Selling to the Enterprise: Challenging SaaS Incumbents
At this stage of technology advancement, most of the good SaaS ideas are already taken. There are still green fields, but the fundraising rampage of the last few years has birthed viable startups in almost every category. Unless you’re lucky enough to be the first and strongest entrant in your sector, you will need to fight a bigger competitor. Let’s talk about a few of the ways to challenge a larger incumbent. Let’s talk about how to do it.
Market dynamics all tend to follow the same approximate shape:
A top company commands the highest price premium and is viewed as the standard.
A small number of competitors fill the role of alternatives in the space. They typically offer something specialized that the top company can’t match, and get a significant share of dollars from their niche.
A long tail of other smaller businesses fight over the scraps, although they can potentially still be very successful in their own right (particularly if they didn’t raise venture capital).
For example, in the project management market:
Atlassian is at the top, as the largest and most enterprise-ready provider (Jira)
Monday.com and Asana are below it – smaller businesses, but still public, which offer generally better UI for generally smaller teams
Companies like Basecamp, Wrike, Shortcut, Linear, and on and on make up the rest of the market
For more reading, the Innovator’s Dilemma outlines this pattern well.
So if you’re a growing SaaS business, what do you do?
SaaS sectors are typically roughly segmented by customer size. One product becomes the dominant player and chooses to go up-market to capture the more lucrative and stable enterprise dollars. This product is the apex predator of the market landscape. The incumbent will typically use its dominance to gain pricing power, and will likely be much more expensive.
This gives you an opportunity to carve out a market niche by dropping your prices. Especially in times when there is a strong focus on profitability, buyers are price sensitive and dropping costs can make a big difference.
For SaaS, the key insight for using lower prices to compete is that it necessarily drives you towards customers that are smaller. These smaller companies behave predictably and typically require two additional factors beyond price in order to get interested:
A lower-touch sales cycle / product-led growth motion
Dropping prices is a commitment to small customers. If you drop prices with an enterprise-targeted solution, you’ll just build a worse business for yourself and in some sales cycle may literally look worse – nobody trusts $10 sushi– and opposing sales reps will tell customers that they’ll get what they pay for. So to complete the package, make sure that you pair your lower prices with a simple UI and fast sales cycles that tell buyers that your low cost is due to intention rather than desperation.
Focus on a Niche
Generally speaking, SaaS companies get huge in one of two ways:
They go “horizontal,” widening their product in order to capture more buyers and differentiate the product. Think of Datadog or Crowdstrike widening their product offerings for Developers and Security.
They go “vertical,” deepening their hold on a particular market. Think of Procore building out more and more functionality, but all within the construction services space.
As a result, large competitors will tend to either be unspecialized (because they spent their effort going wide), or specialized narrowly (because they went deep). Both cases create an opportunity to exploit a niche where the larger incumbent won’t have motivation to follow you.
For example, could you build Datadog in a way that’s specialized for Azure deployments? Can you build Procore solely for constructing airports? In both cases it’s relatively unlikely that focusing on your niche is worthwhile for the incumbent, giving you an opportunity to differentiate, provided that the niche is sufficiently large and complex that you can carve out a defensible moat.
Another effective way to exploit a niche is by riding on the momentum of a high-traction platform. Shopify and Salesforce are great examples of platforms that can give you a way to get huge by focusing your product on the exact needs of some subset of users – the platform will tend to standardize customer’s needs, allowing you to carve out a niche.
What’s important is to pick a platform that both has high traction and a specialized customer-base with targetable needs. A platform like Shopify works great because you can build specialized products for ecommerce (e.g. Loop Returns); Salesforce is great because it draws a CRM-focused buyer (Veeva built much of its business on Salesforce). Slack, by contrast, is a completely horizontal platform and hasn’t had significant businesses built on top of it.
Surf a Technology Wave
One of your biggest advantages as a second or third mover is youth. By tackling a known market with a new technology that gives you a large advantage, you can build directly towards a predictable market, and establish stronger Product/Market Fit with a better Product powered by whatever technical advantage you can leverage.
