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​Setting the Stage ​ ​If you’re an early-stage founder, you probably don’t care what the Fed or RBA are doing. All this pessimism goes against your fabric. The world of tech is meant to be a world of optimism. But, when reality shifts, unfortunately, so must you. Ahead of us lie a few challenges:
​​Satya Nadella remarked on Microsoft’s most recent earnings call: "Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimise that spend. Also, organizations are exercising caution given the macro uncertainty."
Nikesh Arora, CEO of Palo Alto Networks remarked: “More scrutiny of tech budgets…is occurring, and that is a significant change from recent times during which the approach has tilted closer to a “blank check” for tech line items.”
Bundling is Back
With all this going on, the term “bundling” is starting to reappear in many people's vocabularies. Jim Barksdale, CEO of Netscape famously said “there are only two ways to make money in business: one is to bundle; the other is to unbundle.” We seem to be in the phase where bundling is in. The easiest example to point to is Rippling. It’s being touted as the next generational software company. Mike Vernal of Sequoia pointed out in an investment memo on Rippling that “as enterprise software has moved to the cloud, we have seen a massive unbundling of products into ever smaller point solutions. Many startups and small businesses have more SaaS subscriptions than employees. While each tool might be individually great, this setup introduces a tremendous amount of administrative complexity. Data is fragmented across many different systems, each with bespoke connectors to dozens of other systems. Managing your business and getting a simple, holistic view of how you’re doing becomes incredibly difficult.” John Luttig, in his notes on Rippling, pointed out that “bundling is Rippling’s accumulating advantage that offsets classical diseconomies of scale. This means that, unlike most growth-stage companies, Rippling’s core metrics improve over time. CAC paybacks decrease. Growth accelerates. Retention improves. Cross-sell rates increase.” I think they’re both right – bundling can be incredibly powerful. They’re also probably right that Rippling will go on to do incredibly well. If you look at a list of the largest public companies in America, you’ll notice that all the B2B software companies have product and revenue diversity. Charts like the one below have become increasingly popular and are a testament to this diversification.
So, yes, bundling is a pretty good long-term strategy. But I also think this renewed interest in bundling misses two key things:
This brings me to the crux of the article, and it is well summed up by Packy. In The Good Thing about Hard Things, he wrote “i​t’s easier than ever to build the average software company – plug into AWS, snap in a bunch of APIs, follow established playbooks – and harder than ever to make it really big. Modularized inputs and playbooks lead to more competition, smaller opportunities, and lower margins.”
Basically, it’s easier to build and tougher to sell. Bundling is a good but an impractical solution for most. So, how do you get a leg up? With my investment hat on, I decided to dive into some strategies that may work well and came up with a potential answer: take a leaf out of the Consumer GTM playbook. I arrived at this conclusion after stumbling upon some analysis from Toplyne. They recently surveyed 1.8m users of bottoms-up software products and found that the magic number is 10 seats. At this point, retention rates inflect upwards and the risk of churn falls considerably. This means that similar to consumer growth teams who spend a lot of time experimenting with acquisition and retention, you should also be rapidly testing new ways of getting to 10 seats. Once you reach this point, you have every chance of growing revenue within an organisation by 10-50x (as the companies in the chart below have done).
Working Backwards from 10 Users
In order for your product to be used by 10 people within an organisation, it will need a sharing mechanism or viral loop. This basically means users share the product with non-users – internally and ideally, externally.
The Viral Loop Deconstructed
David Skok has some great material breaking down the science behind viral marketing. We can roughly think of this in three steps: activation, referrals and conversion.
Tactics to Improve Virality
Measuring Virality There’s a lot to unpack here, so I’ll leave you with 3 metrics that are worth taking a look at. If you’re diligent with data-driven experimentation, the trends and outputs from these metrics should be very valuable.
Finally, I’d be remiss if I didn’t acknowledge that I haven’t discussed unit economics or pricing tactics in this article. These obviously have an enormous bearing on your approach and should be looked at in tangent with other decisions.
As always, I’d love to hear thoughts and feedback. You can reach me on LinkedIn or Twitter. ​ Comments are closed.
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