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Founder and Partner, Tidemark
Multi-Product is the holy grail for software businesses. Acquiring customers is usually one of the most expensive aspects of building any software company. Selling multiple products to the same customer allows you to amortize that sales and marketing expense, expanding ARPU and TAM. It also can deepen the customer relationship, increasing net revenue retention and driving lifetime value. Further, in smaller markets, multi-product changes from a nice-to-have to a fundamentally necessary strategy for building a large business.
All of this is a bit obvious. What is perhaps unintuitive is how vertical SaaS businesses are better positioned from the get-go.
Vertical SaaS vendors (VSVs) are inherently multi-product. Their merchant customers want a single point of accountability; by leveraging a control point, VSVs are well positioned to deliver multiple integrated products that reduce friction and cost.
"80% of gross profits came from sellers using 2 or more products, 38% came from sellers using 4 or more products with these sellers generating more than 10x the gross profit compared to those only using 1 product." - Block (owners of Square) Q421 Shareholder letter
Being multi-product starts almost at day one for a VSV, and is required all throughout the public market journey. But despite its necessity, going multi-product is one of the hardest transitions for a software company to make. A new product may sound trivial, but it is essentially starting an entirely new business while ensuring your previous business doesn’t explode. It can require significantly different capabilities, and needs to be reconciled with your current go-to-market. Those challenges are why very few software companies have multiple highly successful products.
So if successfully going multi-product is the goal, we turn to the when, what, and how of starting this journey.
When: ARPU vs. Locations?
The two levers of growth for a VSV are locations and ARPU. Most companies are limited in resources, and opportunity cost is real—so when should you prioritize multi-product/ARPU growth over locations? All situations are unique, but two concepts tend to drive the answer: control points and TAM. If you are confident you are focusing on the right control point and you have sufficient GTM economics, always default to prioritizing locations. If you truly occupy the control point, you can sell other solutions later. Keep scaling locations until you see a horizon where location growth will decelerate.
At some point in your company's journey, you start hitting the ceiling of the location count in your geography, and growth slows. As you saturate your ideal customer segments, you will start to see increases in customer acquisition costs (CAC) and close times. Before that happens—ideally a couple of years before—you should consider expanding your geography or segment. Expanding tends to be high-risk and requires a significant investment, so you want to give yourself a couple of years to get it right before your core location growth slows.
As you undergo a location penetration-rate analysis, there are three things you need to do:
- Obtain 3rd-party data: Buy directory lists from industry associations and census data to obtain an idea of the market size. Then, integrate third-party data with your own internal CRM data. The combination can provide more accuracy and an incredibly rich understanding of your ICP, TAM, and segment numbers and characteristics.
- Look hard at segments: Don’t fall in love with the big TAM vanity numbers from your investor deck. Make sure your immediate TAM covers the segments where you have a strong right to win. Beware the temptation of expanding your TAM past the point of a reasonable customer profile fit.
- Think about it on an operational basis: TAM can be an ethereal concept. Ground it in the form of “at-bats”: based on the total number of potential customers and how often they look for a new solution, how many at-bats might you get in a year? Map that through to the sales territory analysis. What’s your win rate, and how many at-bats does a sales rep need to hit quota? How many sales territories are available to you at the current win rate and efficiency levels? When you struggle to find territories for new reps, you are hitting TAM ceilings.
This exercise should give you a pretty thorough estimate of your next few years of GTM so you can honestly examine your product roadmap. If you want to help doing it, reach out to us and we can brainstorm together.
What: Next Product
VSVs typically have an abundance of logical expansion opportunities, many with significant demand, wide-open greenfields, and attractive economics. But don’t lose sight of the prize. You want to own the category, which means you must own the control points. If you have the resources, focus on locking down any potential competing control points first.
If there isn’t an obvious second control point, you can still use the control point concepts in ranking options for the second product. There are three important variables to consider:
- High Attach Rate & Compounding Gravity: The higher the attach rate, the higher the compounding of gravity. Remember the sources of gravity from the control points essay: an additional product should add to your data, workflow, or account ownership, and compound on your control. Dandy founder Toni Oloko articulates this well:
It has to be the thing that… will build more gravity for Dandy, and make it something people will check every single day. We become more integrated, versus having something that has a 10% attach rate with really good economics for 10% of customers. We’d rather see something that has 40, 50, 60, 70, 80% of customers attaching… because you're trying to build gravity over the long term. I can then say we can now launch anything on top of this foundation that is so wild and so incredible over time.
- Compounding Customer Benefits: There are some inherent benefits to organic multi-product done right. In a Stratechery interview from 2022, Rippling founder & CEO Conrad Parker does a nice job cataloging them: deep integration, shared services and capabilities, a common UX, and pricing and bundling opportunities. However, the ideal second product is even more impactful—something where 1 + 1 = 5. In a perfect world, a second product not only leverages the product benefits mentioned above, but also improves your core product. Internally, we call it being “Better Together.” A great example is integrating earned-wage access into payroll, which benefits from lower friction and better underwriting and is also a great feature for payroll.
