VCs hate services - here’s why SaaS shouldn't

Carta. HubSpot. Brandwatch. Rippling. These companies, and many others, offer services (even though VCs don't like it). 

It's not about creating a services business, it's about using it to acquire, retain and grow customers. Here's what we get into:

• (00:00) - Introduction
• (03:08) - Why services aren't attractive
• (04:54) - And why services are awesome
• (11:46) - Services as an acquisition channel
• (12:25) - First example: Carta
• (16:34) - 2nd: Rippling
• (21:24) - HubSpot's Onboarding

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Creators & Guests

Host

Mikkel Plaehn

Marketing leader & b2b saas nerd

Host

Toni Hohlbein

2x exited CRO | 1x Founder | Podcast Host

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[00:00:00] Toni: Hey everyone, this is Toni Hohlbein. You are listening to the Revenue Formula with Mikkel and Toni. What if I told you there's a 10 trillion dollar market you could be tapping into, but VCs really don't want you to?
[00:00:15] Before we jump into the show, today's is to you by EverStage, the top sales commissions platform on G2, Gartner, Peer Insights,
[00:00:25] and Trust Radius with more 2000 reviews from customers like Diligent, Wiley,
[00:00:31] Trimble, and more.
[00:00:32] Visit everstage. com and mention Revenue Formula unlock a personalized sales compensation strategy session with one of EverStage's RevOps experts.
[00:00:43] And now, enjoy the show,
[00:00:46] Mikkel: Be careful touching your mic too much, you know.
[00:00:50] Toni: So I hope people can't see it and maybe they can see it a little bit with this like blue thing here.
[00:00:55] Mikkel: thing here. Ay, ay, ay,
[00:00:58] Toni: so all kinds of things happened in my household this morning, which basically led us to changing plans from recording in my place to recording here at Mikkel's
[00:01:07] Mikkel: my place.
[00:01:08] Toni: And I threw everything in the car.
[00:01:11] Triple checked everything, made sure, made sure I didn't forget anything. Arrive here, first question from Mikkel, where is this thing? Gone. Forgot it.
[00:01:21] Mikkel: very expensive equipment now. We have this very expensive equipment now. And what's really essential is that the mic is being held properly.
[00:01:30] Mounted. Mounted properly. How is it mounted now, Toni?
[00:01:34] Toni: It's mounted at your I would say it's your child's Chair and then we, we tied it against the chair with my scarf.
[00:01:44] Mikkel: That's right. Basically because you're incompetent.
[00:01:48] Toni: right. But also, you know, I made up for my incompetence by kind of gluing it
[00:01:52] Mikkel: together.
[00:01:53] Yeah, that's
[00:01:53] Toni: I cannot move the mic. I have to move my head now, you know, so if, if there's something, I'm just gonna, I'm just gonna, you know, scooch around.
[00:02:01] Mikkel: just imagining a world where, you know, Everything just runs smoothly, you know, there's no problems, no issues.
[00:02:08] Toni: be so nice
[00:02:08] Mikkel: And there's like no, if only someone were selling services that would help us out.
[00:02:12] Honestly, if someone was like, Hey, I'll come set everything up. I'll soundproof it. I'll make sure it's in focus. Ensure Toni doesn't forget anything. It's like, perfect. We'll, we'll, we'll buy that
[00:02:22] Toni: service, but, but Michael, let's, let's not a product that's like a service thing. No one, no one wants services.
[00:02:28] Mikkel: Apparently not. If you're uh, if you're uh, investing in uh, software. Then it's very rare. I think that was a funny piece over the weekend. Or
[00:02:38] Toni: was it funny?
[00:02:39] Mikkel: ha, ha, ha, no, I think about a week ago, you slacked me, Hey, here's like four companies or three companies, all making a killing on the basis of services.
