From Product - Market Fit to Business Model - Market Fit
Written by Mikael Johnsson, General Partner at Oxx
At Oxx we exclusively back companies that are at the scale up stage. That inevitably means we often get the question: what does it mean to be a scale up stage company?
The answer is there is no definition readily available in any dictionary or elsewhere. Different people and different firms will define “scale up stage” in a variety of ways, but a common theme is that scale-up stage companies are ready to accelerate commercial activities in order to grow faster, and become a bigger company.
As far as we at Oxx are concerned, this isn’t necessarily tied to a company having been active for a certain period of time, achieving a particular revenue threshold, or boasting a particular number of employees, but rather being able to display clear proof of what we call ‘Business Model Market Fit’. Now, most entrepreneurs and teams we meet are familiar with the concept of Product Market Fit, but few have heard about Business Model Market Fit. So, what are the signs of Business Model Market Fit according to Oxx?
Strong net revenue retention.
The beauty of SaaS is the compounding nature of revenues, but this only works if you have strong gross revenue retention, i.e. your existing customers renew their contracts when up for renewal. However, the real turbo-charge is achieved through high net revenue retention, i.e. your existing customers renew their contracts and they buy more of your product. In general (assuming you have designed your product and commercial contracts the right way) it is a lot less costly to retain and up-sell an existing customer who is well familiar with the benefits of your product than landing a new customer, so if you have high net revenue retention you will be able to grow faster with less investment than if you don’t. It’s a clear sign of scalability and therefore Business Model Market Fit.
Sharp ‘go-to market’ focus.
Fast scaling B2B SaaS companies generally have a very clearfocus in their marketing and sales-oriented activities. This focus comes in many different forms, and can be centered on customer size, industry, geography, business function/department, partner ecosystem, technology stack or any combination of these.
Clearly identified buyer personas.
A sharp go-to-market focus is a prerequisite, but still insufficient to qualify for Business Model Market Fit. Companies with Business Model Market Fit know exactly who their buyer persona is within those target organizations. Buyer personas will obviously differ depending on what product you are selling and into what size of company, and into which industry; but a fast scaling B2B company generally has no more than three different buyer personas they’re selling to. If the personas proliferate beyond that, it is difficult to maintain sufficient focus, and it is doubtful that the product solves someone’s problem in a fundamentally better way. It also becomes much more difficult to cut through the noise to catch someone’s interest in the first place.
Demand gen scalability and predictability.
Companies that have Business Model Market Fit have deliberately invested in a scalable and predictable “top of funnel” demand generation process. It doesn’t matter if this is product-led, direct or in-direct, inbound or outbound, driven by inside- or field sales, or any combination of the above. The key point is that the company knows where leads (a.k.a MQLs) come from, what the cost for obtaining a lead is, what the process looks like for refining a lead to a qualified lead and approximately what percentage of those leads will eventually become qualified leads (SQLs) and how many of those in turn become customers. Having established these metrics, which we refer to as funnel conversion metrics, will allow a company to much more effectively ramp and fine tune marketing spend to drive forward growth and also forecast forward bookings with much higher accuracy.
Scaling a sales organization is very much an exercise in focus. People who specialize generally perform better than people who split their focus dabbling in many different things. In line with this, companies that have found their business model market fit will usually have adopted specialization within the sales organization separating between Sales Development Reps (SDRs), whose responsibility is mainly to refine MQLs into SQLs, and Account Executives whose responsibility is to close business.
These companies will also generally have implemented a separation between new account acquisition and up-sales on the existing customer base (this is often referred to as hunting vs farming) where SDRs and Account executives are focused on new accounts and a Customer Success team manages up-sales. Other types of sales specialization that are common in companies ready to scale are Enterprise vs SME, Direct vs Indirect and specialization within certain verticals.
Companies that have specialized the roles within their sales team usually have a much easier time recruiting the right people to fill the respective roles. In general this means the risk of failed recruitment goes down, as does the time it takes to onboard and ramp sales resources to full productivity. Ultimately this is visible in a larger percentage of sales reps meeting or beating quota once they are fully ramped, which is key to predictable scaling of the sales organization.