Can a software app vendor survive without hyper growth is the question that many entrepreneurs and investors need to evaluate? Our software business model has changed especially in consumer space towards an app model and the same trend is happening in the enterprise space. We can see more enterprise apps coming out in different areas such as productivity space and there is an expectation from end user organizations and end users how these apps should be deployed and what kind of pricing model they should have. Just visit any of the enterprise app stores and you will see that this is really happening. I am excluding gaming apps from this discussion as that is a completely different business model and relies on different drivers than the enterprise app space.
The rise of platform vendors
We also need to keep in mind that there will be platform vendors that will become the center of the ecosystem and these platform vendors are now racing to acquire as many developers to build solutions on top of their platform. These platforms will become the foundation for third-party apps that use the platform services that end users are eventually paying for and the third-party app developer acts as the intermediator and collects the margin of the use. Pricing of these services can be based on multiple different factors ranging from transaction-based pricing to fixed pricing or a combination of different pricing mechanisms. The platform vendor benefits of the third-party vendor ecosystem as the platform becomes “sticky” for the developer ecosystem which is exactly what platform vendors want to happen. I have also discussed with quite a few large and mature software vendors whether they should build a platform for third-party apps especially when moving to a SaaS and subscription-based model.
Surprise in changed financial model
A key finding in many of the discussions I have had is the surprise that many software vendors run into is the radical change in the business and financial model and the impact it has on the entire organization. Selling a $5/user subscription instead of a $250/user perpetual license model is what is causing issues with many software vendors and the issue is typically the scalability that most small software vendors just don’t have.
How to ensure adequate lead funnel?
How do we ensure that our marketing engine drives enough leads to our funnel so we can convert as many of these as we can so that the software vendor can stay afloat? There is a tremendous transformation in the marketing functions within organizations and many of them are struggling how to support the sales organization with enough leads. Marketing is not the only thing that needs to change with new app models, everything in the organization needs to be adjusted based on how the customer will be on-boarded and how much support the customer needs in deploying the solution.
Level of complexity of the solution needs to be defined
Another observation that I have made during my tens of workshops is the lack of discussion of market segment and level of complexity that the solution represents. Some solutions are highly complex and requires lots of support and hand holding from the software vendor while some solutions can be deployed and provisioned without any intervention from the software vendor.
A good example of these kinds of apps are any value-added apps that are sold on top of Dynamics CRM platform. I use apps from a US-based company PowerObjects and these solutions bring some needed functionality into my business workflows and use cases. I do not have to call anybody when testing out a new solution and PowerObjects even give a 30-day test period without me having to give credit card info. These apps are part of enterprise solution (Microsoft Dynamics CRM platform) and the pricing is from $1/user to $2/user for the apps that they have built. Can PowerObjects have sales reps selling these? Of course not, the Customer Acquisition Cost (CAC) would just be too high for them to even achieve break-even with any of the apps. PowerObjects have had to rely on digital marketing and viral marketing where people such as myself talk positively about their solutions and even write about them in blogs like this. No, PowerObjects is not my customer.
The question of complexity applies to both startups as well as established software vendors that are trying to transform their business model to a sustainable subscription-based model. The startups can’t survive without funding and it will take time before these startups make money. The established vendors struggle with investor community, Board of Directors and management as the change in business model will have an immediate impact on top line revenues.
Will the organization have funding for hyper growth?
The hyper growth has taken some organizations to the next level and according to TechCrunch article, 25 enterprise cloud companies that have been founded since 2007 are valued today at more than $1 billion in private markets. Some of these companies have achieved this billion mark in less than 3 years. That is hyper growth.
Will you be the next software vendor with hyper growth?