[00:02:50] And if there's something that's funny, it's usually VCs don't want to see services MRR on the books. They, I mean, it's like at
[00:02:57] Toni: don't call
[00:02:57] Mikkel: you need,
[00:02:58] Toni: They call it Bullshit,
[00:03:00] Mikkel: yeah, no, it's like, I think you said it even before we hit record. It's like, when are you going to grow up? Right. There's just some negative connotation around it.
[00:03:08] So we're going to, I think, debunk that a little bit because services can actually be truly great and a lot of businesses are using it. So we want to hop into first. Why is it, why is it that it's such a bad thing?
[00:03:21] Toni: Yeah. When you really think about it, right? Why, why do people not want to do services stuff? Well, it's, you know, worse margins. That's the great thing about software. You have like 80 percent margins versus in services, it's the other way around. Or I don't know what, I actually don't even know what the margins are.
[00:03:35] They're worse. Definitely worse. Right. It's harder to scale, right? Thinking you need to hire those people in, you need to train them, make sure that they're smart enough and then deliver the service. If you then have a slump in demand, then, oh shit, you need to now fire those people or you need to, yeah, it's, it's really difficult to manage this the, the resources basically around it.
[00:03:55] Right. I think another thing on that's, you know, to a degree also present obviously in product world is, you know, It's pretty competitive, right? And there's like thousands of those, of those service providers, depending on what you kind of go for. Like, I'm not necessarily talking about hairdressers, I'm more talking about accountants, lawyers, consultants, professional services, engineers, and so forth.
[00:04:17] Those kinds of services, I think we're talking about today.
[00:04:20] Mikkel: so forth. those kind of services I think we're talking about today. You know what, if you ask someone running a services business, we'll say it's, well, you hire some more people, obviously.
[00:04:42] Toni: Yeah. And, and so the, the thing is actually kind of, this is obviously the argument why it's terrible, but I mean, to a degree, that's not, that's not fully untrue for just a pure play product, you know, company either. Right.
[00:04:54] But the thing is, I think what we are noticing here is there's a little bit of a change happening in.
[00:05:01] The founder and CEO behavior we're seeing out there I think people are starting to be way more focused on just building a solid company instead of building something that gets a uniform unicorn valuation, right? Kind of, they're starting to be this, this, this flip happening. Where I'm seeing more and more folks that are on a, on a full on product trajectory and full on SaaS and full on, you know, VC.
[00:05:25] But basically more with the mindset, like, I mean, you know, if I can only raise maybe 10 million and then sell this thing for 50 or 60 million, that would be great. And that, that was actually a pitch that he could totally forget like two or three years ago. I think you can still probably forget it with VC.
[00:05:42] So kind of that's, that's nothing, that's nothing you should be kind of thinking about, but folks are starting to go, you know, at least in their minds in this direction. So what does that mean? It really means people are thinking more and more about basically just building good companies, not crazy outlier companies.
[00:05:59] Of which there won't be so many, likely not yours either but building solid companies. So if we really start thinking about that from this angle, it's like, well, well, why should we, why should we be ditching services? Well, why should we not be able to consider this, right? Why is it such a big no no? And I'm starting to see folks to kind of go a little bit more in this direction.
[00:06:20] It's like, well, actually you're right. Kind of, maybe that's not such a bad idea after all. Maybe we should be adding some services. And I think this is, this is a little bit what we wanted to discuss today,
[00:06:29] Mikkel: today.
[00:06:30] Yeah, and I think we're uh, so just for our reference point, About 8 to 10 percent of revenue usually comes from services when you're running a software company. So it's not like it's non existent, right? And this is also, if you look at publicly traded companies, by the way, it's not an insignificant amount of revenue they have.
[00:06:46] This, this is like a legitimate consulting business. They have on the side, albeit not as big
[00:06:50] Toni: No, and it's like, some of that is, So, and this is now where the lines are starting to become a little bit blurry, but some of this is extremely connected to the offering, right? Some of those are professional services, onboarding services, right? Kind of that someone is paying for the implementation and then you say, well, this is pro services and therefore it becomes an 8 or 10 percent of the whole thing, right?
