SaaS + Fintech
"Once one software solution demonstrates it is valuable, the customer base will consolidate around that company for all its software needs." – a16z
a16z released an article on how SaaS businesses can scale to new vertical markets by directly embedding financial products into their software. Founded by Marc Andreessen and Ben Horowitz (author of What You Do Is Who You Are – one of the best books on creating business culture), a16z is one of the premier venture capital firms, with $12 billion in assets under management. They are defined by respect for the entrepreneur and the company-building process. In other words, their expertise and insights are second to none, and in the article, they provide actionable advice on how to price your product and expand to new markets.
Their thesis on Fintech scaling vertical SaaS is twofold:
Cloud-based software distribution costs are already relatively low, and enhancing user value by augmenting the existing product can improve CAC even further, as well as increase the lifetime value (LTV) of that customer. Upselling software modules or layering on additional financial services (payments, lending, insurance, payroll, etc.) enables a company to capture that potential revenue that would have otherwise been lost on external, ancillary products.
In the context of Proptech companies, it is in the organization's best interests to provide this seamless experience, as there are many moving pieces in a real estate transaction. It's beneficial to not only integrate third-party apps but as the article states, embed these services into a familiar interface. References to software companies like Shopify and ServiceTitan indicate that monetizing payments typically didn't occur until their core business was scaling. They then sought out payment gateways like Stripe's API to manage the checkout flow in-house. Other businesses take a more active role and become payfacs (payment facilitators) themselves.
Scaling vertical SaaS made me think of one of the 7 powers in The Foundations of Business Strategy, which is that of switching costs. Having stickiness of your product, and locking customers in, will protect you from the forces of competition and strengthen the roots inside an organization. It is the value loss expected by a customer, incurred from switching to an alternative solution for additional purchases. A by-product of having a complete product suite is a proprietary set of data acquired from users, i.e. insight into customer behaviour, needs, and risk, that ultimately produce better margins and new go-to-market options.
This is how the venture capital firm calculated the additional RPU, which could be of great help in determining what customers are willing to pay for:
"Based on a16z’s market research and conversation with vertical SaaS companies. In our conversations, most vertical SaaS companies charge between $50 to $1000 per month for software ($200/month is a commonly accepted price point), and most end customers in vertical markets spend $500 to $1500/month on software and services (which we’ve averaged to $1000/month). Consequently, there’s around a 2-5x larger market opportunity when expanding out from just the software portion alone." – a16z