For B2B SaaS companies, increasing Gross Revenue Retention ("GRR") is critical to improving unit economics. Unfortunately, the challenge of increasing GRR is much higher for SaaS companies targeting the SMB.
This is a structural factor intrinsic to SMB businesses irrespective of industry. Achieving a GRR much higher than 85% is very difficult for the SMB customer segment. This analysis from McKinsey & Company, while a little dated, provides supporting data: Grow fast or die slow: Focusing on customer success to drive growth | McKinsey
So, strategically, what is a SaaS company targeting the SMB to do? The challenge of achieving an LTV: CAC of 3.0 or better is a lot higher as opposed to that faced by SaaS companies targeting the Enterprise customer segment. The means to solving for this challenge rests on three dimensions:
Ensure that the average salesforce generated ACV > $10K: Attractive economics (i.e., an LTV: CAC ≥ 3.0) will rarely be achieved if the average transaction value or ACV (Average Contract Value) generated by the salesforce is < $10,000 (at least not in the US!). This implies that if the average net revenue yield is $50 per user (or seat) per year, then customer transactions with less than 200 paid users need to be avoided by the salesforce ($50 x < 200 = < $10,000 ACV). Otherwise, the LTV (based on a GRR of 80% to 85%) will usually not justify the upfront customer acquisition cost ("CAC"). One can argue that a low ACV could be made-up later through high upsell / cross sell success (resulting in an NRR of 100% or better) but this is a high-risk strategy that puts the company in a hole at the onset.
Rely on channel partners with broader offerings to the SMB: Transaction sizes with an average contract value ("ACV") of under $10K should be diverted to channel partners with broader offerings to the SMB. Such channel partners have the economies of scope to offer the company's offering as part of a broader portfolio offered to the SMB segment. That is, the same segment of customers that yields an Average Transaction Value or "ACV" of under $10,000 for a company with a narrow offering, will yield an ACV of greater than $10,000 for a channel partner with a broader offering. An example of such a partner is a Managed Services Provider ("MSP") targeting the SMB customer segment.
Deploy a Freemium Business Model: In a Freemium model, combined with highly targeted Search Engine Marketing ("SEM") and Search Engine Optimization ("SEO"), SMBs are drawn to adopt the base free offering. The base free offering in turn needs to have an in-product self-serve upsell & cross-sell model that can convert ≥ 7% of the free users to paying customers. A frictionless self-serve user experience is critical to minimize customer support and salesforce involvement, hence minimizing CAC and generating an LTV: CAC of > 5.0. The limitation here is on the complexity of the product offering relative to the sophistication of the target customer audience. A mostly unsophisticated target audience coupled with high product complexity will limit the reach of a self-service-based customer acquisition model.
Most SaaS companies are driven to pursue the Enterprise customer segment given the difficulty of profitably building a SMB focused business. As a result, in most categories, the SMB segment remains underpenetrated relative to the Enterprise segment. Attractive opportunities, however, abound for SaaS companies able to tailor their customer acquisition model for the SMB segment.
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