[00:07:11] I think what we want to do, we want to go a little bit further actually today. And go through, I don't know, a small handful, as the Danes would say, a small handful of examples of companies that you absolutely know but didn't quite realize how much, how much services they actually kind of is in this in the, in this, in those gigs, right.
[00:07:32] And maybe just to kind of give a little bit of. understanding how the playing field actually looks like. So those are, you know, those are numbers from Sequoia. I think we're looking at a, you know, total market for software, total market, everything included of 600 billion.
[00:07:52] That's a total market for software. Now what, what would be the total market for services be? I wonder. And they answered that and they said it's 10 trillion. Is it, there's, is it, is a little bit of a difference.
[00:08:06] Mikkel: my math is not great, but it's slightly bigger,
[00:08:08] Toni: It's there, there's a difference. There's a difference. You got it. And we're talking globally, right?
[00:08:13] So it's a, it's a really, really big number. And so why, why is Sequoia kind of looking into this? It's because of this whole AI thing. It's like, ah, okay, cool. Now AI can eat the whole, you know, 10 trillion services market. I think we're still a little bit far away from that. And, and this is not an AI topic actually today.
[00:08:29] It's kind of much, much simpler,
[00:08:30] Mikkel: The other beautiful thing about selling services, by the way, is also, I think just, just think about the sheer insight you're going to get from actually having frontline people. working with customers to implement a strategy or do something within your field. I think that is immensely valuable, the insight you're going to get.
[00:08:46] And just from a, you know, me being selfish from a marketing perspective, that is also super valuable to have, to have that market insight and understanding of what is it actually these folks are faced with day to day that might even go beyond the software we're selling and the solution we're providing, right?
[00:09:03] Toni: let's maybe jump into kind of the, the meaty part of the, of the episode, right? So I think if we go through the life cycle of a company of a software company, maybe even let's start at the beginning. So there have been plenty of examples, at least that we are aware of that have actually started from an agency first.
[00:09:21] Mikkel: Yeah.
[00:09:22] Toni: So we're talking here in Denmark we're talking, you know, Falcon and Brandwatch, we're talking Templify. They're a bunch of others that started from an agency and then developed into a software company. You could also count Groblox into this. It's just not one of those breakout successful examples. But basically kind of starting at an agency and then developing a product.
[00:09:42] Right. So what did Falcon do? They created social media apps when that was a thing on
[00:09:48] Mikkel: And not the apps for like, okay, now I can create an app company. And so it is like, no, to do contests and giveaways and stuff.
[00:09:55] Yeah.
[00:09:55] Toni: And they did this as an agency and then they figured out, well, I can just build a little bit of a, of a, of a builder to do this yourself. And then, you know, I sell this to you. Right. Templify, they, I mean, they created like brand templates for organizations and did this again and again and again, and then they were realizing, Oh, actually we can kind of build a software around this and sell it to you instead.
[00:10:15] Right. And I think what, what all of those companies did is they use the agency business. To figure out, you know, what is the repeatable pain in the market? And try to figure out what is a. You know, software solutions, holding that pain and then had this pro market fit basically already there, right?
[00:10:35] Kind of, that's really the approach. And started setting this into those folks with grow blocks, it was kind of similar. We had those conversations with people about revenue planning and analytics and all of that stuff. And they're like, Oh yeah, that's an issue. We need some help with that. And we use it actually for both things for you know, acquiring new customers, even when we had software, but also for you know, you know, beefing up some of the revenues we got from those customers because we had those services on the side, right?
[00:11:00] So I think that's, that's many, you know, that's a really good start that I've seen many, many times where you start with services and then you, then you grow maybe out of it. I think nowadays, if you start as an agency and then quote unquote grow out of it, I would actually kind of have folks wonder or question whether or not they should do that.
[00:11:19] You know, do you, do you want to grow out of it? Or do you just want to, you know, keep continuing having the services business on the side? I actually know now that we're saying there's welds. Also a smaller team here of Copenhagen. They started with BI services and then built a data warehouse. And I think they still have those BI services running.
