B2B vs Enterprise SaaS: The Critical Distinction
There is a sharp distinction between two different SaaS business models that sell subscription services to other companies. Often they are called B2B SaaS interchangeably, however they are profoundly different companies in their cost, skill and revenue stream.
At this time, I haven't heard any appropriate names. I am calling one B2B and the other Enterprise. Using B2B will lead to confusion because both are businesses selling to businesses. If you have suggestions for a good name, please comment.
Perhaps the best way to distinguish between the two SaaS companies is not by their customers but by the integrations. Enterprise SaaS companies integrate into mission critical systems and legacy work streams. B2B SaaS are less likely to be integrating with legacy systems, often innovate new work streams, and integrate with other SaaS products.
Let's look at two examples that have similar value propositions but different business models.
Enterprise SaaS Example: Accounts Payable Automation such as Transcepta serves the critical function of paying vendors accurately and within the terms of the contract. Picture the Enterprise customer: a 40-year old company that has over 1,000 suppliers feeding their manufacturing lines. To be successful selling to this Enterprise, you need to offer a high availability system that can accurately handle thousands of inbound invoices and outbound purchase orders each month - without fail. You will integrate your solution to pass data to an existing customized ERP system from the likes of Oracle, SAP or a small specialty vendor. You may send and receive some of the invoices via protocol standards like EDI. You can't fail without critical repercussions to your customer so you will be subjected to security audits, certifications and other tests of your veracity and ability.
B2B SaaS Example: Again, let's look at Accounts Payable Automation such as Bill.com. Now imagine the customer is a 10-year old company who processes 50-200 invoices per month. It's a hassle and you certainly don't want to handle all this over email and paper but you can, and you probably don't have an ERP system or EDI. The SaaS vendor in this case, can focus on a simple user experience, low training solution with out of the box integrations into the most popular SaaS accounting solutions.
While you can see that the features from these two vendors have similarities and differences, the difference to the business model of B2B versus Enterprise SaaS goes far deeper.
The 40-year old Enterprise company has billions in revenue, places thousands of orders to vendors each month and facilities around the world. The company may operate in regulated or complex verticals like manufacturing, pharmaceuticals, and energy with critical global supply chains. The customer knows that working with their IT environment is hard. It's a complex mix of new and old systems, their data is large, messy and silo'd, and their internal processes are complex. The accounting and procurement team sizes count dozens of employees.
On the other hand, the 10-year old company has much less legacy IT, fewer data silos, and simpler processes. The accounting team has a few people and there may be no procurement team.
The Enterprise needs you to be there to support them. They have facilities around the globe. You are getting baked into their processes. The cost of failure is high to peoples careers. Once integrated into the customer, the vendor switching costs are high, so the customer churn is low. The customers expect impeccable support that knows how to deal with the customization woven throughout their processes and systems. A self-service help portal won't cut it - they need support personnel, or integration partners, in the right locations and the right time zones to deal with migrations and hiccups. A great support team is a strategic asset.
The B2B SaaS sales effort is low-touch with minimal, if any, sales people in the field. Freemium or self-serve trials are within the customers expectations. Instant gratification is the name of the game. Try it, you'll like it. The solution has limited legacy integration options but may expose APIs that the customer or other vendors can use. Chatbots, self-service and community support portals satisfy the customer.
Let's start with B2B, and what an example would look like. B2B SaaS have fast time-to-value solutions that may be cheap enough to buy on a credit card. Pricing is pre-defined and often published online. The pricing scales by some unit like seat or metered utilization. You can start by buying one seat and then adding more as adoption spreads. Pricing is available on a month-to-month basis with discounts for purchasing a full year. Sales cycles are days or weeks long and churn is higher, resulting in lower Cost of Acquisition (CAC), and also lower Annual Customer Value (ACV) and Life Time Value (LTV)
In Enterprise SaaS, time-to-value is measured in months. There is likely to be a non-recurring engineering (NRE) component to the price to integrate, configure and customize the product to the unique process of each customer. The price is likely negotiated differently with each customer along with redlined Terms and Conditions. Customers are likely to be agreeable to signing a one to three year contract paid annually in advance. Months long sales cycles drive up the CAC. Customers yield high Annual Customer Value and Life-time Value but are fewer in numbers. Though they have fewer customers, payment in advance has the benefits of putting 12-mos of subscription cash in the bank account up front.
In either case, you can build a great business but be aware which path your customers and market expects. Most new SaaS companies today are B2B SaaS rather than Enterprise SaaS. The reasons are clear, a B2B SaaS company with low-touch sales, self-service support and little or no legacy integration requires fewer high skill sales and operations people resulting in hopefully a lower CAC. The Enterprise SaaS, on the other hand, rewards those higher costs and skill requirements with large LTV and stable, low-churn contracts. While having customer success advocates are helpful in both models, the Enterprise model needs less attention on churn reduction.