SaaS That Targets India Does Not Scale

SaaS That Targets India Does Not Scale

adamwalker
 
 
 
 
 
 
 
 
 
 
 
 

Adam Walker

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

October 29, 2020 – [8 mins read]

 
 

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Adam Walker
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

October 29, 2020
[8 mins read]

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Part 1: The Small Online Market

Part 1: The Small Online Market

“Not scalable, not predictable, and yet repeated. This done knowingly — is fine. Attempting this and not knowing is a slow poison.” — Vivek Khandelwal , Founder of iZooto

Can you name a SaaS startup from India that has scaled to more than $10M Annual Recurring Revenue (ARR) by targeting the domestic market? I can name only Ozonetel, and that is it. 

This 4 part series will provide SaaS founders a critique of the Indian market to encourage them to pivot their sales and marketing toward the Global Market.

I was a SaaS founder once, and I know how enticing it can be to discover a problem and build a solution for the people in your network. But do not do this beyond a set of beta customers — as my peers and I have learned — selling SaaS to the domestic market is not scalable.

For the founder’s reading, please follow along carefully.

Without further ado, here are the 4 reasons I believe scaling SaaS in India is next to impossible.

  1. The Small Online Market
  2. The Low Perceived Value of Software
  3. The Culture of B2B Payments
  4. The Culture of B2B Services & The Risk of Custom Development

Definitions

To begin, let me clarify a few vocabulary words:

  • Scale — I define scale as +10M USD (Rs. 70 Crore) Annual Recurring Revenue (ARR)
  • Software as a Service (SaaS) — Any cloud-based software product whose customer and user is a business i.e. Business-to-Business (B2B)
  • SaaS that targets the Domestic Market — Any SaaS startup that spends more than 50% of its sales and marketing budget toward acquiring customers in India
  • MSMB / SMB — Micro, Small and Medium Business. Examples include restaurants, manufacturers, recruiting companies, etc.
  • Online Market / Global Market — For the purposes of buying Adwords and defining Go-to-Market strategy for SaaS startups: “Online Market” / “Global Market” is synonymous with the “U.S. Market”
  • Offline / In-Person — I use these words interchangeably to describe the business model required to serve Indian SMBs

Note 1: This article only concerns SaaS targeting the SMB market — not the Enterprise market. I am unable to speak knowledgeably about the Enterprise market in India.

Note 2: I define Scale as greater than $10M ARR because that amount of revenue indicates a large number of customers.

Note 3: I exclude Payment Gateways from my definition of SaaS.

The Small Online Market and the Barriers to Scaling Offline Business

The Small Online Market and the Barriers to Scaling Offline Business

 
 

Google search volumes serve as a barometer for demand in the market

Do a Google keyword search for any SaaS-style product (e.g. “CRM”, “Website Builder”, “Project Management”, etc.) and you will see how the search volumes in other markets compare to that of India.

 
 
 

(Google Keyword Planner)

The data speaks for itself — if a startup targets the Indian market it is targeting a relatively small online market.

But, wait!”, I hear a SaaS entrepreneur object, “consider this …

  • “Though India’s Online market is small, India’s Offline market is LARGE!”

  • “And, there is enough Online business in India for me to build a scalable startup”

The first point I address here— just because a market is large does not mean it is scalable — and the second point I will address in future articles.

Offline SaaS is Low Margin

Offline SaaS is Low Margin

To characterize the market, SaaS entrepreneurs will agree that the average Indian SMB does not leverage modern technologies to improve its business operations. And, based on the above Search Volume data, the average Indian SMB does not search Online (Google) to find solutions to improve its business operations.

To understand why businesses do not search Online, it means, either:

  • Businesses are unaware they have a business operation inefficiency

          OR

  • Businesses are aware they have a business operation inefficiency, BUT they look for solutions through their personal network, and not by searching Online

For SaaS founders, the problem with these two scenarios is that they will have to invest significant resources into contacting SMBs in-person, and educating them on the inefficiencies of their business operations. This is a challenge because educating a market is SLOW. Education requires meeting prospect customers multiple times. And requires sophisticated sales representatives who can articulate the customer problems and sell the SaaS solution. That is an expensive endeavor and is a barrier to scale for any SaaS startup.

But I’m not the only one saying this, Vinod Muthukrishnan, Founder of CloudCherry, one of India’s fastest growing SaaS startups, had this to say:

“The issue in India is that the Average Revenue per User (ARPU) is low. For a SaaS company to have 80% gross margins, the cost of all people and General & Administrative (GA) expenses around customer success/support should not exceed 10–12%, assuming cloud costs are 8–10% of ARR.

If the ARPU is low and you need to fly every month to see the prospect client in-person in Mumbai, and spend 3 hours a day educating and chatting with them on multiple things, basically, the math doesn’t add up. Both vectors are stacked against us — ARPU (Low) and Service expectations (high)” — Vinod Muthukrishnan, CoFounder of CloudCherry

As Vinod points out, because of the high costs of in-person education and sales, SaaS startups generate lower gross-revenues. This reduces the capital for sales and marketing to acquire customers, making the startup unscalable.