[00:11:37] Right. And it's kind of, it's, it's a legit business that they have on the other side, but it's basically kind of supplementing the, the overall VC strategy that sits behind us. So
[00:11:46] Mikkel: so I think what we discussed is there's two ways you can look at services today. If you're operating in a, let's say just in an established business by now, you can use it in two ways.
[00:11:55] You can use it to acquire customers, Or acquire more revenue,
[00:11:59] Toni: Yes.
[00:11:59] Mikkel: right? And I think we should hop into the first one
[00:12:01] Toni: so what I kind of, what we just kind of discussed what could be ways to use services to create the company in the first place? Let's not talk about ways. Where you can use services to actually acquire a bunch of business and make this part of the, the overall play and kind of really how you're doing it.
[00:12:19] And two pretty cool examples that I stumbled over. Some of you might be aware of, of that place. Some of you might not.
[00:12:25] Uh, so number one, Carta. It's like a cap table software. And I was always, when I saw Carta, I was like,
[00:12:33] Mikkel: there,
[00:12:33] Toni: the way, they're half a billion in revenue.
[00:12:35] Mikkel: Yeah. Yeah. It's like
[00:12:36] Toni: billion. Half a billion.
[00:12:38] And I was always like, come on. I mean,
[00:12:40] Mikkel: it's.
[00:12:41] Toni: you know, it's this Excel spreadsheet. That you really only use once or twice a year. It's like, how can you build a half a billion business out of this? And I discussed this actually with someone recently and they told me how this actually happened. So they built the software and everyone went like, no, thanks.
[00:12:57] My Excel spreadsheet is perfectly fine. Like, sorry, don't actually, don't actually need this. Sorry, Carter. But in the U S specifically if you want to give. Options to your employees, like employee share option approval or warrants or stock options or whatever it might be, what you need to do before you can actually, you know, go ahead and do that, you need to have a CPA.
[00:13:23] So this is a certified something
[00:13:25] Mikkel: accountant. I was like, Oh, you're not,
[00:13:27] Toni: some, some, you know, it's basically like an accountant and
[00:13:31] Mikkel: Or
[00:13:31] Toni: sometimes could also be a lawyer kind of come in. And you know, evaluate your business so, so those shares can be evaluated. Uh, So those shares can be registered also with, you know, the tax authorities and so forth, because it's value that you're giving someone and someone from the outside needs to come in, do an actual service and then give it to you.
[00:13:50] Right. And what Carter then did was like okay, well, wait a minute, actually, how much are you charging for this? And then, I don't know, it was, I think it was 5, 000 to kind of, to do this assessment. And then they were like, well, we could actually do that. So they went ahead, had a couple of CPAs. Had them do this for half a cost, 2, 500.
[00:14:11] By now, so this is, this is CSA by now they are doing, so Carter is doing this work for 95 percent of the businesses in the U S that kind of have that need, like, think about this, right? They basically collapsed a whole service industry around this. And it's like, you know what, this is now our customer acquisition channel because what happened next, it's like, okay, they did all of this stuff.
[00:14:33] They need to get all the information in order to do this, but then they have the information in their tool, CARTA. And then they basically said like, well, instead of the 2, 500 us whatever next year, It's then, you know, 5k for the software going forward and you have it already and you folks can log in and, you know, the onboarding is basically done and everything is done and what, you know, whatever, I don't know what the full pitch is around it, but suddenly it made it so easy for everyone to be like, okay, wait a minute, I'm saving two and a half K on this thing and then I'm buying the software that makes everything easier for my employees to log in, see the updated numbers, take it to the tech folks and that, that's how they grew.
[00:15:11] Mikkel: I think it's such a nice So it's a natural bait and switch when you think about it. Super natural in this setup.
[00:15:18] And we have, we had a similar one in the show notes, which is here in Denmark, which essentially is actually, by the way, all Scandinavia and Northern Europe, probably by now,
[00:15:27] Toni: I was Are are you proud of that?
