SaaS has changed the competitive dynamics for Indian enterprise software product firms, putting them on a level playing field with their western counterparts. It has opened up new market segments, notably the small and medium sized enterprise market, whose requirements are different from those of large global 2000 businesses. These customers demand products that are less complex, plug-and-play and come at a lower price tag. This has pushed product companies catering to this segment towards a light-touch, virtually enabled model, dramatically reducing the need for close customer engagement, large field sales force, and elaborate implementation – all of which traditionally put Indian companies at a disadvantage. Leveraging this wave, a new generation of Indian software product firms such as FreshDesk, Fusion Charts, KissFlow, WebEngage, RecruiterBox and others have started to emerge. This has created an important disruptive force in the mid-sized enterprise market. What is also interesting is that, in their pursuit for a light-touch model, these companies have evolved a unique strategy to define the product, market/sell the product and engage with customers. This iSPIRT report discusses the three core tenets of their strategy - Digital immersion, Desk marketing/selling and Cloud-based customer engagement.

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Indian Mid-market SaaS companies: Forging a new path to disruption
An iSPIRT Product Industry Insights (PII) Report1
By: Srivardhini K. Jha (iSPIRT) and Chhavipreet Singh (Microsoft Ventures)
Introduction
The traditional model of enterprise software product companies, mostly targeting the large global 2000 businesses, required complex, high priced, on premise software solutions. To develop and deliver these solutions, software product companies engaged in
- Deep conversations with potential customers to develop the product
- Key account selling involving long sales cycles (of more than 7 months2) and
- Elaborate implementation and support.
This business model was inherently disadvantageous for Indian software product firms, which had little familiarity and foothold in the lead western markets.
The advent of SaaS has opened up new market segments, notably the small and medium sized enterprise market.
The unique requirements of this market - less complex, commoditized software products at lower price points - combined with the flexibility of virtual deployment afforded by SaaS has altered the competitive dynamics. Software development, sales and customer engagement has rapidly moved towards a light-touch, virtually enabled model.
1 This report has been prepared based on conversations with Paras Chopra (Wingify), Girish Mathrubhootam (Freshdesk), Pallav Nadhani (Fusion Charts) and Sharad Sharma (Brand Sigma). It also includes learnings from the iSPIRT Playbook Roundtables and the ThinkNext panel on SaaS organized by Microsoft Ventures.
2 iFlex data

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As the earlier barriers cease to exist, a new generation of Indian software product firms such as FreshDesk, Fusion Charts, KissFlow, WebEngage, RecruiterBox and others have started to emerge. Additionally, such firms enjoy distinct advantages from being located in India. The lower cost of operations gives these companies a longer runway to achieve product-market fit. This has created an important disruptive force in the mid-sized enterprise market.
However, the mid-market SaaS companies also face a unique set of challenges. As customer acquisition and deployment becomes easier, ability to retain customers and upsell becomes a key differentiator. These new parameters of competition require the adoption of a different business strategy.
In sum, it is clear that the business model of these companies is very different from that of traditional enterprise software companies such as iFlex as well as that of SaaS companies targeting the global 2000. Below, we elaborate on the three differentiated areas that are central to the business strategy of these companies. Given these differences, we go on to discuss how these companies should be evaluated.
Business Strategy of mid-market SaaS companies
Product companies follow a standard business cycle. They identify customer problems that can be fulfilled by a software product, develop use cases for the product, build it, market/sell the product, deploy it and engage with customers to continuously improve the product or introduce new ones.
What sets SaaS companies targeting the mid-enterprise market apart from those that are targeting the larger enterprises are the strategies they adopt to define the product, market/sell it and engage with customers. These three areas are indicated by the circles in Figure 1 below. The key differentiators are:
1. Digital immersion for product definition: The companies undertake digital immersion to identify customer problems and develop use cases for their product
2. Marketing/Selling: They engage in desk selling and marketing and
3. Customer engagement: They leverage real-time data for effective customer engagement.
We elaborate each of these below.

