“Vertical focus, how they approach their addressable market, that’s why they’ve earned the right to beat Salesforce in a deal even though they’re built on Salesforce, because of their knowledge and understanding of the industry, and their referenceability” – Dave O’Flanagan, CEO, Boxever
The first wave of SaaS-enabled disruption saw the larger ‘all-things-to-all-people’ companies like Microsoft and Oracle, who provide a broad range of software products to a mass market of customers from all kinds industries, replace traditional, on-premise software and begin their journey to the cloud. However, as we all know, this disruption was instigated by specialist, ‘born-in-the-cloud’ companies like Salesforce, Dropbox, and Workday who deliver more specific products and functionality sets, doing so extremely well, but retaining the ability to sell to customers across all industries owing to the ubiquitous need for systems like CRM, storage, financial management, and HR in the B2B market. This began what we like to call the SaaS Revolution and has led to exponential growth and the creation of a global market with projected revenues of $106bn by the end of 2016.
Vertical SaaS: The Background
This we already know, but as Boris Wertz of Version One Ventures puts it:
“What’s new is the fact that there’s a second wave of disruption in enterprise cloud computing coming, and it’s going to be in the form of vertical SaaS solutions.”
These SaaS companies are not interested in being all things to all people. They’re not even interested in specializing in a particular, horizontal, product category – rather they have taken that specialization down to the level of industry verticals and developed purpose-built, industry-specific software that aims to serve a niche market requirement far better than its more generic counterparts. The viability of this kind of narrow focus has often been questioned for reasons of limited market size, increased bargaining power of buyers, etc. so in order to put a face to the names of these renegade vertical specialits, I recently met with the CEO of such a company, Dave O’Flanagan of Boxever, and received a veritable lesson in Vertical SaaS, and how to make the Vertical SaaS business model work.
Who are Boxever?
Boxever are the creators of a cloud-based customer intelligence and predictive marketing platform aimed at online retailers in the travel industry. The company’s enterprise product combines master data management, decisioning and analytics into a marketing platform that allows travel companies to capture, analyze, and act upon customer data, and offer their customers a unique, personalized experience. Based in Dublin, Ireland, Boxever has grown rapidly since it was founded in 2011, on-boarding large enterprise customers like Air New Zealand, Tigerair, eDreams ODIGEO, and Ryanair amongst others, tripling its ARR in the past year, and utilizing its $6m series A funding round led by Polaris Partners in early 2014 to continue its global expansion.
The genesis of a Vertical SaaS company
Vertical SaaS companies are much the same as Horizontal SaaS companies, or practically any company at all for that matter, in terms of how they come about. At the most basic level, the first step is to identify a need in the market, closely followed by the second step which is to come up with a solution to meet that need which adds value to the potential customer you have in mind, and is differentiated enough to be a viable business. Essentially, the basic elements of Product/Market Fit.
Identify the need
Having previously worked at an airline ecommerce company, Datalex, O’Flanagan knew the travel industry very well and saw the need to enable organizations to use the vast amount of customer data available to them to better understand their customers and refine their offerings on that basis.
“I was on calls with some of the biggest airlines in the world and they didn’t understand conversion, they didn’t have any CRM function, they were struggling with their email marketing programs – just things that I would have assumed large scale retailers would have sorted out in spades just weren’t there – and that was really the genesis of Boxever,” O’Flanagan recalls.
Create the solution
O’Flanagan, a self-proclaimed “maths and stats guy”, knew that the answer to the problem lay in the data – a lot of which his potential customers already possessed but didn’t know how to centralize, manage, analyze, and use to make better decisions. Much of the infrastructure and open-source technology required to build the solution already existed, too – the “secret sauce” required on the tech side came in the form of Boxever’s unique predictive algorithms that, when applied to the customer data in the platform, provided actionable outputs for travel marketers.
Another challenge, common to many SaaS companies, was that when Boxever started out, the majority its potential customers wanted the software on premise. “They wanted a traditional licensing model with support and maintenance,” says O’Flanagan. “However, this wasn’t the kind of company that the Boxever team wanted to build.
