International expansion is usually regarded as a complex undertaking. As David Skok points out in this canonical article on software-as-a-service (SaaS) metrics, SaaS companies have an even more complex business model, in many ways, than traditional businesses do. So, it’s no wonder that SaaS business leaders often wrestle with how to take their businesses global. After all, who wants to layer more complexity on top of an already complicated business model? When growth is the game, as it usually is with SaaS companies, international expansion is often necessary if not inevitable.
In spite of the inherent complexity, expanding a SaaS business internationally can actually be easier than taking a traditional business global. In fact, SaaS companies are fortunate to be born with the roots of global expansion already baked into their business model. Let’s look at five reasons why traditional companies struggle with international expansion, and how these apply differently to SaaS companies.
SaaS Companies Have Less Fear of the Unknown
Many companies don’t want to pursue global expansion activities because they are deeply afraid to venture into parts of the world they’re unfamiliar with. Interestingly, the same companies often show a high tolerance to risk in other areas of the business. When members of an executive team have experience living or working abroad, their tolerance for risks surrounding international expansion increases significantly, and they become much more likely to view globalization as a viable growth strategy.
For a SaaS business, especially one with strong inbound marketing, the “unknown” of foreign markets quickly becomes less murky and more familiar. Visitors to a company’s website from outside its home market provide opportunities for the company to explore inbound leads from abroad. Thus, SaaS companies can gently dip their toes into globalization from an earlier point in their evolution than many traditional businesses can, armed with data that can boost their confidence.
Any SaaS business needs to watch their key metrics, such as the ratio of customer lifetime value (LTV) to customer acquisition cost (CAC). Interestingly, because marketing and sales costs are lower in some foreign markets, the LTV:CAC ratio can often remain steady or even improve using international markets as a growth lever. To get started with globalization, SaaS companies often don’t need to make the same level of investments as traditional businesses do in production, fulfilment, and on-the-ground sales, marketing, and operational costs before they start to see a clear return on investment.
SaaS Companies Can More Easily Figure Out Where to Start
Another major barrier that companies face with international expansion is simply determining where to begin. In fact, a Radius survey revealed that among business professionals charged with international expansion, figuring out where to begin was the single most challenging issue they faced. With 196 countries in the world to choose from, where does a company begin?
Traditional companies can’t afford to make these decisions lightly. Usually, they conduct extensive market research in order to determine total addressable market (TAM) for each country, looking closely at the populations of businesses, consumers, and industry vertical concentration within each geographic region of potential interest. They also look at typical indicators, such as the Ease of Doing Business Index, and survey top markets for local competitors, before making a decision on their next target markets for expansion.
SaaS businesses, on the other hand, have an easier time figuring out which markets to focus on. They don’t have to rely exclusively on external data and market research. Rather, so long as their model includes web-based sales and distribution, they likely can look at their own top-of-funnel data (such as website traffic, conversions, and lead flow), and analyze the geographic breakdown.
The biggest danger for SaaS companies in figuring out where to get started is that they sometimes choose too many markets at once. Often, the “pull” of foreign markets is so alluring that there are many advocates throughout the business for differing countries and regions. “We’ll sell to anyone who will buy our product” is often the prevailing mentality, but this can become risky without considering the impact on churn metrics further down the line.
There are definitely advantages to going “bigger and faster” with international expansion, but for a SaaS business, the core metrics need to remain stable and strong to guarantee the ongoing health of the company. Generally, having a narrow focus in the early years of global expansion results in a better understanding of factors that can have an impact on LTV:CAC. Once these factors are fully understood in a few early test markets, the expansion model can more easily be evolved to include new geographies.
SaaS Companies Have More Flexibility with Timing
Timing is everything when it comes to international expansion. Traditional businesses typically consider international expansion at a time when they seek to increase revenue and have already explored (and sometimes exhausted) other growth strategies that seem easier or less risky. Usually, a need for growth is the primary trigger for their global expansion projects. It’s a very intentional and decisive move. However, because they often look at international markets in reaction to a business need, they sometimes skip important steps to decrease risk and are not likely to take proactive, smaller expansion steps early on with a goal of, say, diversifying revenue streams.