[00:15:28] Mikkel: I had nothing to do with it, but it's just, they're big, right? It's not a tiny little company
[00:15:32] Toni: I know it's
[00:15:33] Mikkel: of of Europe.
[00:15:33] But anyway, so the concept is you, you don't pay for renting the trailer. You do need to pay for the insurance though, which you're going to need if you're In any case, so that's a pretty great business because if you were own whatever retail store and you want to provide that extra services to your customers that they can bring home the, whatever you're selling, by the way, you're going to contact Freetrailer and say, Hey, you could, can you put some in the parking lot?
[00:15:55] They're going to go, yeah, we can do that. It's like more customer acquisition.
[00:15:59] Toni: absolutely. And I think those, those kinds of business models are so, so great actually, when you think about it and it's, I'm not quite sure, you know, we had it in the show notes, we went kind of exactly kind of clear how, how does it
[00:16:10] Mikkel: But now it's in
[00:16:11] Toni: but that's, that's up to the listener to figure out how it fits, you know, sorry, sorry guys, sorry folks.
[00:16:16] So this was this was Carta, this was Carta. And then the other one. Rippling. So rippling, what do they do? Rippling is, I, I couldn't tell you. No honesty, couldn't research. No, no, no. Honesty. So, so this, this is the crazy side story for rippling. They do HR stuff.
[00:16:34] HR software stuff, right? In the us
[00:16:37] Mikkel: There's a really proud founder listening now.
[00:16:39] Is that what you're putting us into, that category?
[00:16:42] Toni: Now, now comes where, where you know, if they're found a way to listen, I would be honored. But now, now comes the point where he probably would be proud because what they have been doing they had this one product immediate pro market fit because why the CEO previously built Zenefits, which is like a company 10, 15 years ago.
[00:17:01] And they had this one play, which I'm going to talk about in a second. But the company blew up. Like shady shit going
[00:17:09] Mikkel: Yeah. This is a whole other, it's not even
[00:17:11] Toni: it's, it's a whole other episode
[00:17:12] Mikkel: This is more like
[00:17:13] Toni: but basically, basically kind of that thing got shut down. And then the CEO busy moved on. It's like, well, it kind of worked. And maybe next time I don't fuck up.
[00:17:19] Um, and then he just built a Rippling and you know, it's crazy. They grew like crazy. What they also did, which is kind of why it's hard for me to say what they actually doing is I 50 or so former founders that they're hired. And all of them are working on other products that they're basically kind of selling.
[00:17:38] And why are they hiring founders? Well, they're basically figuring, you know, we need to do product market fit kind of, we need to be super lean to get to product market fit with this new product that I'm having. Right. So they basically went multi product super early on and very successfully. So, and it's not just a PM, Like, Oh, you know, I've been a product manager for Microsoft and now I'm going to, no, it's, it's a founder that understands product, go to market, all of that stuff.
[00:18:01] Right. And they had multiple product launches where that new product went from zero to a million AI in one day. Just in one day, right? Basically, I mean, they basically kind of sold it to the existing customer base and they went kind of so broad into this HR use case. And it's not super easy for me to tell you kind of what they're doing.
[00:18:21] The really cool thing, the really cool thing that I just wanted to point out, how did they get kind of to this initial product market fit with their initial product so quickly? Well, and this is again, kind of a special situation in the US and I hope I piece it together in the right way and no one is like, well, Toni, actually so in the US you have you get better health benefit deals from insurers, the bigger your organization is, right?
[00:18:48] Kind of, you have more bargaining power against the insurers. You get good benefits for your employees, but there are so many small businesses there that basically kind of would get screwed over in those cases. So what they're doing, they kind of, you know, bulking together, create an employer of record, and then they basically have hundreds and thousands of small businesses acting as one employer of record that then goes to the insurance company and kind of gets a really good deal for all of them, right?
[00:19:15] For that to happen, you obviously need to pay the employer of record some money. Right? What did Zenefits do and what did Rippling do? They basically went in with a pitch like, Hey, I can give you those benefits and better. And you know, give you all the software and stuff. And you just need to, you know, jump over and pay the money that you're doing, paying over there.