Zoom built a better video encoding layer than Webex (because they were the former Webex team), essentially rebuilding the prior generation’s product with a stronger technical architecture.
Salesforce initially moved CRM software into the cloud, opening up a better software delivery model.
Figma used WebAssembly and the assumption of collaboration from day one to differentiate their way to a $20b acquisition, beating Adobe, Invision, and Sketch on the way.
Large incumbents are often incapable of reacting to this sort of technology-first attack because fighting back tends to require re-platforming their entire architecture. Replatforming is virtually impossible for slower moving incumbents; it’s like asking your cat to do calculus, he couldn’t pull it off even if he wanted to. Their momentum works against them:
They don’t have expertise in new technology, because they have a huge team that’s been trained to expand their existing tech.
They have more functionality and customers to support – it’s hard for them to balance what amounts to a massive tech debt project with their ongoing responsibilities
Replatforming requires committing to a long project that only pays off at the very end. This long-term thinking is more common in smaller founder-led organizations, and less common at larger corporations that demand quarterly performance.
As a smaller player, you can launch on a new technology stack and completely skip the effort of replatforming, using your technology advantage in the meantime to win.
The trick of course is that you need to find a true technology accelerator, which is typically difficult and rare. These accelerators are best when it’s difficult to replatform to take advantage of them – for example, I suspect that relatively few startups will be able to leverage ChatGPT as a unique advantage (as they did with the rise of the cloud or mobile) because incumbents will be able to build products that take advantage of new generative AI technology.
A Guerrilla Marketing Game
Enterprise companies typically acquire customers through relationships, channel partners, strength of brand, analyst reports, outbound sales, and other types of enterprise-y channels. These are the known ways to reach big customers.
But there are a ton of ways to market and acquire customers in SaaS. Big customers don’t get acquired from blog posts, Slack communities, or viral product-led growth motions. If you walk into your boss’ office at Morgan Stanley talking about a cool new HR product that you learned about in a Discord channel, you’ll get thrown out of the building. As a result many enterprise companies let these alternative acquisition channels atrophy.
If you’re a challenger, you can exploit this weakness and use these down-market channels to acquire smaller up and coming customers. Your sales team probably can’t outsell a Salesforce rep, but nobody wants to read Salesforce’s blog posts. While that won’t beat a larger competitor alone, it gives you a foothold to grow and challenge them.
What Doesn’t Work
Some strategies won’t work for beating larger competitors:
Software sales is really, really hard. As a result, great salespeople want to sell dominant products alongside dominant marketing, because all else being equal, salespeople like buying Rolexes and don’t like working that hard (who would blame them).
So when you compete against a larger competitor you’re often going up against some of the strongest concentrations of sales talent in the industry. If you’ve ever had a really amazing enterprise account executive pitch you, you’ll see that they really are better – verging on irresistible if their product can actually help you.
The biggest companies tend to attract the strongest partners, who are attracted to the leader’s momentum. If you feel like you have a partnership in the works that will help you compete against your larger competitor, consider that if your prospective partner is that compelling they’ll probably want to work with you as well.
The exception here is when you have (say) three players, all of which have high ambitions and are at significant traction. In some cases, #2 and #3 can combine forces to challenge #1’s leadership position, often by using #3’s technology paired with #2’s market share.
You’re not going to out-spend the biggest player in the space. If you’re thinking that you’ll just raise more money and spend more on acquiring customers, you’ll lose. In addition to the fact that you’ll likely be out-spent, the incumbent’s stronger brand means that they’ll get higher leverage from their sales and marketing dollars.
Larger competitors are the boss fight that every startup needs to complete. If you’re gearing up to beat an incumbent, these are some of the top ideas to try:
Lowering costs (and combining it with usability and a low-touch sales process)
Focusing on a niche, especially using a larger SaaS platform
Surfing a technology wave
Building a strong guerrilla Marketing game