There has been an explosion in the number of B2B Software-as-a-Service (SaaS) startups offering innovative solutions to niche verticals. A large number of these markets are pretty immature in terms of adoption - we are very much in the ‘early adopter’ phase for B2B SaaS to paraphrase Geoffrey Moore from Crossing the Chasm.
However, As barriers to entry continue to fall, competition in most B2B SaaS verticals is intensifying as categories emerge and various market entrants compete. We are also witnessing an increase in new market entrants who seek to replace several disparate apps bringing them all under one-roof placing them in competition with a number of other competitive solutions.
Running marketing campaigns targeting switchers rather than relying solely on trying to persuade targets to buy a new software solution for the first time becomes important.
In this paper we explore some of the challenges B2B SaaS startups face when seeking to target competitors customers, before outlining in part two what elements you need to consider to successfully execute a switcher campaign.
Targeting Customers of Competitors
Targets who are existing customers of your competitors are signalling that they have had a problem and were willing to pay for a software solution to help them solve it. The question now becomes a case of whether or not you can successfully target this segment encouraging them to switch to your offering?
However, unfortunately, in many instances trying to entice someone to switch is not that easy.
After all, retention and recurring revenue is the lifeblood of every SaaS business, and the last thing the incumbent wants is to churn their customers to you their competitors.
“It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well under the new.”
Niccolo Machiavelli, Il Principe (1532)
Identifying Users of Competitive Solutions
The first challenge is to assess how you can identify if someone is using a competitive solution?
The following represent some of the key methods:
1/ Some solutions may be visible e.g. a chatbot on a website, or a newsletter ‘Powered by MailChimp’
2/ Some may tell you if you get to talk to someone as part of an outbound exercise (or the data may be in the CRM based on notes captured from a previous conversation)
3/ Some may be actively looking to switch and advise as much in a sales process
4/ Some may be identifiable using tools like Cognism or BuiltWith
Finally, it is also worth noting that inertia can be a powerful factor in play also. Perhaps prospects are using Excel or paper-based solutions to manage processes. In this context, the competitor is inertia i.e. the odds of them ‘doing nothing’ essentially represents the competition.
Switching Costs - A Context
Historically, before SaaS, lock-in was commonplace in the software industry, especially for enterprise software, and switching costs were often significant (and also represented a key part of the software business model at the time). Switching costs represented a form of economic moat i.e. a structural barrier that protected a company from the competition.
“Switching costs refer to the expense in cash, time, convenience, risk, and process disruption that a customer of one product or service must incur if they change from one product from an incumbent Producer A to another product from Producer B. Switching costs can be explicit or implicit, and confer the benefit of customer lock-in to incumbent suppliers if the customer perceives the cost of switching to outweigh the benefits that would be obtained by making the switch.” Revisiting What I Know About Switching Costs & Startups, Brian Laung Aoaeh
If the software was providing real ongoing value, lock-in and switching costs did not matter much to the user and was usually not on people’s radar. However, if the software failed to meet expectations or to offer real value, then exiting the contract was usually a source of much frustration for the customer as they were often ‘locked-in’ - hence the phrase.
“What works with you is what are they switching away from? What’s shit about their current world? And then what’s attractive about your world? That’s how you get them over to you.”
SaaS - The Decline of Switching Costs
In theory, the emergence of SaaS heralded a new dawn when it came to customer lock-in. Upfront multi-year licences became less prevalent, and flexible subscription billing and increased competition married to weaker contractual terms meant that software companies were forced to align value with payment (instead of the previous dominant model of customers having to pay upfront).
So in theory, with the advent of SaaS, switching costs declined, meaning that lock-in was no longer the issue it once was. With the majority of SaaS applications if you were not obtaining value you simply stopped your subscription and sourced an alternative solution. But despite the structural changes with SaaS, it became clear that when it comes to enterprise software (as distinct from personal software) the factors impacting a decision to switch suppliers goes well beyond financial considerations of stopping paying.
“Switching costs are incremental expenditures, inconveniences, and risks incurred when a customer changes from one supplier to another.” Tom Eisenmann, Harvard Business School
Finally, it is worth noting that switching can vary depending on the applications in question. We will focus on two main types here:
A ‘like-for-like’ switch between two competitors in the same category
A ‘bundle switch’ where the new player offers a bundled solution targeting numerous different categories
The Context
So why am I writing about this topic?
1/ A B2B SaaS client of mine has recently asked me to look into this area as a key part of their route-to-market strategy for 2020. When I explored the issue further, it became apparent that the topic was potentially of interest to a larger group than I had initially envisaged.
2/ I have recently been ‘targeted’ as part of a marketing campaign, with a switcher SaaS solution that was unsuccessful and it got me thinking about the whole area.
A Real Life Example: The Switcher Marketing Campaign
The switcher campaign targeting me related to an application in the broader Chatbot space. It was obvious from my company’s website (where I was the Chief Marketing Officer), that we were using a competitor’s Chatbot so they were able to identify that we had a competitive offering in place.