[00:19:36] Maybe a little bit less to me, but actually on top of that, you even get the software. I think their pitch was a little bit smoother. Like pointing this out right now, but basically it became a no brainer proposition. It's like, you looked at it, it's like, yeah, why would, why would I not do this? Right. So that's why it's a little bit the Carter game.
[00:19:52] It's a little bit like, okay, so I have to have this, I would pay 5k for this in the open market, you offer me this for 2. 5k, and I get the software, it's like yeah, let's please do
[00:20:03] Mikkel: please do that. They just don't trust you. You feel too shady. Do you know what I mean?
[00:20:09] It's like the seller coming in is like, Oh, this is too good to be
[00:20:11] Toni: This is unbelievable.
[00:20:12] Mikkel: how will I get conned
[00:20:14] Toni: Yeah, what's the hook?
[00:20:15] Mikkel: Yeah.
[00:20:16] Toni: So, and, and this is, this is again, you know, is this services? I think to a degree it is, I think in Rippling it's much more built in. I think the the other services that Rippling is also selling are also very much HR services, like of actual people needing to do actual stuff.
[00:20:31] Right. And, and, and they're not afraid. They're not afraid of, you know, pushing this into their customer base. And that's actually their strategy of going from you know, one product to a customer, to multi product per customer, right? Because, and, and so many people want to do this. Like, this is the dream growth strategy that no one actually gets to execute is you pay the expensive cost of acquiring one customer once and then you cross sell multiple products to that same customer for a fraction of the cost, right?
[00:21:05] That's what everyone wants to do. That's why everyone is kind of, you know, doing M& A and buying other products. They want to cross sell into the existing customer base. But it usually fails and folks like Carter and Rippling completely figured this out. And to, to our point, some of that obviously is software products, but some of them services
[00:21:23] Mikkel: services products.
[00:21:24] Yeah, I think since we're talking about the whole using these services also to acquire customers, there's another small company out there, it's not on the list by the way, it's called HubSpot.
[00:21:33] They also have some services that they use to acquire customers. It's onboarding, by the way, so they actually will price it out. I don't know if they, as an example, will go to the extent of helping with various detailed implementation. I think if you're like going the BI route, there might be some companies that actually do that work with you.
[00:21:52] The kind of the last mile implementation or whatever. But I think from a Hotspot perspective, it's interesting because for some, implementing a CRM can be kind of scary. It can be a big daunting task, and if you actually have a, well, okay, cool, so I can see that could kill the deal, but we have this service here, do you just want to buy that and then
[00:22:13] Toni: mean, to a degree, Hapswell basically created a whole agency ecosystem basically doing this, right? So in some cases people would say, Oh, as an implementation partner and stuff like, okay, that's cool.
[00:22:27] But in a, in HubSpot's case, it feels like it's a, it's a whole strain of just agencies that they kind of, that, that are now doing this as their main business to, to do HubSpot implementations, right? And, and again, this is, so obviously would, you know, if HubSpot would have done this themselves. They wouldn't have been able to grow as fast, like
[00:22:51] Mikkel: Probably not because it's more profitable for them to
[00:22:54] Toni: And no, but also, you know, they're basically kind of, since now this is a partnership ecosystem, you have all of those agencies. that basically are pushing HubSpot into their clients to then do the implementation. Right. So it's a, it's, it's a really nice acquisition channel also for them. But let's just, let's just be honest here for a second.
[00:23:13] That's not true for most of us. Like we, we don't, we don't have this luxury to have the, you know, suddenly pop up kind of a whole agency ecosystem that's doing that stuff for us. I think a good start can be to. Really think about, well, maybe we do want to, you know, sell the implementation and maybe we want to go the extra mile and not just kind of, Hey, here's our CSM, but no.
[00:23:33] You can actually, you know, buy the implementation and trust that it happens.
[00:23:38] Mikkel: actually, I think if you can do that, then at some point, if you want to do the ecosystem of implementation partners, you can go to them and say, Hey, you know what, we're doing X million a year on implementation.
