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Control Points 2.0
Founder and General Partner, Tidemark
In the long run, there are no point solutions in Vertical SaaS, there are only platforms. Small business owners want “one throat to choke,” and while you might partner with other VSVs in the short term, don’t fool yourself – you will ultimately be competing over account control and downstream expansion cross-sells. Own the high ground, own the control point!
In Vertical SaaS, we used to think that there were only one or two control points, or systems of record. Usually, one control point is in the front office, such as point-of-sale, CRM, or e-commerce. This control point drives sales and serves as the cash register. Another common control point is in the back office, the home of the general ledger to which everything is reconciled. At a more basic level, the control point or system of record is also the most important system and the last to be thrown out before an owner ceases operations.
A traditional control point will usually have three types of strength or, as we call it, gravity.
- Workflow is the system other systems integrate into. It provides integration value and surface area to cross-sell. Workflows that have the most engagement or that manage scarce assets like time and money (e.g., calendars or G&L) tend to be the most valuable.
- Data gravity is the system that creates and holds the most critical information and is the hardest to migrate. Customer, product, and transactional (particularly revenue) data can enrich offerings and customer experiences, and make workflows intelligent.
- Account ownership maps to the importance of the user/sponsor of the system. The higher the ranking of that individual in the merchant organization, the more frequent their engagement, the stronger the account ownership.
Control Points 2.0
When I wrote about this topic two years ago, the essay stopped at the above. As an entrepreneur, all you had to do was own and scale one of these control points, scale locations, and you are well on your way to owning the category. However, this has turned out to not be completely true. We've learned that other offerings impacting a merchant's business model or helping to change the consumer experience can also serve as control points. These new control points can act as wedges for more traditional control points, or could threaten to displace or subsume traditional control points entirely. If you’re looking for an opening against incumbents to establish a control point, look here. If you’ve established a control point in a vertical, this is where you should watch your back!
Incremental Consumer Demand
In SMB and Vertical SaaS, bringing in customers beats most other value propositions. Merchants love products that help them make more money. It is doubly powerful because by bringing in demand, a Vertical SaaS Vendor (VSV) allows the merchant to fund the purchase of their other offerings. In the extreme example, if a VSV can generate demand, it can charge a take rate on demand that allows it to offer disruptively low pricing on other products. However, a VSV doesn’t need to provide demand directly. It can also generate incremental demand by increasing customer access through lending and financing, conversion through customer confidence (e.g., certification, fraud), demand via integration into more demand sources (e.g., channel management), or new customers and repeat rate through CRM and loyalty.
For example, Square is making a bet that their recent acquisition of Afterpay, a provider of Buy Now Pay Later (BNPL), can not only provide consumer credit, but also a compelling value proposition to surface consumer demand. On the company’s Q4 2021 earnings call, CEO Jack Dorsey shared, “We've also built in Cash App an initial search page for customers where they can discover Buy Now Pay Later offers. To me, this is where a lot of the real segment lies... we have an opportunity for a whole lot more discovery on the Cash App side.” On the same call, Square CFO Amrita Ahuja added, “We've already seen over 100,000 leads going out from Cash App to Afterpay merchants since late December when we enabled this.” If Klarna’s recent $46B valuation is any indication, consumer demand for BNPL is rampant, and Square’s approach holds promise.
Similar to incremental demand, a merchant can grow more quickly if a VSV can provide credit, insurance, or improved working capital management. Since credit can be a commodity, it is rarely enough to bring in funds alone. To be an effective wedge, the provision of credit is usually accompanied by several conditions:
- Scarcity of capital
- Lack of data or social relationships and norms that make underwriting or servicing difficult
- Speed of underwriting or capital movement that can be accelerated
- A relationship that naturally trends towards exclusivity
Success Take Rate and the Super Bundle
The ultimate endpoint for a VSV is to benefit from their merchant’s success with a meaningful take rate of the merchant’s revenues. In doing so, any incremental product that the VSV provides to grow revenue increases stickiness and retention, and may be monetized by multiple of the VSV's offerings.
The super bundle is a powerful concept and can apply to a huge variety of industries. The gritty world of construction has Procore, which eschews per user fees in favor of multi-product licenses + annual construction volume-based pricing. In contrast, Dandy, a provider of dental practice management software, found that by offering outsourced dental lab services, it could grow revenues as its dental office customers grew. As a result, Dandy benefits from any incremental offering that helps a dental office grow its customer base. VSVs can even super bundle with your local deli: Toast’s “Better Together” model describes how in the restaurant ecosystem, products sold to each stakeholder—the owner, the employee, the guest, the supplier—can work to the benefit of every stakeholder.
Changing the Consumer Experience
A VSV’s offering can become a control point when it sits at the nexus of multiple parties that provide a good or service. Rather than capturing a unique workflow, certain VSVs can gain market share by bringing together a diverse group of stakeholders. In some ways, this is a specialized version of a workflow gravity and provides a launching point to extend through the value chain. We will flesh out many of these concepts in a subsequent essay.
