Control Points 2.0


Dave Yuan

Founder and Partner, Tidemark

All Roads Lead to Rome

In the long run, there are no point solutions in Vertical SaaS; there are only platforms. Small business owners want a single point of accountability, and while you might partner with other vertical SaaS vendors (VSVs) in the short term, don’t fool yourself—you will ultimately be competing over account control and downstream expansion cross-sells over time. 

In Vertical SaaS, there are typically one or two control points, or systems of record.On a fundamental level, the control point is the most important system, the last to be thrown out before an owner ceases operations. One of these is in the front office (i.e., point-of-sale, CRM, or e-commerce). This control point drives sales and serves as the cash register. The front office control point is accompanied by one in the back office, home of the general ledger to which everything is reconciled. If you own a back office, the goal of a VSV is to build or acquire the front. Own the high ground, own the control point! 

Control points have this power because of the three types of VSV gravity:

  • Workflow is the system other systems integrate into. They provide integration value and surface area to cross-sell. Workflows that have the most engagement or manage scarce assets like time and money (e.g., calendars or G&L) tend to be the most valuable. 
  • Data 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 more intelligent.
  • Account maps to the importance of the user/sponsor of the system. The higher the ranking of that individual in the merchant organization, the stronger the account ownership.

‍Winning the control point is not easy. By definition, a system of record is hard to displace. Unless the market is literally pen and paper, a VSV will be fighting highly entrenched software companies. You may be able to do it organically with product innovation, but M&A can also be an option if the integration debt is manageable. If M&A is not possible, a slow winnowing of your competitor may be the only approach available.

This winnowing can happen by having an even more in-depth understanding of control points beyond the three types of gravity.

Control Points 2.0

As the Vertical SaaS industry has developed over the last few years, we've learned that other offerings can also serve as control points. These new control points can act as wedges to either capture the traditional control points, or subsume them entirely. They can either impact a merchant’s business model or improve the end-consumer experience. 

Business Model

Incremental Consumer Demand

In Vertical SaaS, bringing in customers beats most other value propositions. It is doubly powerful because a VSV bringing in demand allows the merchant to fund the purchase of the VSV’s other software products. 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 financing (buy now, pay later), conversion through customer confidence (certification, fraud, etc.), integration into more demand sources (e.g channel management), or new customers and repeat rate through CRM and loyalty programs.

Bring in Funds

Similar to revenues, a merchant can grow more quickly if a VSV can provide credit, insurance, or improved working capital management. However, credit can be a commodity, so 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 
  • Difficulty in the underwriting or servicing
  • Being relationship-driven, potentially with more than one constituent (both the merchant and the consumers) 
  • A relationship that naturally trends towards exclusivity

Success Take Rate and the Super Bundle

If a VSV creates their product roadmap correctly, they should co-benefit from their merchant’s success via 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 of revenue-accretive products is a powerful concept. Dandy 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. Toast’s “Better Together” model describes how in the restaurant ecosystem, products sold to each stakeholder – the owner, the employee, the guest, or the supplier – can work to the benefit of every stakeholder.

Changing the Consumer Experience 

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 market structure is efficient if the product, its use, and its purchase are standardized. If that's not the case, a VSV that sits in between these constituents can improve the end consumer experience as a specialized form of workflow gravity. Some examples include:

  • Multi-party communication
  • Product data: ingredients, performance attributes, authenticity, quality, reviews, and reputation
  • Product education and training
  • Procurement & auctions

‍A few more examples:

Embedded services can improve digital services with the interjection of human assistance, particularly if the task is highly complex, unfamiliar, or high-stakes. A live person often brings clarity, speed and confidence. TurboTax Live, an embedded live accountant offering, was the most successful product launch in Intuit’s history. GoDaddy sometimes offers free website design support during critical steps of a customer’s journey to increase odds of success. Embedded services become a control point if the human consultants can provide strong account ownership and serve as a trusted advisor. 

The Formation Stage is a unique stage in the customer experience during which small businesses and consumers are often open to establishing long-term advisory and customer relationships. One example is LegalZoom’s tax offering: a legal formation product which engages a small business during this stage when it launches. By engaging small businesses with its accounting services, LegalZoom is building an ongoing advisory relationship with these businesses as they scale. In addition, small businesses who work with accountants tend to do better, as accountants also serve as business coaches. LegalZoom is creating a control point while helping their customers succeed. 

Once you have determined how to transform the business or customer experience, you need to decide how to handle the competitors who own control points. ‍

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 offer a lot of functionality. They were also usually sold as a license, rather than a subscription, with little to no ongoing costs to use—so they are effectively free, and hard to displace.

Because it is too difficult to rip and replace a PMS, an alternative approach is a strategy I call Integrate and Surround. With the right value proposition (the best is a super bundle of 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 then further open up their PMS integrations to third-party apps, creating a network effect and platform economics. Over time, if done correctly, the VSV can relegate the PMS to the nameless system in the office closet that is simply a repository for data. 

Integrate and surround is not an easy path. It requires a low-cost team to build and manage these PMS integrations, and can also require the cooperation of the PMS themselves. Companies that appear to be pursuing Integrate and Surround strategies include:

Channel Management
  • 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.
Supplier systems
  • Dandy’s lab services on top of legacy dental practice management systems. 
  • Vetcove's Group Purchase Organization (GPO) direct integrations into legacy veterinary practice management systems, for inventory and direct product-specific veterinarian communications.

As the Vertical SaaS opportunity expands, so does the concept of control points. The approaches I covered in this essay provide new opportunities for VSVs to control larger swathes 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.

Share your thoughts

Please reach out to info@tidemarkcap.com if you have a particular passion for the topics above or would like to contribute. And please support us by spreading the word about the Vertical SaaS Knowledge Project with your network. If you would like to keep updated as we publish these essays, sign up below.

Case Studies Relating to this chapter:

Karbon: A Case Study in Control Points

Dutchie: A Case Study of Vertical SaaS in Emerging Industries

SiteMinder: Extending into Consumer Demand


Control Points 2.0
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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.

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