In the world of B2B (business to business) there are plenty of business model options. Most Software-as-a-Service (SaaS) companies use a monthly (or yearly) subscription model. In some cases they add layers of “price discrimination” where costs go up based on certain variables. The goal is to get more money out of customers that use more of the service. Variables include things like more users, more hosting space, more projects, etc. (In some cases, these variables are quite arbitrary and don’t necessarily impact a vendor’s cost structure.) Generally speaking, vendors want to generate more revenue from larger companies, because they typically have more money to spend.
But what I’ve been thinking about a great deal of late is the concept of top down and bottom up business models. Really, it’s about top down versus bottom up user acquisition models, on top of which you then layer an appropriate business model.
So what’s the difference between top down and bottom up B2B user acquisition and business models?
Top Down User Acquisition and Business Models
The top down approach to user acquisition and business models is the older, more recognized approach – at least in the B2B world. In the B2C (business-to-consumer) world, almost everything is bottom up. But in B2B, where software purchases can be in the hundreds of thousands or millions of dollars, top down rules.
Top down essentially means that upper levels of management (think: C-level) decide to make a purchase and force that purchase on everyone else. The executive team buys a new email management system, sets it up and mandates that it becomes the de facto tool of use, end of story. In some cases this makes sense – especially when I.T. is involved to support something that’s company wide; it’s hard to do so with tons of different applications in use, different standards, etc. That’s why some organizations don’t allow individual users to install anything on their own computers (or even change settings). A bit draconian, and the concept can be taken too far, but you can understand where the top down mentality comes from.
A top down user acquisition model can be attractive to vendors, because purchases tend to be larger. Companies that are implementing company wide initiatives need to spend more on licenses, training and consultative services. Top down business models are often heavily weighted towards service-oriented revenue: implementation, training, customizations and on-going support. It makes vendors feel like they really have their claws stuck into the customer. Companies like top down user acquisition because they feel as if they can control things, provide support and gain efficiencies through uniformity.
But top down user acquisition models don’t always succeed. In fact, from the customer’s perspective there’s significant risk – higher price points, bigger user adoption curves, and the issues of enforcement. Generally, people hate being forced to change, and that reluctance is expensive. Top down projects often cost more than originally expected because of the scope of implementation – scope creep (one of my favorite buzzwords) runs rampant in top down projects.
Bottom Up User Acquisition and Business Models
B2C, social media, social networking and social software have started to impact how B2B software is sold, implemented and even built. B2C software is by its very nature bottom up — you’re not acquiring groups of users by selling to one person who forces things down their throats. You acquire each individual user, essentially one at a time. Of course the key to successful bottom up user acquisition is that it’s viral. No B2C company is successful unless its application and use are viral – spreading easily from one person to another to increase user adoption. User adoption has to be inexpensive and happen quickly, because most of the time a B2C’s value grows significantly with scale. More users = more value (for everyone.)
Bottom up user acquisition models are becoming much more prevalent in B2B software. Some early bottom up B2B players included 37signals (with Basecamp) and Freshbooks. They did it by targeting freelancers and small companies with only a few users, but making sure that those users could take the products to bigger companies or share information virally with other organizations (big and small.) Newer examples include Yammer and Rypple. These companies take the bottom up user acquisition model a step further by encouraging a few people within any size organization to start using the product, and over time watching as that spreads throughout the organization. In the case of Yammer, its current business model is built on the assumption that a few users inside a company will start using it, bring in others, and eventually the company will want to manage the process with enterprise-like, administrative tools.
Instant message grew within organizations in much the same way – it started as way for people to chat (outside of work), people then started talking during work about work stuff, and companies eventually realized that it was so commonplace within their organizations that they needed administrative control – security, user rights, more features, etc. That trend of bottom user adoption is becoming much more important for B2B startups today.
Top Down Vs. Bottom Up
So which is better?
That’s not really the right question. Although for any startup today entering the B2B space, I would strongly recommend looking at a bottom up user acquisition model (with a strong element of virality) because the more traditional top down approach is getting tougher. Let’s take a look at some factors:
|Variable||Top Down||Bottom Up|
|Sales Cycle Length||Long||Short|
|Sales Strategy||Hire Salespeople w/ B2B software sales experience for on-site sales (expensive)||Initially viral / web-based (inexpensive)|
|Sale Price||High (better be)||Low (although can scale)|
|Revenue Model||A few sales may be all you need||Need big volume of customers paying small amounts each|
|Value Justification||Just at top||Everyone has to buy in, every day|
|Lock-In Factor||Very high||Much lower|
|Virality||Not really||You better hope so|
|Purchasing Habits||Companies recognize this model more||Still somewhat new / radical|
|Development Cycle||Not very iterative||Much more interative|
More B2B startups are emerging with bottom up user acquisition and business models because these are the strategies younger entrepreneurs (neck-deep in social networking, social media, social software) are familiar with. Young entrepreneurs look at older models with dismay because they themselves don’t like the idea of being forced to do something in a specific way, and they want to bring innovation (both in terms of ideas and business models) to the table. It’s a trend that will continue to grow, and will be interesting to follow.
What do you think? Do you have experience with bottom up user acquisition and business models as a user of B2B software or an entrepreneur?