Some SaaS (Software as a Service) customer groups are bigger, easier to reach, and more profitable than others. How do you find a profitable target market?
How can a SaaS increase MRR from $5k to $700k?
A good example of this is Nathan Barry and his SaaS, ConvertKit. ConvertKit started back in 2013 and initially positioned themselves as “email marketing for digital product businesses.”
“We were just doing email marketing for whoever happened to be frustrated with MailChimp. That wasn’t an effective marketing strategy.”
It wasn’t until around 2015 that Nathan decided to go full time on ConvertKit. During that year he discovered the positioning that would save his business:
Initially I asked: ‘who are people like me that I know are making a good living online?’ I wanted folks who had an audience, were selling products and were likely to have the same problems as me. Initially chose ‘authors’ because I described myself as a writer. The problem is most people who describe themselves as authors are selling their Kindle novels for $0.99. They’re not a profitable customer to have. So then we tried like email marketing for course creators and eventually narrowed it down to professional bloggers.
Changing their positioning to “email marketing for professional bloggers” was a turning point for ConvertKit. But initially, other people in the software business made fun of them.
“People were like: ‘Seriously? When are you going start selling to real companies?”
Luckily, Nathan stayed the course. Since ConvertKit started targeting professional bloggers, monthly recurring revenue went from $5,000 in 2015 to over $700,000 in 2017!
Customer positioning was key to Nathan’s success. Are you building a SaaS? Choosing the right market is crucial. Here is what I recommend in my book: look for a target market that has:
- Purchasing power
- Purchasing desire
- Market mass
Let me explain these three points.
What is your target market’s purchasing power?
First, purchasing power. What you’re looking for is somebody who can pay for whatever you’re producing. In Nathan’s case, a professional blogger is the only person he needs to convince to buy his product. There’s only one decision-maker; they don’t need to run their expenses by anyone else.
Many software products, like project management software, have to convince a whole team of people to make a sale. You need to talk to the CTO, the COO, the Product Manager, and the development team. Purchasing decisions made by committee increase the cost of every sale.
Purchasing power also refers to how much money people can spend to solve their problems.
A college student might have the autonomy to spend their money as they please, but they’re generally cash poor. A business owner, on the other hand, has both spending authority and the budget.
A customer’s desire for software
Next, you should look at purchasing desire. You are looking for a group of people that is highly motivated to solve their problems. They’re willing to spend money to overcome obstacles and make progress in their lives or their business.
Professional bloggers make most of their money by building an email list. They are a great market for ConvertKit to target because email is the core of their business. Furthermore, if they’re having problems with their existing service (like MailChimp), they’ll be highly motivated to switch.
Desire is important. Certain types of business owners have the ability to spend money as they please, but they’re cheap. They’re not willing to pay to overcome certain types of problems. If you’ve ever been a part of a business’ budget discussions, you’ll notice that every business has certain non-negotiables. Phone service, website hosting, and email service are necessary for most businesses. But other applications are just “nice to have.”
The final ingredient is “market mass.” To have a sustainable business, you need enough people in your target market with the ability and desire to pay you. If your market is too niche, it’s going to be difficult to make a profit. However, if there are thousands (or millions) of people in that market, your opportunity to attract leads is greater. Choosing a niche is still important, but it has to be sizeable enough to support your business.
Selecting a target market for your software product is one of the most important decisions you’ll make. Evaluate each potential market on its ability to pay, its desire to pay, and its size.
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Looking for more? You might like the startup marketing checklist and essentials for SaaS marketing (with PDF download).
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