In the next section, I will show how Online SaaS models are different and more scalable than Offline models.

Online SaaS is High Margin

Online SaaS is High Margin

 

By leveraging technology, you can see how Online SaaS startups can market-to, acquire, onboard, and service a larger number of customers with fewer resources, than Offline SaaS startups. This makes Online SaaS a more scalable approach.

The Difficult Pivot

The Difficult Pivot

 
 

The skillset and culture required to operate a Online versus Offline SaaS is worlds apart. This is risky because the longer a SaaS invests resources into building a Sales and Marketing culture to acquire an Offline market, the harder it becomes to pivot to an Online Market. So SaaS startups can literally get “stuck” by selling Offline. I’ve had this experience myself, and so have many of my peers.

In Closing

In Closing

 
 
 
 
 

There’s a reward at the end of this tunnel if you’re willing to pivot to the Global Market. As the great Shekhar Kirani — Partner at Accel — once said:

 

“I think there is an extraordinary opportunity for entrepreneurs from India to build massive B2B/SaaS companies purely by focusing on large global with a high-quality product. Having a base in India is a massive advantage on unit economics of demand-gen, inside sales, and R&D.” — Shekhar Kirani — Partner at Accel

Part 2: The Low Perceived Value of Software

Part 2: The Low Perceived Value of Software

 

 

“Indian organisations tend to overlook metrics like “Time to Value” and “Total Cost of Ownership” as a key metric when considering the build vs buy vs rent argument. They grossly underestimate the effort, money and expertise it might take to build an effective solution…” — Rohit Kalro, Founder of Zscore

Generally speaking, the Indian market has a low perceived value of software. If you’ve ever tried selling SaaS in India, you can probably relate to this observation. And I’m sure you’d also have a few (agonizing) stories to share.

There are probably many reasons why Indian SMBs have a low perceived value of software, among them, I’ve identified the six most common:

  1. SMBs do not have a culture of paying for software
  2. The “Build vs. Buy” mentality
  3. The corporate culture of squeezing suppliers
  4. The value of money savings vs. time savings
  5. SMBs trusting people greater than software
  6. The habit of only comparing software to the low cost of labor.

No Culture of Paying for Software

No Culture of Paying for Software

I once had a meeting with an executive at Tally, India’s most popular accounting software, and he shared with me that, in India Tally’s biggest competitor is Tally itself”.

That’s because out of the 5M users of Tally in India, approximately 3M of them are using a PIRATED version of the software. This fact may not come as a surprise to readers in India because pirated software is just so ubiquitous in the market. Many small businesses use pirated versions of Microsoft Windows, Adobe Suite, and many other popular software packages.

But aside from the fact that some SMBs have a limited capacity to pay for software or that legal repercussions for pirating are practically non-existent, I also believe that SMBs do not pay for software because they are conditioned to expect that it should be free. Software like Microsoft Word and Excel come free on new computers, and a significant percentage of smartphone apps are totally free.

So if you’re an entrepreneur selling SaaS to SMBs in India, why should you expect a small business owner to pay for your software when they have been conditioned to expect it to be free?

Despite this massive challenge I expect that in the next 5 years the apprehension to pay for software will sharply decrease across India, largely driven by the new behavior of paying for entertainment on apps like Disney Hotstar, Netflix, and Amazon Prime Video.

Build vs. Buy Mentality

Build vs. Buy Mentality

“Why wouldn’t I build this myself?”

This objection SaaS entrepreneurs hear all the time during sales pitches.

First of all, this objection for 90% of cases is ridiculous simply because businesses should NOT be building software that is NOT core to their business. But many Indian SMBs and even startups do this anyway. In Bangalore, I’ve met a dozen businesses that have built their own CRMs, marketing software, invoicing solutions, vendor management portals, and inventory management software in-house.

Why would they do this if off the shelf-software already exists for these operations? I believe two reasons could be, and I flesh out these ideas further in this 4 part blog post, that the cost of building software in India is relatively low. So if it doesn’t cost much to build, then the perception of building your own CRM, marketing software, etc. doesn’t seem as daunting. And the second could be the way of looking at software from the lens of India’s IT Services culture, where every piece of software is custom-built. So if I’m a business owner and I have an operations challenge, I’m going to, by default, look for a custom solution to be built rather than search for an off-the-shelf product.

Squeezing Suppliers

Squeezing Suppliers

 

The reality is that for many Indian industries, the market is shallow. There are only so many large banks, only so many large media companies, and only so many large pharma companies. So when SaaS entrepreneurs go-to pitch to these corporations they are often low balled on pricing. Corporates know they can squeeze their suppliers— whether SaaS vendors or OEMs — dictate terms because they know that without their business the suppliers will lose a huge revenue opportunity.

