The way enterprises buy software has reached a fascinating juncture where the consumerization of the enterprise has created fertile ground for the next generation of SaaS tools. The digitisation of the SaaS sales process has meant that SaaS adoption grows strongly and with that grows the willingness of businesses to source, assess and buy SaaS online.
A marketing tool that has been round the block to facilitate this is the traditional “yellow pages esque” directory for online software, a business model based on pay-per-click (PPC) and other paid advertising models. The SaaS sector has been able to come up with a set of standardized metrics that work for almost any SaaS business so these marketing directories leverage the paid acquisition budgets and are able to continue marking a good living by servicing these vendors with leads.
At Beacon we believe there may be a significant opportunity in this market and this is something we have explored recently by way of an investment in Crozdesk. We believe there is pent up demand for qualified sales leads and the intensifying competition amongst SaaS vendors drives demand for qualified sales leads acquired either organically or via PPC. We estimate there is close to $1bn in unchannelled demand for PPC by SaaS vendors and existing SaaS directories satisfy less than a 1/20 of this, especially seeing as the current top 3 players have a combined turnover of less than $50m.
So how much do SaaS companies really spend?
Global SaaS revenues have surpassed $30bn and are growing at 20% year-on-year. B2B businesses spend a minimum of 10% of this on marketing budgets ($3bn) and of this, an estimated 30% is typically carved out for paid acquisition methods leaving us with a total spend on paid acquisition of circa $900m. In fact these may be modest estimates; for example the graph below takes into account data available from public companies, where marketing spend comfortably remains more than 30% of the revenues over the life of the company.
The graph above was produced here by Tomasz Tunguz at Redpoint, however please note this takes into account public SaaS companies only.
PPC remains a significant part of many B2B SaaS marketing strategies today. We have seen several businesses over the years (link to our old blogs) and the anecdotal evidence suggests that in the case of smaller B2B SaaS companies the overall PPC budget in relation to marketing budget may be fairly high – sometimes roughly around 60% of their marketing budget.
Natural ceiling: a plausible theory?
One theory for the unchannelled demand is that the rate of growth in demand for traffic from SaaS vendors may be growing quicker than the directories’ ability to grow their traffic. In this case we could argue that the market has a “natural ceiling”. The precise reasons and weighting of these reasons are difficult to prove but the increase of pricing in particular through the use of the auction pricing model appears to demonstrate excess demand from software vendors. The likely main reasons for incumbent platforms increasing prices are a) they can: since demand is outstripping supply and b) they must: since the cost of their acquiring traffic is itself increasing (for example, we believe that some incumbents are spending up to £1m per month on acquiring a portion of their traffic).
Another view is that this “natural ceiling” is partly a product of the actions of Google, from whom most of the major traffic is bought. Some have seen Google actively limit traffic flows from their site to companies which grow too strongly in a particular category and thus pose a threat to their own search dominance. The quantum of this effect is hard to measure but for whatever the reasons the market is making it more expensive for vendors to acquire leads on their CPC / auction models.
So where does this leave us?
In addition to easing the supposed “natural ceiling”, by injecting more traffic at lower prices in the market, a potential stumbling block is the presentational hierarchy at play in in such digital platforms. A vendor’s willingness to pay determines the ranking of their product on screen and indeed whether it can make it to the all-important first page of any listing. Some have seen this as generating a long tail of “second page” of SaaS vendors which cannot compete for paid acquisition with the industry incumbents. This leaves a long tail of SaaS businesses which are typically niche vertical SaaS solutions, micro SaaS horizontal solutions, “unbundled” SaaS applications (API based) and, of course simply new entrants, who cannot outbid the large SaaS vendors on PPC.
As it stands there are high barriers to entry for new SaaS directories: new entrants have to acquire traffic bidding on CPC (cost per click) on Google, Facebook etc. which is capital intensive especially as they have to outbid the incumbent directories. Original content creation and SEO is an alternative to paid-for traffic acquisition but this takes time and is a slow burn to result in significant volumes of traffic.
However, the market opportunity is likely to persist for two reasons: i) the top directories are all owned by a single player in Gartner thus controlling the supply of qualified sales leads and the PPC for the SaaS Vendors; and ii) demand for paid traffic from SaaS vendors is likely to grow faster than the rate at which the SaaS directories seem able to scale their own traffic economically.
Most of what has been discussed in this post applies to businesses with lower AOVs (annual order value), where the sales engine is typically more digitised and where most of the sales process can be optimised. Our next challenge is to look into the extent to which (if at all) these platforms may benefit enterprise sales at higher AOVs, where longer and less digitised sales cycles persist.
Also published on Medium.