[00:23:47] We're going to just push that to our partners going forward, provided certain, you know, so I think that's super helpful.
[00:23:52] Toni: It reminds me a little bit, kind of the, the, the services angle to the partnership ecosystem and reminds me a little bit of, you know, what Jacko sometimes says about partnerships, partnerships are great. But if you haven't figured out how to go to market, And you're hoping your partners will figure it out
[00:24:09] Mikkel: yeah. Forget
[00:24:09] Toni: Forget about it. It's just, it's just not going to happen. And the same thing is actually true here. If you haven't figured out, let's just say product market fit for a service offering surrounding you, forget about that your partners will, right? So to a degree, you need to live it first before you can go outside and and really kind of, also show people that it works out.
[00:24:28] Mikkel: Yeah. Yeah. Yeah, that's true.
[00:24:31] So let's do this. Let's talk a bit about expansion now. Now we talked about it as a
[00:24:35] you know,
[00:24:35] Acquisition strategy or tactic, if you will. I don't think a VC will kind of bark at that, if that's the approach, right? I think people would love the Carta case. So, but let's talk a bit about the expanding MRR instead or
[00:24:48] Toni: and, and touched up on this already a little bit. Right. Said like, well, you know, it's really great you have an existing customer relationship. Just sell other stuff to them. Yeah. Doesn't matter all that much. That some of this is services, some of this products, it's like whatever.
[00:25:02] Just kind of sell more stuff, right? So I think this is one thing and, and. I think it's really important for everyone out there just to not to be afraid to sell the services piece. I kind of, that's actually kind of what I'm trying to say here. And to a degree you will have so many reasons why why selling services is a bad idea.
[00:25:20] Mikkel: but
[00:25:21] Toni: You actually need to see this in context. Why do you need to kind of compare it like for like. Number one. You have you know, you have an existing customer relationship, kind of you sold them and now you're trying to figure out how can you not double the account, but double your AR, right? Kind of, that's obviously everyone is trying to figure this out and let's just say in a very stupid example you say, okay, instead of only selling to the UK, we're also now going to sell to Germany, or if you're only selling to the US, we're also selling to Europe.
[00:25:51] Let's just say that's what it is. That, that is a, you know, do it. It's fantastic. But you also need to see and realize that that is a risky move. This is not just like, Oh, okay. Now we have a rep in London and now we're sending one to Berlin or whatever. There's a lot of risk involved here, right? And depending on what kind of product you have, you need to also change pieces in the product for this to work out.
[00:26:13] So there's risk there to try and double your ARR by just, you know, going to a different market, right? Then the, the other alternative to double your ARR is to, why don't you create a new product and sell that to your existing customer base, right? Problem here is. Well, product market fit, you need to create a new product.
[00:26:34] You need to develop it. You need to kind of figure out the ins and outs, tweak it and so forth. Just what you did with product number one, you do the same thing with the product number two and then set it to the existing customer base. That's going to be difficult. There's going to be lots of risk for this to work out.
[00:26:50] Right. And now let's just say alternative number three.
[00:26:53] You have talked to your customers, all of them are using this one service that they're buying all the time. You know, let's say it's an accountant or whatever it might be, or some, some HR lawyer or whatever, you know, it's like, okay, we could just do that.
[00:27:07] It's basically immediate product market fit. It's already there. It's like they have this problem for, you know, some reasons because you're in there with your technology. You can actually offer this thing cheaper, right? And it maybe even has some additional benefits of well, the customer is not going to become stickier and Hey, you know, all the cost for us to sell to new customers, those costs are kind of in that equation gone.
[00:27:34] Right, you're not talking a 18 month CAC Payback, you're talking a 3 month CAC Payback, 2 month maybe, to sell this completely proven product market fit piece into it. Yes, it's a service, right? And then, you know, downsides obviously are you need to hire those folks, you need to kind of pay them, even if there's no debat, and you know, all of these things.