“When we envisaged the product, we absolutely believed that the right model was going to be on-demand, delivered as a cloud service,” says O’Flanagan. He added that “Cloud has enabled us to do remarkable things – 15 years ago, we would have needed tens of millions to do what we’re doing.” The team insisted on SaaS, building their solution on Amazon’s public cloud and ensuring that scalability, flexibility, redundancy, and all of the other benefits of our favorite software delivery model were standard in their offering.
Boxever’s lesson in Vertical SaaS
The success of Vertical SaaS companies, by its very nature, can be very difficult to replicate. In fact, this is one of the key benefits to those who manage to succeed in their vertical, as it is a far less hospitable environment than even the highly-competitive Horizontal SaaS markets for copy cats to enter and thrive. Nonetheless, the principles outlined below are based on the experience and learnings of Boxever and other successful Vertical SaaS companies and act as a useful guide for founders and executives, as well as sales, marketing, customer success, product, engineering, and other professionals who find themselves at the helm of a vertically-focused SaaS business.
Identify where your competitive advantage lies
Once this potential product/market fit was identified, it was time for Boxever to do some thinking about where their competitive advantage was to be found. They could have developed a generic predictive marketing platform with the potential to serve all verticals and sizes of customer – this certainly would have broadened the size of their potential market, but would it have maximized that competitive advantage? As Lincoln Murphy says when advising on SaaS marketing plans, “Make sure you know who you need to be targeting (if you’re going to say “but everyone is a potential customer” save it for the bankruptcy judge)”.
This thought process is as much about knowing yourself, your skills, attributes, strong points, and weak points, as it is about knowing your market and your customer. On this point, O’Flanagan says:
“When we started the LaunchPad programme, we wanted to find out what we were good at and what did we know. We knew eCommerce, but from a travel perspective. We knew travel systems and travel integrations very well, and we saw that there was a consistent problem across the horizontal with all these big organisations, but actually what we knew well, and the reason we got funded, I believe, was our knowledge of the travel industry.”
It was clear that for Boxever, their competitive advantage lay in their in-depth knowledge and understanding of the travel industry combined with their talent for big data analytics. Once this decision was made, they could build their product, sales and marketing channels, and every other facet of their business in a way that best met the needs of that industry. As all things arguably should, that process started with the product, and O’Flanagan brought his knowledge of travel products and how they differed from other kinds of products to bear on Boxever’s platform:
“With travel, when you buy a product, there’s a whole host of opportunities to speak to that customer before they consume that product. There are other people participating in the product. There are networks of people that travel together. There are social networks on top of that. There are networks of people in the same company – and all this information is yet to be discovered.”
In addition, the company leveraged its vertical focus in terms of integrations with third-party systems and offered native integrations with airline IT systems that allow it to on-board customers quickly and simply wouldn’t be possible or economical for a horizontal competitor to offer.
When it comes to verticals, referenceability is key
Vertical industries, however large, can be remarkably tight-knit. People move around between companies, share customers and suppliers, attend the same events, read the same publications, etc. So when all your eggs are in that vertical’s basket, you better be sure not to drop it. The flip-side of that coin, of course, is that once you gain a good reputation and your credentials as a reliable expert in that industry are well established, doors can open and opportunities can arise. O’Flanagan expands on this point in saying: “We go in as trusted advisers. We know the space. We’ve delivered some huge projects for some big customers, they have been a tremendous success. That earns us the right to talk to the big players in the industry.”
The vertical focus and the reassurance that it can bring to potential customers in the space is a valuable currency for Boxever and others who have zoned in on a niche in the market. One such example O’Flanagan provides is from the life sciences industry where Veeva Systems have been remarkably successful in cornering the CRM market within the vertical. You might assume that life sciences CRM is almost too niche to make for a successful business at any significant scale – but when you consider that Veeva achieved revenues of $313m last year and a market cap of $3.07bn, and counts the likes of Pfizer, Bayer, and Amgen (more than 30 of the 50 largest drug companies worldwide, in fact) amongst its loyal customers, that would be quite the erroneous assumption. What makes Veeva’s success even more astonishing is that its solution is built on the Salesforce platform and competes directly with Salesforce.
