The pricing valley of death

From Software’s Valley of Death by Raj De Datta:

Let’s say you want to build a $100M recurring revenue SaaS business. There are really only two fundamental ways of doing it:

1. Tackle the enterprise: Sell 1000 companies @ least $100,000 per year deals with a market size of at least 5,000 companies.

2. Tackle the small & medium business: Sell 100,000 companies @ least $1,000 per year deals with a market size of at least 500,000 companies.

The valley of death is often in the middle. It’s the company with the long sales cycle (often because you are selling something that is pretty complicated to enterprises). You still require expensive sales people, have a limited market size and low price points (often $5,000 to $30,000 a year. ) Over time, the model simply doesn’t work.

The valley of death is totally avoidable, but only if you deal with it pretty early in the lifecycle of your start-up. Basically, you’ve got to pick your market segment in tandem with your product. You’re either enterprise, or you are mid-market (at least initially). You can’t be both.

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