There are many factors that go into which company size is an ideal target for SaaS companies. As the data suggests, there are different trade-offs when it comes to looking at potential retention rates, CAC (customer acquisition cost), and willingness to pay across the different market segments of SMB, Mid-Market, and Enterprise sized companies.
On this episode of the ProfitWell Report, Matt Smith, Founder of Later, asks Patrick a tough one: Which size company would he target as customers if he were to start a new company? To answer his question, let’s look at the data and unit economics from just over 5,000 companies and the willingness to pay for 1.2M subscription consumers.
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Higher ARPU Companies Have a Retention Advantage
There are a lot of vectors to consider here, but let’s assume we’re taking the baseline of building a business - acquiring a customer, keeping them around, and monetizing them accordingly.
On the revenue retention front, larger ARPU (average revenue per user) companies have an advantage.
As a company’s ARPU increases - correlating with becoming more Enterprise - gross revenue retention reduces dramatically. Sub $100 products see revenue churn at 7 to 9% which balloons in comparison to the median of nearly 3% gross revenue churn for those getting into five thousand dollar plus ARPU.
CAC is rising across the board, but especially for SMB
Beyond retention, acquisition is a really big factor here, so we need to consider CAC, and here’s where things get really interesting.
CAC has increased substantially with both B2B and B2C seeing 55 to 65% higher than five years ago overall.
Yet, the story unfolds very differently when you look at our three sized categories.
On a relative basis, SMB CAC has grown at a far quicker and higher rate than CAC in the mid-market and enterprise.
While maybe not immediately intuitive, the big reason this has happened really centers around the fact that mid-market and enterprise CAC has always been high and there’s been gains in some efficiency with these types of sales processes over the years.
SMB and Mid-Market WTP has increased
Our third vector though around willingness to pay is where things get tricky. Interestingly enough, SMB and mid-market willingness to pay has actually increased in the aggregate while enterprise willingness to pay has decreased over time.
Compared to five years ago, the median willingness to pay for an SMB buyer has actually increased by 35 to 50%. Mid-market shows a similar path with an increase of 20 to 30%, but Enterprise has actually decreased by just over 10%. (graph 4)
Keep in mind that we’re blending B2B and B2C here and happy to go deeper there if you send us a question to, but the trend stands to reason considering the technical and information asymmetry moats we once enjoyed in the enterprise don’t exist as much as they used to.
So what should we do? Well, controlling for market size, which is expanding on all fronts, I believe the answer still comes down to the DNA of you and your company. No particular trend indicated there was a gold rush of opportunity and similarly no trend indicated you should be running for the hills. Instead, the trends indicated in context of one another it’s getting harder for everyone out there, so now more than ever you need to specialize and utilize your frameworks and data to grow as effectively as possible.
Well, that's all for now. If you have a question, ship me an email or video to firstname.lastname@example.org and let's also thank Matt from Later for sparking this research by clicking the here to give him a shoutout on Twitter. We’ll see you next week.
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