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Figure 1: Product Business Cycle
Digital Immersion Strategy
As Vijay Anand3 notes in his popular blog, problems and not ideas should drive the entrepreneurship process. He argues that it is the understanding of the problem domain that leads to the creation of successful products. In the academic parlance, this is the distinction between ‘market-driven’ innovation and ‘technology-driven’ innovation. While both forms are possible, market-driven innovation expedites product-market fit.
Traditionally, the activity of identifying potential customers and their pain points required spending many face-to-face hours with potential customers, trying to understand their requirements and use cases. This was time taking and required a lot of upfront investment. More recently, with the software product industry maturing, many product categories have become well- established and well-understood. This has been leveraged by industry insiders turned entrepreneurs, with a good grasp of the pain points and the white spaces in the products available, to develop products that address those gaps. Girish of Freshdesk and Suresh of KissFlow fall into this category of entrepreneurs. But, even for a relative outsider to an industry, the process of understanding the problem domain has become faster, cheaper and easier due to the prevalence of information on the internet. We advance the term ‘Digital immersion’ to capture this phenomenon.
Digital Immersion is the activity of understanding customer requirements and building use-cases from digital trails, rather than from face-to-face conversations. The proliferation of internet and
3 http://inc42.com/entrepreneurship/why-ideas-are-a-bad-place-to-start-a-startup-or-why-ideas-are-evil/

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the abundance of information available on the web have enabled companies to perform an upfront analysis of customer pain points and requirements through blogs, discussion forums, and reviews. This has given them the ability to gather a substantial amount of requirements and build use-cases without physical presence, enabling rapid development of a minimum viable product (MVP). A good example of this is a company called Themeefy. Operating out of Pune and through a process of digital immersion, they have understood the pain points of US middle school teachers and built a category defining product.
Further, having deployed a first version of the product, mid-market SaaS companies leverage the digital trail of the users on the cloud to incrementally modify the product to achieve a product- market fit or develop new products depending on market needs.
In essence, reduced information asymmetry stemming from the wealth of information in the public domain and the ability to track product usage patterns on the cloud enables companies to rapidly move from idea to initial product definition and finally to product-market fit.
Desk Selling & Marketing Strategy
Desk Selling & Marketing is the process of marketing and selling a product leveraging technology. In other words, it does not entail having a large sales force or employ key account selling. The selling and marketing is very much a ‘desk’ activity that leverages telephony, internet, web conferencing and other technologies. This is a fundamental shift in the marketing and selling strategy.
Three factors have made this possible –
1. The modest price points of mid-market SaaS products: Most of the products in this segment are priced at USD $20K per annum or less, an amount that is well within the signatory authority of middle management. As a result, the spend decision falls in the operational domain (as opposed to the strategic domain) and can be taken by the lower rungs of the customer organization, expediting the process.
2. Well understood or simple products: Several product categories targeting the mid-market are well understood (e.g. workflow management) and those that are not very well understood are simple enough to be grasped quickly (e.g. charting solutions a decade ago). This familiarity or simplicity, as the case may be, eliminates the need for key account selling and facilitates desk marketing and selling.
3. Sophisticated collaboration tools: The availability of web conferencing and demonstration tools allows the customer to see the product in action and seek clarifications prior to making the buy decision. The availability of these supporting technologies is a key enabler of desk selling.
It is important to distinguish between two categories of products - ones with well-established categories and others that are carving out a category. For the former, the selling strategy or lead generation strategy will involve both inbound and outbound lead-generation (e.g.: Freshdesk). For the latter, it is primarily inbound and there is no 'selling' per se. The focus is on demand creation