- Customer Love: Certain products enjoy higher engagement and NPS than others. Pay close attention to new customer NPS and onboarding ease, as they tend to set the tone of the relationship with a customer and, ultimately, the long-term cross-sell opportunity. Hone in on products that are critical during the merchant customer’s formation period. You can introduce the annoying but necessary stuff later—for now, be popular.
An additional way to think about sequencing your products is based on targeting pools of merchant spend. By analyzing where your merchants are spending the most capital, you can easily find what matters most to them. Further, each potential expansion product should be measured by the impact it has on the VSV, the merchant, and the merchant’s customer. As a starting point, the new offering should be evaluated on
- ARR impact
- Gross margin impact
- Customer adoption impact
- Retention impact
- Level of effort to build and launch the solution
- Ability to obtain high customer adoption of the solution.
I call it being a “TAM Shark”: Size and prioritize your merchant customer’s spend categories with other vendors. Build this early in your sales process and make adjacent vendors, spend amounts, and renewal dates a part of your account profiling and management process. (For more on sequencing, you can read our essay here).
Even with these criteria, it isn’t always as simple as just taking hold of the control point. There is often a balance between acquiring control point positioning and monetizing on top of it. When you start thinking about monetization vs. control, consider the following patterns (you can find our deeper exploration into these strategies here):
Follow the Workflow: Use your current control point to expand into adjacent workflows. Merchants ideally want a single vendor, so it’s natural to add functionality onto the ends of your current workflow. If your ultimate ambition is to extend through the value chain, grow your workflow towards the stakeholder you ultimately want to sell to (your customer’s customer, supplier, or employees).
Follow the Money is a specialized version of Follow the Workflow. Transaction flows can be the most important because money is involved. A VSV can add value by reducing friction and cost, creating automation and decisioning, and improving speed of payment. As leverage tends to tip to the person paying the check, so too does the VSV benefit from buyer power when selling into adjacencies that are downstream of its merchant customer.
You’ve now identified the locations and built the product. Figuring out the GTM is the final, crucial step.
Scaling multi-product is easier in Vertical SaaS, but it’s definitely not easy. In a perfect world, you launch a new product, sales reps promote the new product to customers, and you go on to multi-product greatness. The reality is that sales reps have competing demands for their time and attention, and new products are unfamiliar and unproven. Your biggest internal task is to win the confidence and attention of sales reps so they give the product the chance it deserves.
Remember that sales reps really don’t care about product road maps—they care about quotas. You have to make sales reps believe that they won't miss quota by betting on the new product launch. Here’s what I’ve seen work:
- Sales Support: Focusing a team of specialist sales engineers on the new product brings expertise that builds sales rep confidence. Longer-term, you may want to get to a model with a single account owner to manage the customer experience, and some sales engineers who help you sell a specialized part of the platform. For more on building out sales specialist teams, you can read how ServiceNow did it in our case study here.
One specific call out for payments: Payments products & pricing can be highly complex, and oftentimes you need to displace an incumbent provider. The area is sufficiently complex that in the early days, a VSV should field a specialized payments sales team.
- Social Proof: Start with a small seed group of reps with outsized pipelines and territories to sell the new product. Same quotas, but up to 2x opportunity, creates a great selling environment for the new products. Success and proof of demand will attract interest, and momentum begets momentum.
- Pricing and Bundling: Done correctly, pricing and bundling can increase overall ARPU for the VSV, lower the effective cost for the merchant, and increase NPS. You want sales reps to see that higher ARPUs are the path to easier quota attainment. I’ve seen situations where, within a year of a product launch, sales reps come to demand the new product to make quota. For a more in-depth guide on how ServiceNow managed their multi-product pricing to ensure sales success, read our case study here.
- Compensation: Compensation is another powerful lever. The typical approach is to start with incentive programs—not a quota—to provide opportunity before accountability. Bundling (e.g., discounts for the new product) also provides a form of incentive for the merchant. When you do start layering in quotas, start with quotas for management first, before the frontline representatives.
- Stay Close to Sales Teams: Many companies create a sales representative counsel so that executives have regular feedback from frontline sales teams. Some sales technologies also allow senior executives and product managers to listen in on customer calls, providing data and analytics to identify or scale pockets of success. I can’t stress this enough: separating product and sales will result in a disastrous new product rollout.
- Product-Led Growth: Stealing concepts from Product-Led Growth frameworks can also help. Be deliberate in determining your Land Product, which you lead with, and Expand Products, which you cross-sell to existing merchant customers, to drive focus and correct sequencing. As Tidemark Fellow Cameron Deatsch advises, look for engagement with administrative interfaces, as those can be moments when owners are open to new offerings. A good Vertical SaaS example: When a store manager exports labor data to ADP, it is a great opportunity to merchandise integrated payroll. Likewise, understand the Customer Maturity Model—which solutions are most highly demanded, in which segments, at what stage in the company’s lifecycle. All of this will help you understand which of your multiple products to push to whom and when.
For a case study on how ServiceNow did this with their own sales reps, you can read more here.
Multi-product is a massive opportunity and a huge topic, so I’ll continue to add to this subject moving forward. In particular, I will focus on organizational models, product development, and multi-product pricing and bundling. We also host small group, deep-dive sessions on multi-product go-to-market in our Vertical SaaS in Action Series.
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