This supplier-to-corporate, many to 1 relationship, is what economists call a “Monopsony” where there is a single buyer in a market. And it is the reason why we see so many SaaS companies squeezed on pricing, and squeezed on payment terms that can run up to 120 days between invoice delivery and payment release.

Culture of Money Savings > Time Savings

Culture of Money Savings > Time Savings

 
 

“Save 5 hours a week for the price of one cup of coffee” just does not work in India. Individual inefficiency is conflated with process problems, and most organizations are not driven to adopt tools to improve processes.” — Niraj Ranjan Rout, Founder of Hiver

“Time savings” is a common value-proposition for SaaS products. But this proposition often does not resonate with the majority of Indian SMBs. Let me explain why through an anecdote from a previous advisor of mine:

He was the founder of mCent, a Boston-based mobile app that incentivized Indian users to download mobile apps, like Twitter, by rewarding them with free phone minutes. The product leveraged the vanity metric of “app downloads” at a time when the e-commerce industry was in full swing in 2015, and startups like Flipkart would measure their “growth” by this metric. So one of the ways to quickly get downloads was to use mCent to drive paid acquisition. 

Today this concept may sound extraordinary, but in 2015, mCent was among the top 10 apps on the Google Play Store in India.

My advisor shared with me that mCent was built around a particular thesis of how the average Indian irrationally values money savings over time savings. So someone would spend an inordinate amount of time to save an insubstantial amount of money. (Note: I use “irrational” in the purely economic sense, in the day-to-day social sense). My advisor used this theory to build mCent — an app that rewarded consumers with phone minutes (i.e. money savings) for their time spent downloading apps.

This culture of valuing money-savings over time-savings explains why so many businesses in India have massive accounts departments. They simply would rather do billing by hand, even if it takes an inordinate amount of time than pay for a software that could do the job in 1/1000th of the time.

I even witnessed this in 2015 when I pitched my invoicing software to a property management group at the Bharat Diamond Bourse in Mumbai. The property manager had a staff of 30 accountants who processed billing across their 500 properties and manually calculated invoices using the ₹/ft² of offices, the electricity consumed at ₹/kWh, and the water consumed at ₹/m³. These calculations were managed offline on Excel, then used to generate invoices on Tally, and lastly sent as email attachments to clients.

To say the least, the process was inefficient. But even when I pitched my invoice automation software that could save hundreds of “man-hours” each month, the property manager felt my software should cost less than ₹6,000 (USD $85) per month. 🤦‍

[As a side note: every culture across the world has a different value perception of time vs money. For example, Americans irrationally value time savings over money savings. So generally US businesses are willing to spend a lot of money, to save a little time. That is why I stubbornly push SaaS entrepreneurs in India to focus their sales and marketing resources on the US market. It’s easier to get a dollar than a rupee when selling SaaS]

Trust in People is greater than Trust in Software

Trust in People is greater than Trust in Software

Indian businesses would rather hire people than computer software to complete a task.

This is a generalization, but it’s fair to say that many small business owners’ exposure to software applications in India is still in a nascent stage. So it’s reasonable that they would have reservations about using the software.

To traditional business owners, the software can give the feeling of a lack of control.

Only Comparing Software to Low Cost of Labor

Only Comparing Software to Low Cost of Labor

 

It’s often the case that business owners in India only take into consideration software’s value in savings from labor costs, and not its other merits. So when considering software, business owners will tend to only compare the value of the product to a low-level office worker who may be drawing a monthly salary of 30,000/month (USD $400).

This is an incomplete consideration of software because it does not take into account other benefits including traceability and transparency – to benefit internal audits and quality control; the ability to scale non-linearly – unlike the linear nature of human labor; and the ability to have 0 downtime – unlike the diminishing marginal returns of human labor.

Because these value-propositions are rarely considered, SaaS founders routinely hear the objection from business owners,

Why would I pay this if I can get my staff to do it?”

In Closing

In Closing

 
 

You can see how the perception of software among Indian businesses impacts the marketability of SaaS in the domestic market.

On average Indian businesses:

  • Do not having a culture of paying for software;
  • Possess a “build vs. buy” mentality
  • Often squeeze their suppliers
  • Tend to value money savings greater than time savings
  • Have more trust in people over software; and
  • Have a tendency to only value software 1:1 with low cost of labor.

If these points resonate with you, then you are likely targeting the wrong market. I would urge you to pivot your market to the “global market” and leverage the benefits of Internet-based marketing and sales to acquire a “global” customer base that has a greater intent to use and to pay for your software.

adamwalker
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Adam Walker

 
 
 
 
 
 
 
 
 

October 29, 2020

 
 
 
 
 

Adam is a product marketer and former SaaS founder, who has been operating in Bangalore since 2015.

 
 
 
 
 
 
 
 

Share it on

adamwalker
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adam Walker
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

October 29, 2020

 
 
 
 
 
 
 
 
 
 
 

Adam is a product marketer and former SaaS founder, who has been operating in Bangalore since 2015. 

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