Earlier in the Vertical Saas Knowledge Project, I argued that Vertical SaaS vendors (VSVs) are “born multi-product.” Most VSV founders and CEOs will nod in agreement, before quickly asking the natural question: where should I start? 

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I invited my friend, Ershad Jamil, Tidemark Fellow and former Chief Growth Officer of ServiceTitan, to help answer that primal question and share his framework for prioritizing expansion opportunities.  

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I love this essay because we start with first principles, but dive further into the specifics of the “follow-the money” and “follow the workflow” frameworks. Finally, Ershad shares a matrix to help you stack-rank expansion opportunities. And because all people who like this series are Vertical SaaS nerds, we will of course go deeper. 

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If you are a late-stage vertical SaaS company and interested in brainstorming and some deep benchmarking, reach out to us and we’ll set up a session. 

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First Principles

The long-term goal of a Vertical SaaS company is to create a diverse portfolio of revenue-generating products that drive stickiness in the customer base. The stakes are high to get expansion right—expansion offerings oftentimes represent multiples of the initial SaaS ARPU. The benefits of being multi-product are significant for both parties in the transaction.

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For the Vertical SaaS Vendor (VSV):

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• Creates new revenue streams with high gross margins. You can increase overall gross margins for the entire company while having dramatically lower acquisition costs per product.
• Allows for diversification on top-line growth. Not all products have to hit annual goals over time; it’s a portfolio approach that allows for a more nuanced growth strategy.
• Enables higher stickiness for existing customers on the core software by increasing net dollar retention.
• Attracts prospects due to the additional features and functionality that can differentiate you from competitors.

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For the merchant:

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• A better experience for the end customers (e.g., they can do payments in the same UI)
• A better experience for their own staff by reducing the need to learn multiple systems
• Ability to generate additional revenue via marketing automation
• Ability to increase efficiency through things like embedded payroll and reduced errors from manual calculations

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So, back to our original question: How should a VSV determine where to expand?

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Pools of Merchant Spend

One good approach is reviewing the customer’s P&L to understand areas of spend and where the VSV can provide value. This analysis should be done by customer segment—SMB, Mid-Market, or Enterprise merchants will have vastly different needs. An example of an SMB customer is below.

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Follow the Workflow

In parallel, understanding the merchant customer’s workflow can help prioritize where they may need multiple products and what you should build based on economics, level of effort, and customer adoption.

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For a $600B GMV example in the US, we can look at tradespeople (roofers, floorers, plumbers, etc.). They have a variety of software options to choose from, but a Vertical SaaS company can provide the ability for tradespeople to consolidate many disparate systems and software. Across the workflow for a contractor, there are a ton of opportunities for add-on products, which are typically replacing existing software (i.e., share-of-wallet approach). Contractors are then moving spend to the SaaS product. 

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Expanding GMV take is one of the strategic advantages for a Vertical SaaS vendor (VSV) to increase wallet share and stickiness.

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#1 Marketing acquisition: Helps companies target new customers (e.g., a homeowner who may need to fix their floor).

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• Direct mail - Send direct mail from the software. An integrated solution replaces a manual and local direct mailer that companies use.

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#2 Inbound & outbound communications: Helps companies answer phone calls, use SMS, dial out to customers, etc.

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• VOIP/Telecommunications - Take and dial out calls with the software, along with sending SMS and other communication modalities. This can replace a local provider or a VOIP solution that is not integrated.

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#3 Dispatching technicians: Helps companies track driver behavior, maintenance on the vehicle, and location of vehicles for features like ‘route optimization’. 

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• Fleet management & insurance - Track vehicles through hardware on the trucks. An integrated solution replaces existing GPS solutions.
• Fleet cards - Fleet drivers to use fuel cards in the field and tie the payments back to the core product. The office staff can monitor and track fleet payments and fleet drivers can obtain discounts at the pump.

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#4 Servicing in the home or business: Helps technicians in the field perform more efficiently.

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• Pricebook - Show customers a catalog of services, materials, etc. This could replace a vendor-provided or custom-built pricebook.
• Forms - Build complex forms in the software. This could include enhanced forms functionality if needed.

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#5 Taking payments: Helps technicians and office staff accept payments and reconcile appropriately in one solution.

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• Credit cards - Take credit cards remotely. This replaces the company's current CC solution with an integrated experience in mobile and desktop, including features like online payments and auto-reconciliation.
• Checks - Take physical checks, mRDC, or ACH out in the field or in the office, instead of bringing physical checks to the bank or using a machine in the office to process. 
• Customer financing - Allow customers to pay through embedded financing (BNPL). This would be an integrated experience where customers can use financing for the job and get approved in a matter of seconds in the app.

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#6 Marketing retention: Help companies retain existing customers and increase brand reputation online.

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• Email retargeting - Hyper-target existing customers through tailored campaigns. This is an extremely valuable solution for companies that rely on repeat business. 
• Reputation management - Manage reputation in the software and reply to reviews to maintain a high brand. This also could allow companies to track reviews by technicians and award those with high reviews over time.
• Ads - Pull in Ads data and flight ads. This wouldn’t replace the robustness of Google or Facebook, but it would allow companies to have better insights on campaign performance, and to optimize ad spend & results.
• Websites - Build and maintain the website of the company to optimize SEO and allow for widgets like web schedulers, reviews, etc.

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#7 Financial Technology (Fintech) in the office: Helps office staff to obtain funding, pay employees, and potentially do all ‘banking’ in the software. 

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• Business financing/capital - Obtain loans to help with working capital. Ideally, the solution is a simple application inside the app. The app could also recommend when to obtain capital based on financial results.
• Payroll and HR - Paying employees in the software, vs. existing payroll solutions, is embedded payroll. You can also go ‘up-funnel’ to build HR capabilities for their customers (i.e., background checks, onboarding, talent management, etc.)
• Insurance - Tie insurance into other products like workers comp, vehicle insurance, general liability, etc.
• Payables - Pay vendors in the software (e.g., AP automation) via ACH, direct ACH, virtual cards, etc. The great thing about payables is that the contractor does not pay for it, the vendor does—although that also complicates adoption.
• ‍Banking as a service - Conduct Neobank functionality in the software. This is an early stage add-on product for most SaaS today.

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The Payoff

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 following should be evaluated:

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• ARR impact
• Gross margin impact
• Customer adoption impact
• Retention impact
• Level of effort to build & launch 
• Ability to obtain high customer adoption 

The table below is an example of potential multiple products for a VSV company, to help prioritize the products and solutions the company can build. With R&D always having to prioritize core vs. add-on, this framework can help you understand the order of what to build and deploy over the years.

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It’s also important to understand who does the billing, along with who actually pays for the product (i.e., the VSV or their merchant customer). In general, the larger the software company's customer, the higher likelihood there is to adopt more products due to additional staff with the ability to manage the products and their workflows. Plus, there will be a lot more budget to go around—the bigger the P&L, the more dollars there are for VSVs to capture.

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Share your thoughts

As with most things, prioritization of expansion products is highly contextual, so let’s talk and get more into the specifics. If you’re a late-stage VSV and want to go deeper with a benchmarking and brainstorming session, reach out to us at knowledge@tidemarkcap.com.

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 knowledge@tidemarkcap.com. If you would like to stay updated as we publish these essays, sign up here.

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CASE STUDIES RELATING TO THIS CHAPTER:

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