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by way of evangelization, education and enlisting early customers to champion products within their organizations (e.g.: Fusion Charts).
Finally, though the companies start with a light-weight selling model, once they have a large footprint within an enterprise, they do move towards key account selling and the traditional sales model.
Desk Selling & Marketing has provided a significant advantage to Indian companies because the low cost structures further bring down an already low cost of customer acquisition. However, this advantage stemming from low-cost may be short lived. This is because many elements of desk selling and marketing are rapidly moving towards a tool-based model, one where tools (rather than humans) are used to carry out the process. This is a reminder of the fast changing competitive environment and the necessity for Indian companies to constantly innovate and reinvent their business model.
Cloud-based Customer Engagement and Feedback
Cloud-based customer engagement enables companies to capture customer behavior and interaction with the product from the digital trails on the cloud, on a real time basis. This continuous feedback, coupled with agile development leads to quick product development cycles with incremental features and upgrades. This eventually helps the company adapt as per the changing customer needs in particular, and market needs in general.
Another key consideration in this stage is to segment the existing customers into different cohorts based on parameters such as acquisition cost, retention rate, product usage, and the amount of customization required. This helps companies define the target cohorts to focus on, thereby narrowing down the marketing effort and sharpening the product development roadmap.
Here again, Indian SaaS companies have an edge. The inherent cost advantages from running the business out of India enable these companies to undertake more number of product revisions with the same funding.
The cloud-based customer engagement is not to undermine the importance of face-to-face customer engagement. Customer engagement does happen in person, though at a lower frequency and with a different agenda. Speaking to key customers helps create ideas for the next iteration of product development, whereas usage data from the cloud helps validate that idea. An impeccable balance between the two combined with an agile development team helps companies achieve product-market fit more quickly.
Digital immersion, desk selling and marketing, and customer engagement strategies described above is summarized in the following 2x2 matrix. Digital immersion is the predominant strategy to develop new products, be it for existing customers or new ones. Desk selling and marketing is leveraged to expand the footprint of existing products with new customers. And finally, ongoing cloud-based customer engagement ensures that existing products are meeting customer requirements.

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It is evident that SaaS companies targeting the mid-enterprise market are a distinct strategic group. Therefore, they need to be evaluated as such. Below, we discuss a set of parameters that can help evaluate these companies.
Evaluation heuristics
Companies are evaluated based on the future potential revenue. The key parameters used to evaluate SaaS companies attempt to capture metrics such as customer growth rate, customer churn, and the cost of acquisition. The most fundamental way to evaluate SaaS companies would be to look at the unit economics for each customer. To that effect, the two most important metrics to capture and monitor are:
1. Lifetime Value of a customer (LTV)
2. Customer Acquisition Cost (CAC)
Additionally, the monthly recurring revenue (MRR) is useful to gauge the viability of the business model. This can help evaluate the time it takes to recover CAC, and therefore helps understand the profitability outlook.
Unless CAC becomes substantially lower than LTV, the SaaS business isn’t viable over time (Figure 2).
Figure 2: Evaluation framework for SaaS companies
Typically LTV grows and CAC comes down over time. Kayako increased its per-agent value from $1/agent/month to $18/agent/month over the last 7 years. KissFlow has reduced its CAC from $755 to $400 in six months starting Sep 2013. Evaluating if CAC will come down and whether LTV will go up is the big bet that a potential investor is making.

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Whether CAC will come down or not depends of the quality of the desk-based sales and marketing engine that has been put in place. LTV increase depends in the quality of the customer engagement engine that’s in place. So, in some sense, mid-tier SaaS investment decisions are based on the ability to determine the “goodness” of these two engines in a startup.
Concluding Remarks
This report has established mid-market SaaS companies as a unique category within software product companies in India. It has brought to the fore the three pillars of their business strategy – digital immersion, desk selling and marketing, and cloud-based customer engagement – and how together, they lend a competitive advantage to Indian companies vis-à-vis their western counterparts. The report has also provided some guidance on how to evaluate these companies. In future reports, we will take a deeper look at each of these three pillars, elaborating on the activities involved in setting them up and running them efficiently.