The switcher campaign was pretty intensive consisting of:
Several personal emails to me (via Linkedin)
A carefully crafted Linkedin request
A series of emails to my business email address
A series of emails to the wider marketing team - especially my direct reports (via Linkedin)
A personalised video outlining why their product was better (than the one I was using)
Did I bite? No
Like most Chief Marketing Officers (CMOs) of B2B SaaS startups, there was ‘1001 things’ on my plate at the time of the marketing campaign. From my perspective, switching suppliers of a pretty low priority nice-to-have application, a Chatbot, was never going to make it anywhere near the top of the pile of things “I needed to do”.
A second factor related to usage. Many European B2B SaaS startups like my company, do not have significant volumes of traffic on their sites, and even smaller numbers of target personas engaging with Chatbots. Thus my thinking at the time was closer to a decision as to whether or not we turn off the Chatbot, rather than to contemplate switching providers. As an application, it simply was not offering enough value for me to pay any attention to the category.
So what if anything could the Chatbot company have done differently to convince me to switch?
We need to start with the challenges of switching.
“When you’re selling a SaaS product to a potential customer, you have to convince them switching is worth the effort. And once you’ve sold the product, you have to do the opposite: convince the customer that switching to anything else isn’t worth it.” Tom Tunguz, RedPoint
10 Switching Challenges to Consider as You Plan Your Campaign
So what are some of the challenges you are likely to face trying to entice a customer away from a competitive SaaS solution?
1/ The Incumbent
Any B2B SaaS startup knows the importance of retention and will have systems in place to try and avoid churn. For example, most SaaS companies operate off Key Performance Indicators (KPIs) where they measure things like in-application usage and user behaviour (as a proxy for value creation). So if the user is logging in less regularly (decline in daily active users) and uses the application less (session duration reduction) the incumbent provider is likely to be proactive in trying to retain the customer. They may also send Net Promoter Score (NPS) surveys as a means to measure that they are delivering ongoing value from a product perspective.
In short, the incumbent SaaS provider is likely to be working exceptionally hard to retain the customers business as retention is a key element of any SaaS startups business model. You need to know the weak points of the main competitor’s solutions to help ensure that you are focusing effort on switching where there are obvious vulnerabilities.
2/ The Commercial Terms
Many SaaS businesses are keen to migrate users onto annual upfront contracts to help manage churn as well as cash flow, so depending on the contract, the window for switching may be pretty narrow. For example, If the ticket price is five figures and above you, are in the world of Purchase Orders, and multi-year contracts (not to mind account management) and thus it can be difficult to time your approach to try and motivate a switch. Thus if you look to switch customers when they have just renewed, the odds of them willing to evaluate an alternative are pretty slim. For applications with smaller monthly subscriptions, the commercial impact becomes negligible and is thus not a barrier to switching so timing is not relevant.
3/ The Users
The greater the number of users of an application the bigger the switching costs typically unless there is significant internal dissatisfaction with the application. This issue is a particular challenge for those solutions that seek to displace numerous category players with a bundled solution. You may want to replace several disparate applications with one solution but other users of these disparate applications may not be so keen. Inertia and resistance to change can often be bigger barriers than the feature-set. Assessing the likely number of users of the competitive application will help you understand how entrenched the application is likely to be. Again you may need to use proxies here based on your own experience with your SaaS solution with companies of a similar size or make-up. Your value proposition for an all-in-one solution may appeal on commercial grounds as well as apparent efficiency gains, but happy users will likely resist unless the value proposition is significantly more compelling while also addressing the other issues raised here.
4/ The Learning Curve
Depending on the complexity of the application, most users are creatures of habit, and the prospect of learning a new UI/ UX can be daunting, often leading to significant resistance. Undertaking a frank analysis of your application’s usability and that of the competitor will help inform how entrenched the application is as well as how steep the learning curve will be. It will also be important to understand who amongst the key stakeholders or decision-makers are likely to be users. A Chief Financial Officer (CFO) may be very interested in a switch based on increased efficiency or cost savings, whereas another c-suite decision-maker may be less keen on these if their motivations are more closely related to the impact the decision will have on how they work.
“Learning Costs are the known hurdles that a customer must overcome in order to attain mastery of the new product that is at par with that customer’s mastery of the incumbent product required to accomplish the tasks the customer needs to complete. Learning costs need to be considered on their own, independent of other categories of switching costs. High learning costs tied to adopting a new product increase switching costs in favor of the incumbent. Minimal learning costs tied to the adoption of a new product lower switching costs in favor of the new product.” Revisiting What I Know About Switching Costs & Startups, Brian Laung Aoaeh
5/ The Feature Set
In many instances, applications are rarely an exact match between competitive solutions in terms of features. Again this will be a concern for those who are deriving real value from the current application. Will a bundled offering have the same breadth of features as the existing stand-alone application? Will the software be customisable to replicate how I work?
