Should Your SaaS Subscription Pricing Model Make a Downmarket Move?

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Michael Litt and Devon Galloway came up with the idea for Vidyard during a serendipitous drive home from Silicon Valley.

The two were engineering undergrads at the time. Litt had just finished a co-op placement and Galloway had flown out to accompany him for the long drive home to Waterloo, Ontario.

Talking start-up ideas kept the entrepreneurial students occupied during that fateful road trip, and most of the chatting centered on internet video.

Fast forward to today and Litt and Galloway are the co-founders of Vidyard, a SaaS business that creates software to host and analyze video performance.

Like the road less traveled, Litt and Galloway grew Vidyard—which started off as Redwood Media in 2010—through a route not many SaaS businesses take to scale. Most SaaS businesses grow by looking upmarket, that is, starting small and subsequently taking on larger clients.

And that makes sense.

Getting small- and mid-sized customers signed up with your subscription pricing model often works best when you’re starting out as a SaaS start-up on the up and up.

But Litt and Galloway weren’t planning on following the herd.

We often hear about moving upmarket, but when does it make sense to expand into downmarket segments?

Let’s take a look.

Expanding downmarket with your subscription pricing model can be a good idea

Vidyard had its eye on the larger, enterprise customers from the beginning. Any client with less than 200 employees wouldn’t have access to its software.

But turning down small clients didn’t sit well with one sales development rep, who pitched the idea of targeting smaller prospective clients rather than turning them down.

In one month, the rep garnered more than $150,000 in sales among smaller clients, illustrating a need for Vidyard’s software among this customer segment, Litt said during an interview with Intercom.

“We saw that there was some pent up demand downmarket that we could apply ourselves to,” Litt said.

Vidyard removed the barrier to entry for smaller businesses so they could use its software, and it launched a freemium version.

While most SaaS businesses launch a freemium product first, relying on product-led growth (PLG) to scale their customer base, Vidyard went the other way. Litt calls it “reverse freemium”.

“We made this transition to ensure that we're lined up with the way software companies and enterprises will buy software in the future,” Litt said.

By catering to smaller businesses—along with those that are more enterprise—Vidyard gained access to a large market share in the video-marketing platform space.

Growing by expanding downmarket can also have the added benefit of acquiring the patronage of businesses just started on their own growth journeys. They’ll offer you shorter sales cycles, great opportunities to train your newest sales team members, and of course, these smaller businesses eventually grow up.

If you can land these customers and form relationships with them while they’re early in their growth, they’ll often choose to expand with you instead of ripping and replacing your technology as they scale. Win-win.

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Sometimes it’s better to shift downmarket

Aside from increasing your market share, going downmarket with your subscription pricing model can be a great strategy for a few other reasons. These reasons are especially relevant to businesses that may have bit off more than they can chew with targeting enterprise clients.

  • If your find that a more downmarket customer base is actually your ideal customer base, marketing and sales will likely become easier. It can be challenging to bring in qualified leads and close deals if you aren’t targeting the best fit customers for your product.
  • With better fit customers, you’ll likely have fewer requests for unique product customizations to fit the growing needs of your too-big customers. Development time and dollars should go toward enhancing your product to fit the needs of your target market, not specific customers.
  • Your customer success team will spend less time struggling to keep customers happy if the customers you’re bringing on are a better fit to begin with.

In addition to these points, the benefit of having hundreds, if not thousands, of happy small clients is they’ll often show your business love through blogs, tweets and other online means. Think of large numbers of small, happy clients as a proverbial army defending your brand. It can be a boon for your marketing efforts.

When to avoid going downmarket with your subscription pricing model

For some SaaS businesses, going downmarket is akin to going downriver into murky waters laden with crocodiles.

It’s best to avoid it.

If you’ve found your groove among enterprise clients, adding a downmarket segment to your subscription pricing model can pose several challenges and risks.

  • You’ll need a large number of smaller clients to see a return on your downmarket investment. This often means hiring more staff in your marketing, sales, and customer success departments to target and support an influx of smaller clients.
  • Most marketing departments are stretched thin already, so expecting them to work on both enterprise and SMB customer segments can take a toll on strategy and results. And from a messaging standpoint, this move can also make prospects confused about who the product is actually for.
  • Targeting prospective clients downmarket also means funnelling more resources in that direction. When you’re moving resources away from your enterprise clients it may burden your business if your downmarket strategy doesn’t deliver a strong ROI.

Finally, one of the most important factors to consider is your SaaS product.

While the technology behind your product may fit well among enterprise clients, it may need rejigging for your clients downmarket.

This may sound simple, but it can involve additional resources to ensure the product accommodates easy onboarding, is infrastructurally ready to handle higher volumes of users, and most importantly is able to provide a great user experience.

And that begs the following questions.

  • Can your SaaS product currently meet the needs of smaller customers?
  • And if not, does your engineering team have the resources and wherewithal to revamp your enterprise-targeted product for a customer base that’s more downmarket?

If the answer is no, you might want to reconsider going the downmarket route.

Is a downmarket move in your SaaS subscription pricing model’s future?

Going downmarket isn’t exactly the norm when most SaaS businesses think to scale—especially if your business has been successful with clients that are more mid-sized or enterprise.

And there are certain challenges you need to consider when eyeing downmarket customers: Is there interest from those customers? Is your team ready for that kind of strategy shift? And is your product ready to meet what may be some very different needs?

But as Vidyard illustrates, a downmarket growth strategy could benefit your business by increasing your market share and limiting the barriers to entry and growth for your product.

And of course, in some other case, this strategy may not be about expanding downmarket so much as moving downmarket entirely if you find this customer segment is more inline with your true ICP.

Just remember, if you’re consider going downmarket, take into account both the obstacles and potential returns with your strategy.

Tags: SaaS SaaS Strategy Pricing

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