As Veeva’s CEO, Peter Gassner, told IBD: “Cloud companies are usually growing but not usually profitable. We know who we are making products for. It’s not a guessing game. So we can have lower sales and marketing costs.” O’Flanagan draws a lot of parallels between Veeva and Boxever and I’m sure would like to emulate their incredible growth and successful IPO. As he says in reference to Veeva, “Vertical focus, how they approach their addressable market, that’s why they’ve earned the right to beat Salesforce in a deal even though they’re built on Salesforce, because of their knowledge and understanding of the industry, and their referenceability.”
This kind of referenceability is worth its weight in gold, not only in terms of acquiring new business, but also in creating a barrier to entry to would-be competitors and establishing a strong foothold as the vertical market leader much faster than would be possible in a horizontal market.
The SaaS metrics stack up in favour of the Vertical approach
The importance of Gassner’s point about lower sales and marketing costs is not to be taken lightly either and this is one of the key attractions of the Vertical SaaS model. Narrowing your target market reduces the number of potential customers, enabling you to reach customers more quickly and with fewer costly outbound sales and marketing resources. Lower cost methods of customer acquisition like word-of-mouth referrals, industry events, and inbound marketing come to the fore in the vertically-focused business and CAC is significantly reduced. However, it’s not just the bottom line that benefits as, according to O’Flanagan, specialized vendors can charge a premium for their expertise that boosts the top line, too:
“They have a right to charge a higher ACV because of their expertise and their ability to deliver their product more quickly. And their sales and marketing costs are much, much lower because Veeva, like us, will cover 15-20 events in a year, actively product market on 2-3 blogs and publications, and your major target audiences are covered.”
Given that in some horizontal models CAC can be anywhere between equal to or double ACV, the most compelling metric which justifies the vertical model for O’Flanagan is the combination of the two: “When you look at acquisition costs relative to first year’s recurring revenue, that’s the interesting metric. We would acquire a customer for 50-60% of first year’s revenue so in terms of CAC we’re doing really well.”
How niche is niche? Choosing a segment within a vertical
These kind of metrics don’t come from vertical specialization alone, however, and there was another decision facing Boxever and Veeva which helped them to achieve the kinds of enviable numbers which Tomasz Tunguz lists among the characteristics of an ideal SaaS company: “The company is able to recoup its cost of customer acquisition, be it online marketing or inside/outside sales, in less than a year.” However, on the very same list, Tunguz goes on to state the following characteristic: “At the outset, the company targets the less sophisticated SMB segment which doesn’t demand the compliance, heavy security and integration features needed by enterprise customers.”
Boxever is open to this kind of SMB-focused model. They have a lot of interest from SMBs at the low-end of the market and as O’Flanagan quite happily admits “We typically didn’t meet our first customers. We did one deal for $200k recurring over the phone”. But after dealing with SMB customers for some time, Boxever realized that they were as hard to sell to and support as the big guys. Their CAC was multiples of first year revenue, and the model was more difficult to scale. The realization then came about that it isn’t in fact the size of the customer but the sophistication of their requirements that made the difference. So O’Flanagan took the decision to re-focus on the enterprise end of the vertical, and on SMBs with the sophisticated infrastructure and requirements that would get more value out of a sophisticated platform like Boxever – the product/market fit moment, if such a thing exists.
O’Flanagan elaborates on this saying “I qualify us as Enterprise SaaS so our sales model is an enterprise sales model, with all the SaaS dynamics, but ultimately when you sell something for a few million a year, you’re going to have to go meet the person and the sales cycles are anywhere between 6 and 18 months depending on the deal size and the customer. In order to scale it properly we needed to admit we were enterprise SaaS, look at different models, and not be afraid of it.”
Selling to enterprise as a start-up
Pivoting the business model and moving to an enterprise sales approach is easier said than done, however, and it can be very challenging for a start-up to achieve the level of credibility required to sell to well-established, global corporations. Boxever seemed to crack that nut at an early stage nonetheless – bringing eDreams ODIGEO, the largest ecommerce business in Europe, on board when O’Flanagan was still only one of a team of 8 at the company.
“A big challenge we had at the outset was convincing some very big organizations to take bets on a small, but growing, start-up in Dublin with a cloud platform hosted on a public cloud.”
