Moving Upmarket: A concerning trend among software companies

Everyone has used software that gets worse over time. This post tries to explain why it happens, and what you can do about it.
Written by Tyler King

If you talk to anyone with small business experience, it’s pretty much a sure thing that they’ll have a story like this: “I used to use XYZ software for [CRM/Project Management/Accounting/etc]. 10 years ago it was amazing software. Then it started getting more bloated, slower and more expensive . It got so bad that I had to switch to something else.

Sound familiar? This is so common that it’s virtually impossible to find anyone who is still happy with the software that was powering their small business 10-20 years ago. But why? Shouldn’t software get better over time? Shouldn’t new technological advances make software faster? Shouldn’t design improvements make it easier to use? So why does the opposite happen?

There are probably a variety of reasons for this trend, but I think there’s one thing in particular that causes small business software to get worse over time: moving upmarket.

Moving Upmarket (or “Upstream”)

Just like any business, creating a software startup is a long and gradual process. It takes time to build all of the advanced features that established software contains, so most startups choose to begin with something very basic and simple. They might launch with just a few core features that cover the bare minimum.

As you might imagine, most larger customers don’t want software that just covers the bare minimum. As it turns out, the only customers who generally want incredibly basic software are small businesses. Because they’re small, their needs are simple and in many cases they actually prefer software that doesn’t have all the bells and whistles. So by default, many new software startups have no choice but to sell to small businesses because those are the only customers interested in their software.

But just because a software company starts out selling to small businesses doesn’t mean that’s what they want to do forever. In most cases, software companies really want to sell to larger customers, and that means adding more features and focusing more on an enterprise sales process. This is called moving upmarket.

This of course means that the software becomes bloated, more expensive, and increasingly focused on benefits that aren’t important to the original group of small business customers. Those customers in turn grow frustrated and have to switch to something else. Then that new company moves upmarket, and it happens all over again.

Moving upmarket is such a common goal for software companies that there are countless articles giving advice on how and when to do it.

Why do software companies primarily want to sell to larger customers?

This is big enough of a topic that it deserves it’s own post (and I hope to write that post sometime in the future). For now, here’s a summary of a few reasons why most software companies are so hellbent on moving upmarket:

  • Larger total market size: This isn’t a particularly interesting point, but the fact of the matter is that big businesses spend a lot more money on software than small businesses do, which makes enterprise more appealing to most software startups.
  • More revenue per deal: In the software industry, it’s common to hear something along the lines of, “It takes the same amount of effort to close a $10,000 deal as it does to close a $100,000 deal.” If that’s true, then of course it makes sense to go after the biggest deals you can.
  • More stability: Small businesses go out of business at a much higher rate than the fortune 500. They’re also more nimble which allows them to switch software easily. Basically, enterprise customers are a lot more likely to stick around.
  • Easier to spend investor money: When software startups raise money, it’s expected that they’ll spend it. The problem is, it’s not always economically viable to pour money into sales to small businesses because each deal is too small. On the other hand, enterprise deals are easy to scale up by pouring more money into the sales team.

Basically, if a software startup wants to become a massive multi-billion dollar company in a short period of time, conventional wisdom says that they’re wasting their time focusing on small businesses. So even though most software companies start out selling to small businesses, that was never really their long-term plan.

We’ve established that selling to the enterprise can be better for the software company, but there’s just one problem: it’s TERRIBLE for small businesses. Small businesses are the ones taking a risk on young, unproven startups. They’re the ones acting as guinea pigs, and the reward they get for supporting young software startups is to accelerate the pace at which those software companies ignore them.

What can small businesses do to protect themselves?

Unfortunately it’s not possible to completely ensure that you won’t be screwed over by your software providers, but you can do a couple of things to improve your odds.

First off, no matter what size your business is, you should always make sure that you own your data. It might be stored in a CRM or a project management tool or anywhere else, but you should make sure that you’re able to get it out of that system if you ever want to leave. If you really want to be safe, you can export your data from SaaS providers every month just to make sure you’re not 100% reliant on them.

Second, you can proactively identify which software companies are most likely to move upmarket, and be extra cautious when dealing with them. Of course, you might decide that a company is such a good fit for you right now that you’re willing to risk them moving upmarket, but it’s helpful to at least go into that relationship with your eyes wide open.

How to identify software companies that are likely to move upmarket

It’s hard to know for sure, but here are some warning signs you can look for to tell if a company is committed to servicing small businesses, or if they’re more likely to move upmarket as soon as they get the chance.

  • Track record - If a company is more than a few years old, you should be able to look at their history and see where they’re headed. Have they already started moving upmarket, or are they staying true to their original customer base?
  • Economics - If you do a bit of research on the company, you should be able to tell if they’re run in a way that can possibly be sustained if they stay in the small business market. If a company has raised a lot of money from investors, offers features that seem to be meant for enterprise, is based in an expensive city like San Francisco, or has a real sales team, chances are good that their business model won’t work if they stay focused on small businesses.
  • Language on their pricing page - Go to a software company's pricing page and evaluate whether the language is meant for small or large customers. Do they have a “small business” plan followed by more expensive plans for larger businesses? If so, there’s a good chance they’re hoping to get more of the larger businesses as customers. You can tell a lot about a company’s intentions just by reading their website.
  • Public statements - It’s not uncommon for software companies to explicitly state that they’re planning on moving upmarket. They normally wouldn’t say it directly to their customers, but if you read their investor relations materials, news articles about them, etc. you might be able to get a glimpse into their future plans.

Here's a real-life example about a software company called Base CRM. That one article about them says (a) they raised a bunch of money, (b) they’re relocating to the most expensive city in the country, (c) they’re mostly looking to grow their sales team, (d) they’re competing directly with an enterprise CRM, and (e) they’re trying to add more features in order to compete with that enterprise competitor. In that one article, you learn pretty much everything you need to know about Base’s likelihood of remaining focused on small businesses.

Unfortunately, it’s all too common for software providers to move upstream and abandon their small business customers. But if you look hard enough, you will be able to find a small group of companies that managed to stay true to their early customers for a long time (Basecamp, Freshbooks, Grasshopper, and a bunch of smaller companies you probably haven’t heard of come to mind). If you examine those companies, a pattern will emerge. They’re normally bootstrapped, or at least were able to get by with minimal reliance on investors. Most of them aren’t based in the major tech hubs which are dominated by the “boom or bust” mentality. They all have products and business models that are actually viable (read: profitable) when selling to 1-20 person companies.

As a small business, there’s nothing you can do to 100% protect yourself against your critical software providers moving upmarket, but with just a bit of research and a healthy dose of skepticism, you can definitely improve your odds. If you’d ever like to discuss this topic with me personally, you can hit me up on Twitter (@TylerMKing) or email (tyler@lessannoyingcrm.com).

Posted on Jun 29, 2015
Filed under CRM Articles, Tech Analysis, Company Philosophy
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