SaaS companies selling in the SMB market are structured operationally very differently from SaaS companies selling in the enterprise market. Everything from Sales structures to Marketing to R&D is organized differently depending on whether you are selling a low-priced product to a high volume of customers, or selling a high-priced product to a smaller number of customers. But while many of the operational drivers and related costs are different, many of the financials actually end up about the same. But, what are the pros and cons of SMB sales characteristics versus Enterprise sales characteristics?
Both models can result in highly valuable companies. Hubspot, valued at almost 10X revenues last year, is an example of a very valuable SaaS SMB vendor, and Workday, at almost 12X revenue last year, maintains its value selling into the enterprise marketplace.
Definition of SMB versus Enterprise Market
Let’s clarify what we mean by small & mid-sized businesses “SMB” and “Enterprise” customers. Strictly speaking, the two markets are often defined by employee numbers and sometimes by revenue size. The “S” in SMB type companies can have under 100 employees and can be essentially the same as selling in the consumer market. SMB is broadly defined to cover companies with employees under 1000. The associated revenues vary but fall somewhere under $100M.
Enterprise Sales Characteristics
Enterprise is a bit more difficult to define purely by employee numbers or revenues. In the past, enterprise has meant any company over $1B, or any company in the Fortune 1000, but I prefer to define it more by the sales process.
The enterprise sales process is characterized by:
- Longer sales cycle, typically over 180 days
- A higher average contract value (ACV) of at least $50k subscription, but may be phased into several stages
- Often combines software with professional/custom services for implementation, integration, and customization
- Involves more than one person on the part of the vendor in the sales process, often including a sales engineer, perhaps inside sales, perhaps Customer Success, and someone from services
- Involves more than one person in the decision process of the customer
- The contract and licensing process involves some negotiation of terms
Enterprise sales have longer sales cycles because it is a bigger decision for the customer and more people are involved with using the product. Enterprise models require more expensive salespeople. There’s less marketing lead gen because there are fewer customers and the salespeople generally work and know their territories better than in SMB.
Enterprise sales have more people involved in account management and more investment in the long-term relationship with the customer because there is more growth opportunity with any customer. Customer acquisition cost (CAC) is much higher, and justified because the Customer Lifetime Value (CLV) is much higher. The same rule of thumb for the CLV/CAC ratio applies (3:1 – CLV should be at least 3X CAC) but the numerators and denominators for enterprise companies are much much bigger absolute numbers. We see in our benchmarking also that it takes enterprise companies longer usually to get to the 3X CLV/CAC ratio than for SMB companies typically.
SMB Sales Characteristics
SMB sales are:
- with low average contract values
- low touch sales involvement
- limited customization or professional services offered if any
- no or extremely rarely allowing contract negotiations but there may be discounting on standard contracts
The price point for SMB sales can’t support a long, expensive sales process. To achieve high volumes of customers, a company has to cast the marketing net broadly which can be expensive. SMB companies have lower priced sales people, but invest more in lead gen and marketing. The prospect and customer web experience also has to be almost consumer ready and self-serve which is actually a harder R&D problem sometimes than building an enterprise product.
To get a comparison between SMB sales characteristics versus Enterprise sales characteristics, we created two cohorts of companies that sell primarily into the SMB market and companies that sell primarily into the Enterprise market. We segmented private SaaS companies averaging $60M in revenues with approximately the same amount of median invested capital ($35M) into two cohorts and found that median:
- Revenue growth rate was higher at this stage for Enterprise model than SMB sales model cohort: close to 50% for Enterprise and 34% for SMB
- Gross Margin for the SMB model is 10 points higher
- Product COGs for SMB and Enterprise model is about the same, but Services COGs is much lower for enterprise
- Deferred revenue is slightly higher for the Enterprise model
- But deferred revenue per customer is about 3X for the Enterprise model than the SMB model
Operating Cost Differences
- Sales expense is roughly similar to support growth but Marketing is higher for SMB model
- R&D expense was slightly higher (2.5% higher) for SMB
- But R&D employee retention was 10% higher for SMB
- Total operating expenses as a % of revenue is 10% higher for SMB compared to enterprise companies
- Overall, median operating expense per customer was $18.7k for SMB versus $$89k for enterprise
- Employee productivity is almost exactly the same
- But overall compensation per employee is somewhat higher for the enterprise model companies
As mentioned above, both the SMB sales characteristics versus Enterprise sales characteristics models can be highly valuable models. Financial results can be similar, but the operational drivers such as sales ratios, funnel metrics, R&D metrics, are very different. To learn more about the financial and operating benchmarks for SaaS companies at any stage, with any B-2-B model, contact us to learn about the SaaS benchmarking platform and community.
An interesting article.
You did not address the investment required to achieve sustainability (zero cash flow) in each space.
My view is that those enterprise SaaS solution providers that entered the SMB market and than transitioned to t he Enterprise market need very large (several $100Ms) investment while some that focused on the enterprise market initially, have needed far less to achieve sustainability (i.e. Veeva).
Since you have a lot more data, I am interested in your perspective on this issue.
If your data bears out my premise, it would be interesting to understand the reasons.