Recurringly

4 ways B2B software companies can monetize their customers’ payments

As a B2B software company builds its customer base, it often also builds up a sizeable payments monetization opportunity. For every dollar the software company earns from its customers, its customers likely collect and spend hundreds. Here are 4 ways well-positioned software companies can earn additional revenue on all that payment volume.

1) B2B2C

The setup: A software company that sells to businesses who serve consumers helps its customers more easily collect consumer payments.

Who this works for: companies that sell software to plumbers or shopkeepers or consultants or pretty much anyone else who’s providing goods and services to consumers. There are plenty of consumer payment options out there, but if the software is core to its customers’ operations an integrated solution has the advantage of tidily tracking everything in one place. Consumers like and expect to pay with credit cards, and credit card payments tend to be the most lucrative to monetize, so B2B2C software companies sit in a favorable position.

Who pays transaction fees: usually the supplier, but sometimes the cost is passed onto the buyer for large and/or recurring payments (like rent or tuition)

What’s it worth to the software company: the value of the payments opportunity is driven by the percentage of each transaction that the software company captures and the total volume going through the system. High payment volume is doubly good because companies with greater total transaction volume tend to be in a better negotiating position. Software companies can also earn more by assuming more risk; acting as a referral partner is the lower risk and easier way to start, but becoming a payment facilitator (payfac) allows software companies to capture more of the transaction fees.

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A cheat sheet for setting OKRs

Midway through the year is an excellent time to revisit goals, and potentially rejigger goal-setting. I’m a big fan of the Objectives and Key Results (OKR) framework, as a way to help product teams focus on outcomes instead of outputs.

Setting OKRs involves choosing objectives for your product (why you’re building the things you’re building), and key results for each objective (what you measure to see if it’s working). Coming up with what to measure can be tricky, especially the first time, so I’ve been collecting good ideas from books, conferences, and teams I’ve worked with. The result is the following index of OKR archetypes. They come in a couple of flavors: lagging indicators, leading indicators, and pre-launch indicators.

Lagging indicators

Lagging indicators are those tied most closely to the business’ success: things like revenue and bookings. Every product team should keep them in mind, but they usually manifest too slowly to be the only outcome you track. They make good long term goals, and are useful for mature products.

lagging indicators

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Who should own product marketing?

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For software companies, it’s no longer viable for designers and engineers to build a product, then toss it over the wall for marketers to sell it. Product positioning and go-to-market strategy needs to adapt as fast as customer needs and product features do, so pretty much constantly. Enter product marketing.

Product marketing is hard to define, because it tends to fill the gaps in any given organization. If could help marketing better highlight product differentiation that customers aren’t understanding, it could help product build the features that customers will pay the most for, or it could provide sales enablement to pick up sales velocity. No matter what shape it ends up taking, product marketing can be tricky because its goals are almost always shared with other functions, most notably product and marketing. Big technology companies may have entire product marketing departments, but for a small and growing business, where should product marketing sit?

If you DON’T have dedicated product marketing managers…

Owner: Marketing

In a small company, much of marketing’s job is product marketing, so marketing leaders need to have deep knowledge of their product. If bandwidth is limited, the most important activities include packaging product value and positioning, identifying and targeting personas, and defining the go-to-market plan. Product can and should help with articulating the value of the features and products they’re releasing.

Watch out for: Traditional marketers who mechanically drive volume without thoughtful focus. If your marketing leader is wearing the product marketing hat, make sure that they are assessing their market, and positioning your product intentionally, rather than just driving volume at the top of the funnel generally. Continue reading “Who should own product marketing?”

Not quite recurring: driving utilization in reoccurring revenue businesses

Reoccurring–don’t you mean recurring–what’s the difference?

Recurring revenue is pretty well defined: this is revenue that comes in repeatedly, in predictable amounts, at regular intervals. There is also a sister category, which I’ll call “reoccurring revenue”. I can’t find a good business definition, so I’ll have to lean on the grammatical distinction between recurring and reoccurring. Things that reoccur happen more than once, but not always regularly or predictably. So by extension, reoccurring revenue is revenue that repeats, but for which there’s some uncertainty around timing or amount.

Technically, lots of repeat customer relationships could qualify as reoccurring revenue, but I’m more interested in steadier arrangements that might otherwise be categorized as recurring revenue. There are a few big categories that fit this bill

1. Payments, commission, and other B2B2C

While business-to-business-to-consumer (B2B2C) companies get revenue through the same business clients every month or year, the amount of revenue can vary based on behavior of the end consumers. Payments companies are a classic example: the revenue that a payment processor makes in fees depends upon end customer traffic, spending, and choice of payment type. Companies that make their money on commission or referrals, like travel aggregators, would also fall into this category.