O’Flanagan’s advice for start-ups that want to sell to enterprise customers is that “credibility starts with the product” – it needs to be more usable, deliver more value, and be 100% rock solid. It also comes down to less tangible factors like “does the customer believe in the founders?” Convincing a potential corporate client that you have a solid business and you will still be around in a year’s time can be tricky. It helps you have the backing of venture capital firms like Tribal VC, which Boxever had in the early days, as customers will be aware of the rigorous due diligence that VCs carry out on companies prior to investment and this will provide some piece-of-mind. That said, as O’Flanagan admits “selling to enterprise out of the blocks is hard and we probably chose a difficult path” so be warned that such an approach is not for the faint of heart. Surrounding yourself with a team that is experienced in enterprise-level sales and in handling the common, primarily IT-related, objections to SaaS such as data security, data residence, privacy, etc., is a must.
Customer Success is just as vital in Vertical SaaS
A further note on the sales approach is not to try to sell to everyone, particularly when your product requires such a transformation in the customer’s mind-set that only those that are willing and ready to change can really be considered active sales opportunities. O’Flanagan explains that if the customer’s questions equate to “What is this thing?” they need to go into another bucket where you educate them with information and content, but if their questions add up to “How do you do it and when can you do it?” the conversation changes and you have an opportunity on your hands.
The implication of trying to sell to a customer who culturally and organizationally is not ready to change and to truly, successfully adopt your product is two-fold: firstly, you may waste a lot of time and energy and not make the sale, but perhaps worse again, you make the sale and the customer will fail to activate in any meaningful way and you will have a churn problem down the line. In that sense, customer success is just as important in vertical as in horizontal markets, if not more so given the high dependence on referrals to keep CAC low and maintain credibility in the industry. Boxever’s proposition of omni-channel marketing personalization is big transformation so it helps to find a champion within the organization who will help you sell your product within the organization.
Of course, it’s once the product is sold that the real work of customer success begins and there should be no complacency among vertical market leaders that their strong market position will negate the need for a focus on customer success. There will always be an alternative if the customer is unhappy and fails to see the value in your product, so invest in customer success, on-boarding, support, customer education, etc. as nothing will destroy those aforementioned positive CAC and ACV metrics of your vertical SaaS business like a customer churn problem when it comes to renewal.
The limitations of the Vertical approach
So it can’t all be good news, right? Where are the limitations og this vertically-focused approach to the SaaS model? Boris Wertz cites the following in particular:
“Vertical markets can be limited in size. In order to scale, companies will need to enter into parallel verticals once they own their first.”
O’Flanagan asserts , however, that the market for predictive marketing in travel is $2bn, and the $1bn of that which resides in enterprise (there’s quite a long tail of SMEs in the market) is the market opportunity for Boxever’s current offering. This is a substantial market by any measure and certainly sufficient fodder for a successful, public SaaS company. As to Wertz’s assumption that companies like Boxever will need to enter parallel verticals once they own their first, O’Flanagan has a few ideas up his sleeve in terms of ideas for possible future revenue streams that wouldn’t necessitate a move out of Boxever’s wheelhouse in the travel industry:
“Revenue management in travel, for example. How do you price a flight or product? Right now nobody is using customer data. Everyone is looking at how full the plane is, or the hotel. Nobody really understands how many customers are searching and using that data to inform pricing strategies. And ultimately, can you price and bundle products specifically for a customer so that every customer on the website gets a unique offer? The holy grail is to have an end-to-end online and offline experience.”
Right now, Boxever is the brain behind many of the various marketing channels and mission critical systems used by its travel industry customers. The simplest way to create additional revenue streams in the future will be to forward integrate into providing those systems for which they are already the brain. And crucially, this does not necessarily mean a move out of the travel vertical which would force the company to forego some of its inherent competitive advantage in that industry.
O’Flanagan’s unambiguous mission for Boxever is to take the company public and he has assembled a team that has experience of doing so in other large SaaS organisations and is more than capable of doing it again with Boxever. This start-up is an excellent example of a Vertical SaaS business and as for the team’s goal of building a substantial Irish company with a global footprint – I wouldn’t bet against them.
By Michael Cullen @michaelcullen87