A fragmented value chain exists in many industries, where the product provider is separated from the customer by many layers of wholesalers, distributors, and retailers. This works if the product, its use, and its purchase are standardized and well understood. If that's not the case, a VSV that sits in between these constituents can improve the end consumer experience to facilitate multi-party communication. We have found that multi-party communication can improve the consumer experience in product information, multi-party collaboration, and iterative purchase experiences such as complex procurement.
A special example of this is product information. In many verticals, key product information is created and held at different levels of the value chain. For an easy example, think of consumer packaged goods. The manufacturer will have standardized information on product ingredients, performance attributes, health and safety, and usage instructions. A food distributor will vouch for the authenticity of the product. And finally, the retailer collects reviews and reputational data on product and vendor quality.
A VSV can be a conduit for this information between the manufacturer all the way to the merchant’s staff and ultimately the consumer. For example, it would allow a prescribing veterinarian to share the latest side effect information (direct from a pharma company) with their pet owner client. On the flipside, this conduit can be also valuable to the manufacturer. In a salon example, the VSV could serve as a conduit to help get product education and information into the hands of the stylist or even directly to the end consumer. By providing this multi-party communication, the VSV can provide opportunities for all stakeholders to improve the consumer experience.
Embedded services can also improve digital services with the interjection of human assistance, particularly if the task is highly complex, unfamiliar, and/or high stakes. A live person can bring clarity, speed, and confidence. TurboTax Live, an embedded live accountant offering, was the most successful product launch in Intuit’s history and is still growing 100% YoY four years later. GoDaddy offers free website design support if they see a customer stalling at critical steps of the journey. Embedded services become a control point if the live consultant can provide strong account ownership and serve as a trusted advisor.
The formation stage is a unique stage in the customer experience. Starting a new business can be so intense and overwhelming that oftentimes an entrepreneur wants a vendor to give her everything as long as it works and is a fair price. This is a great opportunity for a VSV to establish long term advisory relationships.
LegalZoom is a great example of this phenomenon. LegalZoom’s core offering helps small businesses establish a legal entity quickly and economically. Because of their engagement during the launch of a small business, LegalZoom has an unfair right to offer downstream products and services as these small businesses scale. LegalZoom has recently added accounting services which continue the advisory relationship. Accountants can be great coaches, and small businesses who work with accountants tend to do better. LegalZoom is creating a control point while helping their customers succeed.
Integrate and Surround
Non-traditional control points can exist when natural control point systems become old, fragmented or entrenched.
In some vertical markets, legacy practice management systems (PMS) dominate. They were built during the first wave of business software in the 1980s and 1990s as all-in-one packages, so they pack a lot of functionality. They are also licensed software packages with little ongoing costs, so they are effectively free and hard to displace.
These existing systems can be so entrenched that it is impossible to take them out. However, there is a different approach: Integrate and Surround. With the right value proposition (notably, incremental demand), there are new control points that VSVs can compel merchants to integrate into their PMS. The VSV can then extract key data and build on top of the existing PMS workflows. The VSVs can further open up their PMS integrations to third-party apps to create a network effect and platform economics. Over time, if done correctly, the VSV can relegate the PMS as the nameless system in the office closet that is simply a repository for data.
Integrate and surround is not an easy strategy. It requires a team, often in low-cost geographies, to build and manage these PMS integrations. It can also require the cooperation of the PMS themselves. We see a couple different Integrate and Surround concepts that companies appear to be pursuing:
- Siteminder’s hotel channel management system on top of legacy property management systems.
- Olo’s site and channel management offering on top of legacy restaurant enterprise point of sale systems.
- Zocdoc’s booking platform on top of legacy healthcare electronic medical records and practice management systems.
- Dandy’s lab services on top of legacy dental practice management systems.
- Vetcove’s B2B marketplace integrates directly into the veterinary practice management systems for inventory management and ordering automation.
Share your thoughts
As the Vertical SaaS opportunity expands, so does the concept of control points. The Business Model, Changing the Consumer Experience, and Integrate and Surround approaches provide new opportunities for VSVs to expand their opportunities and control larger swaths of the value chain. Leading VSVs also need to be vigilant, as power dynamics can quickly shift and there is a strong opportunity for new entrants to seize high ground.
We love the idea of bringing together a community to explore the boundaries of Vertical SaaS and are excited by what we can learn from each other. If you have thoughts or comments or want to get involved, reach out to us at email@example.com.
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The information presented in this post is for illustrative purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by Tidemark or any of the securities of any company discussed. Companies discussed in these posts may include current Tidemark portfolio companies and/or prior investments made by Tidemark employees while at other investment firms. These companies identified above are not necessarily representative of all Tidemark investments, and no assumption should be made that the investments identified were or will be profitable. The information in this post is not presented with a view to providing investment advice with respect to any security, or making any claim as to the past, current or future performance thereof.