2. Two-sided platforms and marketplaces

Marketplaces have always had to build their products around distinct buyer and seller user groups. Typically their revenue is proportionate to the traffic on their platform, so they need to drive utilization by both user types.

3. Contracted volume-based pricing

More and more SaaS and tech-enabled service companies are opting for usage or value-based pricing. Most end up still operating with some flavor a recurring model, but some move to pricing that’s completely variable and enter reoccurring territory. For examples, think about companies that opt to charge only for users active in a given period (like Expensify) or companies that charge per usage event (like Twilio).

Utilization is the name of the game

In reoccurring arrangements, there are often multiple customer types: service provider and service seeker, product buyer and product users, payer and payee. Usually, it’s something of a two-part sale, where you start with a larger “partner customer”, then encourage a smaller “utilization customer” to use the product or service. If you stop once you have the partner customer, you’re only half way there. Continue reading “Not quite recurring: driving utilization in reoccurring revenue businesses”

How should value prop inform functional strategy?

After reading Tomasz Tunguz’s post on how machine learning is especially valuable for software companies that help customers cut costs, I started thinking about other ways that a SaaS company’s value proposition should inform the way it approaches not just product development, but pricing, customer success, marketing, and sales.

value prop strategy

Is your niche too small (or too big)?

A follow up to 4 reasons it’s nice to be niche, here are tips for assessing the market you’re defining as your niche. This probably goes without saying, but if your target customers aren’t enthusiastic about your product, it doesn’t matter how many of them there are. Assuming you’ve got some product-market fit, how can you tell if you’re focus is too broad, or not broad enough?

Are you number #1 or #2 in your space?

If you’re not #1 or #2 (and you’re not on a fast-track to getting there), I’d argue you’re not focused enough. If you can’t define a set of customers such that you are the de-facto choice, it’ll be much harder to achieve the advantages of focus detailed in my previous article. Instead, those would-be advantages could become weaknesses.

“Me too” product – if you’re not focusing on a narrower set of customers than your larger competitors, it’ll be really tough to outdo them. Instead you’ll probably end up with a lesser-known duplicate of the leader’s product at best, and only a piece of it at worst.

Outgunned in sales and marketing – in a big market, big companies set the table stakes for sales and marketing. To make a name for yourself, you may need to shell out for trade show floor space, bid on expensive search keywords, or invest in uncertain RFP processes. The large competitors are doing all those things too, but they spread those costs over a much larger bookings number. By swimming in the big pond, you give up the advantage you could have had by being more focused on a smaller group.

Bogged down by switching costs – if your team is trying to serve very different types of customers, you risk additional costs and delays. Firefighting could hijack your strategic priorities if you have to do custom development to meet one customer’s needs, struggle through unexpected implementation requirements, or have to spend lots of executive team time to sell a prospect for whom you have no relevant references.

Over-extended team – if your team doesn’t agree on what their primary focus is, they may run in opposite directions. Your sales team could be selling features that were never supposed to be on the roadmap, or your support bandwidth could get chewed up by tricky customers while neglected bread-and-butter customers start to churn. Continue reading “Is your niche too small (or too big)?”

4 reasons it’s nice to be niche

“More organizations die of indigestion than starvation.” -David Packard

When you take on too much, you lose out on the efficiency that comes from focus. The lesson isn’t a new one, but it bears repeating—here are 4 reasons to specialize.

1) More compelling product

Product focus is critical for small and growing companies because, almost invariably, they’re going up against larger, better-resourced rivals. When you don’t have the resources to be everything to everyone, having a narrower product strategy helps ensure that your product is fantastic for someone.

Picking a niche allows you to zero in on your segment’s needs, and to outperform larger competitors in two important ways. You can offer the right features for a given customer set to beat out a gappy generalist product (or fill a totally unmet need). You can also offer intuitive simplicity as an alternative to a product that has all the bells and whistles, but is painfully complex or expensive.

2) Lower customer acquisition costs

Marketing and selling a product, particularly if you’re evangelizing a new space, is an uphill battle. Geoffrey Moore’s “Crossing the Chasm” advocates that new technology products start with a focused beachhead market for exactly this reason. Focusing on a smaller target market limits the number of people you need to inform and convince. Focus permits you to spread the message less widely, and speeds the time it takes to go from an unknown to a no-brainer.

Once your product becomes an accepted standard with name recognition and relevant reference customers, selling it gets easier and less expensive. Rather than trying to enter multiple sub-markets simultaneously, aim to dominate one first. Define a group of customers that read the same publications, attend the same conferences, and most importantly, talk to each other. Continue reading “4 reasons it’s nice to be niche”