SaaS companies, by contrast, often obtain a small percentage of their recurring revenue from international customers at a much earlier stage. They achieve this frequently without making a major intentional push. Their journey often consists more of an “awakening” to the global opportunity that already exists within their customer base or lead flow, followed by a more aggressive push into specific markets where they already have at least some initial presence. Because they move into international markets more gradually and often less intentionally, SaaS companies have the luxury of a wider window when it comes to timing. Generally, there isn’t an urgent need to go global, but rather, it’s one of several different, relatively low-risk bets that a SaaS company makes to ensure growth.
SaaS Companies Can More Easily Adapt Their Model
Traditional companies typically try to replicate their domestic success in international markets simply by “cloning” their business model for each new market they enter. Even companies with enough foresight to localize their product offering prior to moving into a new market are often guilty of making this mistake. Usually, businesses do this because they’re taking advantage of a short-term opportunity in a rush to bring their product to market. They don’t stop long enough to weigh all of their different options for the best go-to-market strategy in the long term.
Usually, traditional companies invest a large amount of money in marketing up front to acquire customers quickly and see a return on that investment. So, the stakes are somewhat higher when entering a new market under this model. If they get the product and packaging wrong, all of the budget they spend on their initial marketing push is basically lost, and likely cannot be recovered.
A SaaS company, which relies more on retaining existing customers to ensure strong business performance, can enter markets more gradually and slowly. In doing so, they avoid taking on as much risk, but they also are luckier in this regard because of their agility. They can execute more easily on quick, real-time changes based on new information. So, even if they initially move into a new market through the “cloning” approach, they can pivot and work toward a better product-market fit later on. Whether it’s re-packaging the product components to come up with a new product SKU, accepting local payment methods, offering local currencies, or simply changing the product positioning to be more suitable to a new market, SaaS companies can course-correct more quickly and easily than traditional companies can.
SaaS Companies Don’t Rely as Much on Physical Presence
Today’s marketers work to build brands that encircle the customer and can reach them anywhere they can be found, both online and offline. For traditional companies, this often means that international expansion is a very expensive undertaking. Expansion into new geographies becomes especially costly when companies go the “cloning” route described above, which often entails replicating marketing, sales, and operations for each new market. Usually, this involves setting up physical offices, which can be quite expensive. Instead of looking for alternate approaches, they stick to what they “know” (for their home market at least) instead of innovating and approaching each market with an open mind and fresh thinking.
SaaS companies have an easier time going direct to the customer without the need for brick and mortar locations. It’s not uncommon for a SaaS company to reach 25% or more of its revenue from international before it even begins exploring the idea of a physical office location abroad. The need for a physical presence in market depends greatly on the type of business, the product and surrounding services, local competition, and other factors. But in general, SaaS businesses are not as tied to location as traditional businesses by virtue of their distribution model.
Start Small, Stay Focused to Achieve International Success
Most of the points above actually lend themselves not just to SaaS companies, but to digital businesses of other types too, such as e-commerce companies. Because the barrier to entering new markets is slightly lower with a digital product offering or a digital go-to-market strategy, one of the dangers that most digital businesses face is expanding too quickly, into too many markets, thereby diluting their focus.
A concentrated, phased approach is usually a saner one — not because digital companies can’t simultaneously achieve big results in many markets. They absolutely can. The risks are simply higher, and the ROI is usually weaker, when too many markets are chosen at once.
The good news? If you start small and keep a narrow focus initially, international expansion can be led by a small number of people, or even just a single champion in a digital business. Companies can see swift results from international growth without investing in a lot of overhead.
While having an autonomous, lean swat team for international is a great way to get things going and obtain some short-term ROI, it’s often harder later on to get the rest of the company to rally around international. International can be viewed as separate from the core of the company, making it hard to embed “global DNA” into every single department. That’s a challenge that traditional companies face as well, but that digital companies are even more prone to because of the faster traction they can obtain early on, before the rest of the business fully catches on.
The bottom line is this: if you’re working at a digital company, take heart. Globalization will in many ways be an easier undertaking than it would be in a traditional business setting.