“Switching to a new vendor might have some benefits, but I may lose some functionality the team values. This is why there’s a mantra that a product has to be 10x better. For many possible internal champions, the rewards bearing these risks and costs must be justified by substantially larger gains.” Tom Tunguz, RedPoint
A useful approach to evaluate the merits of the competitive products or otherwise is to scour review sites like Get App, Capterra, G2Crowd and Software Advice to see what reviewers are saying about the usability and feature set of the main players in the category. If review numbers are low and overwhelmingly positive they can be disregarded (as they are likely to be false) but if there are lots of reviews these can be used as a proxy for an NPS. The more complaints about your competitors application the greater the likelihood that there will be some internal dissent about usability from those switcher accounts you are targeting etc
Finally, it almost goes without saying that if the market perceives that you have an inferior offering then your job of enticing a switch gets all the more difficult. Instead, you may need to change tact and lead on a significant price differential, or a specific geographic market, or create a more basic offering for a specific niche. One option here is to target segments where it is obvious the competitor is moving more up-market. This often happens after a large VC raise when pressure is put on startups to move into more commercially attractive segments.
6/ The Purchase Decision
Again depending on the ticket price you will either have had a discrete purchase by one person using a company credit card, right up to a complex purchase with numerous stakeholders and decision-makers involved in the process.
It is not easy to establish who made the initial purchase decision and how long ago it was made, but it is something to bear in mind. It is easy to switch out a legacy system purchased years previously by a long-departed manager, but much harder to switch out a solution purchased more recently by the same individual who will have an emotional attachment to the decision. Did they get the decision wrong the first time? Is their judgement going to be questioned if they propose an alternative solution so soon after the initial decision? Ensuring you tread carefully here is key.
7/ The Application
Is your solution a mission-critical application or something that is a ‘nice-to-have’? Unless there are compelling reasons to switch, time-pressed managers are unlikely to prioritise a software change. Being realistic about where your application sits in the mind of the buyer is key here. If mission-critical you are more likely to get some attention, but on the other side there is more perceived risk. Unless the product feature differential is significant or because the existing solution is likely to be flawed (either by dint of issues with the features or perhaps because it is a legacy system long overdue an upgrade) you may struggle. Again an understanding of the broader competitive landscape is key here.
“Switching costs develop and become stronger when an incumbent product becomes “mission-critical” for the purpose for which the customer acquired the product in the first place. An incumbent that combines network effects with high switching costs in the same product line is well-positioned to build a durable moat around its business.”
Revisiting What I Know About Switching Costs & Startups, Brian Laung Aoaeh
8/ The Legacy Data
Is there likely to be much data in the application? Is it easy to port data out of the current application or do they make life difficult for those seeking to migrate to a new solution? Again these are some of the questions that will be in the mind of the buyer as they contemplate a change and will need to be addressed in your marketing.
9/ The Risk
What does the risk profile of the proposed move look like? If the incumbent application is a big brand name and it is a key part of the companies infrastructure the ability to convince the decision-maker of the merits of a switch are likely to be minimal.
“When businesses outsource “mission-critical” activities, changing vendors may involve considerable risk. For example, some companies reduce their need for IT staff and infrastructure by relying on cloud computing services. Switching from one cloud service to another exposes a company to significant risk if customer records are lost or corrupted during the transfer.” Tom Eisenmann, Harvard Business School
10/ The Implementation
Finally, it is also worth considering the software implementation. Is it a straightforward process or one that involves multiple agents with different agendas?
Can it be done via code inserts taking a day at most or does it entail weeks of deployment? What dependencies exist? Being clear on the steps needed by the client will also help ensure that you are addressing as many potential challenges upfront.
Summary
In short, there are significant hurdles to overcome when looking to replace a competitive solution for most B2B Saas applications. Before embarking on a marketing campaign to target switchers it is thus important to flesh these various issues out for your particular solution to help shape the approach to targeting your competitor’s customers. We are very much in ‘Jobs to be Done’ territory here (Clayton Christensen) - thinking about how the world looks from the current user of the competitor application (and your target buyer) is crucial. Given all the potential effort and the impact on your cost of acquisition (CAC) you need to ensure that the likely size of the prize is commensurate with the effort required.
“Changing CRM, ERP, marketing software, customer success software has many soft costs. All the data from the old system needs to be migrated. Teammates must be trained. Productivity will decline during the transition. Not to mention the time involved in educating and convincing internal constituents to change.” Tom Tunguz, RedPoint
Given all of these challenging factors, one could be concerned that switching may not be a credible tactic? The reality is switching is a powerful option in many scenarios. The goal of this paper is to help you identify whether the unique context you face is one where the motivations and incentives for switching are high or not.
In Part 2, we thus explore when you should undertake a switching campaign and what approach you should take to guarantee success.
About Alan Gleeson
Alan Gleeson is a B2B SaaS Marketing Consultant based in London with a passion for helping B2B businesses to grow.
Follow Alan Gleeson on Twitter or visit Work With Agility to learn more.
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