[00:27:54] But that, again, needs to be seen in context with the other risk that you would be needing to take and on to WAR, aka, going to a different region. Or trying to sell a different product, right? And when you kind of lay it out side by side, the VC will tell you, don't do services because I'm not going to give you as high of a multiple for it.
[00:28:13] But folks, I mean, this is mud. We're still talking money here, right? There's, there's a bunch of money in this
[00:28:18] Mikkel: think that's just a, so it's like we talked about in the beginning, if you're running a non VC backed business and you're looking at where we're going to invest the next, whatever, 5 million in 2025,
[00:28:30] well,
[00:28:31] well, CAC Payback is kind of terrible for us to continue putting it into the software.
[00:28:35] So we could do this services thing here. And just because it's not recurring revenue doesn't mean you shouldn't do it. Actually,
[00:28:43] Toni: Now that we're talking about
[00:28:45] Mikkel: Oh. Analysis time or
[00:28:47] Toni: no, no, no, I was actually, I was actually thinking for some of the, the, the, the number folks out there, you could actually do almost a gross margin adjusted CAC Payback analysis.
[00:28:59] I'm just going to say it again, gross margin adjusted CAC Payback analysis, meaning you can choose to sell your current product to a new audience. different market or just, you know, whatever. And you're going to be paying 18 months, 16 months, 15 month CAC Payback to that. And you have an 80 percent gross margin on it, right?
[00:29:19] Kind of think about that. Or you can sell a service where you only have a 40 percent gross margin. So half, let's just say but at a CAC Payback for two or three or four, where are you going to come out better? And, and this is just one way to, yes, you're not going to get the super juicy 10x AR multiple from this stuff.
[00:29:42] But you're going to grow your business. You're going to stay profitable. You can push out your funding horizon. It will still contribute. To you getting you know, higher ARR, multiple and so forth. And it might even be a cheaper way to do it in the first place. Right? So I think people need to stop treating this like a, like, a,
[00:29:59] I don't have like
[00:29:59] Mikkel: Like a no, no, I think you can't do it. Yeah. Yeah. This is a viable business path you can take. And I, by the way, even think if you're running a SaaS business and looking at the bowtie in terms of performance. There is also services you can construct at multiple stages to prevent negative outcomes such as churn or lack of adoption or not getting to the first impact or not being able to map out the organization
[00:30:22] Toni: of, lack of adoption, not getting to the first impact. Other story that pops into my head. Now about plan day though. Um, so Zero, when they bought us, They were like guys, at some point you need to decide, are you a product company or are you a services company? And I just looked at them as like, what are you talking about?
[00:30:40] I don't, you know, I didn't
[00:30:41] Mikkel: have revenue coming.
[00:30:42] Toni: say this, but it's like, what, what do you mean? Right. And they say, well, you spend so much time on the onboarding and implementation. And I was like, yeah, okay. But that still makes us a product company, you know? So, and, and the insight here is
[00:30:57] And it's almost like the superhuman example kind of the email provider.
[00:31:01] If you want to build a very strong adoption and be super sticky to the organization, maybe you do want to pay or, you know, overextend on the onboarding. Maybe you do want to actually do that. And then be much stickier afterwards. And just because you're doing that, just because it's part of your rollout plan and implementation doesn't make you in, in, in Xero's eyes a services company, you know, no it's still a software company just with a, with a good play around it.
[00:31:31] Right. But yeah, maybe that's, that's enough in terms of stories
[00:31:33] Mikkel: Let's see if, that's for another time. Yes. I think that's it for now. I hope you liked the episode. If not, I would recommend you check out reviewformula. substack. com. You can always subscribe to get the latest episodes and a ton of other
[00:31:46] Toni: That's what they should be doing if they didn't like it. Didn't I say
[00:31:49] Mikkel: No, if they liked it. Didn't I say if they
[00:31:51] Toni: Yeah, no, I think you said it. Anyway, it's fine. It's fine. Yeah, hit the subscribe button, folks.
[00:31:57] Mikkel: bungled the outro, but that's cool. Okay. Bye everyone. Take care.