cloud; those days are over.  B2B SaaS is now about attaching yourself to important workflows or transactions.  This means you need to fit clearly somewhere in the organization. It also means you will be butting up against adjacent platforms, legacy and internally built systems. And those systems are not static. The folks that provide them are likely clawing at the edges of the hole in the market you are trying to fill. They might incorporate some of your features into their products for free, essentially commoditizing parts of your value proposition. Or they may influence a shift in the budgets, thinking and even the behaviours of your target buyers and users.  What was once a useful piece of automation or a highly praised insight delivered by your product, can become a less relevant driver for your customers.  This may seem unfair and illogical. You have the better mousetrap, the customers still need to solve their problems, yet they churn and use the budget to go in some other direction. Your product works great, but you just don’t fit quite right anymore - the square-peg in a square-hole is now a square peg trying to fit into …  a hexagon or something.  

The big question 

If you are detecting a decline in the quality of your ARR, the tendency is often to fight harder by adding more features or integrations or even making an acquisition or two. Perhaps some these things are what you believe your customers demand, so I respect spirit of this kind of reaction. But in my view, it doesn’t work on its own and often gets in the way of the big question:  

How can we get better PMF and how do we get there from here in the most direct way?

Depending on the industry you serve or the space you exist in, this shifting PMF problem may be a perennial issue: rearing its head every two to three years. If you are lucky or smart enough to avoid those spaces you may get five or even ten years before your product slips out of PMF, becomes hard to position and kills the quality of your ARR.  In either case, it is a mistake to assume your product market fit (if you have it) is a permanent thing.  PMF is more correctly viewed as a state you maintain. PMF requires focused, on-going investment, product leadership and deep understanding of what problem you are really good at solving. PMF is a strategic thing not to be confused with chasing customer feature requests or fending off competition, which are important but essentially tactical.

Delicate Tension #85

Wassily Kandinski, 1923, Madrid, Thyssen-Bornemisza Museum

The influence of Russian constructivism of the revolutionary years and the laconic aesthetics of Bauhaus, in which Kandinsky was just beginning to teach at that time, laid the foundation for his further development in the abstract art.

 

PAIN

PAIN

The land where CEOs and their investors often fear to tread

The land where CEOs and their investors often fear to tread