B2B or B2C, which is best for your SaaS?

This age-old question has occupied the minds of many an entrepreneur.

We all have lists of ideas tucked away in both physical and digital formats for when the time is right to jump on this journey. Some make sense for consumers, people like you and me, but we’re aware of their limited revenue potential. Others could be solving real business problems, but may require more effort than we can give it.

In the end, the best one really depends on you, your abilities, and your reach.

What do we know about B2C SaaS?

I bet when thinking about examples of companies that fall in this category you may name Netflix, Spotify, Disney+, Apple Music and other similar ones that charge you a monthly subscription.

However, these are not SaaS products. They are content businesses with a subscription revenue model.

When you log into any of them, your goal is not to use the software itself, but to consume their content.

The app is just a delivery mechanism, so it’s an intermediary between you and what you pay for. Consuming through their app is just a convenience, but you want the music or the movies, not the app.

The reality is that a B2C SaaS is quite rare since most builders are choosing to target businesses instead. Maintaining a SaaS can get quite expensive and frankly, consumers are pretty cheap and super quick to churn away. Just think about how difficult it is for someone to convince you to pay for an app that doesn’t have a business impact. Unless it’s something you really think would save you a bunch of time or make it more effortless for you to do something.

But even in those cases, I doubt you’re willing to pay more than $20/month whatever it may be. The average is probably below $10/month.

Since the Software-as-a-Service business model specifically involves you renting out processing power for others to do something, apps that run natively on someone’s device without you incurring extra costs beyond building and maintaining them are not actually SaaS.

For example, a workout app that only runs on your iOS device (and maybe uses CloudKit or other services that are managed by Apple) cannot be classified as a SaaS unless you also manage external infrastructure that is critical for your software to function.

A personal budgeting app is also not a SaaS unless the way you build it, you’re required to manage some central repository that is important for the main unique selling point to happen.

When you’re only making use of the device and services that your users already own, that’s not a SaaS, but an app with a subscription revenue model. The whole point behind the SaaS business model is that I’m paying you for your computing power, not just for the interface.

There certainly are some benefits for targeting consumers with a SaaS:

• Less decision makers means a faster sales cycle

• Way more consumers than businesses, so a potentially wider audience

• Consumers are everywhere, so easier to acquire customers

Though we have to look at the negative sides as well:

• More price sensitive, so limited average revenue per customer

• Consumers easily switch to competitors, so higher churn rates

• More fierce competition

• Very hard to charge money because consumers are looking for free stuff

What do we know about B2B SaaS?

Almost everywhere we look, we’re going to find an example that falls in this category because that’s what the SaaS business model was really invented for: helping companies avoid managing their own infrastructure and instead convincing them to pay you to do it for them. You package the software along with the infrastructure that runs it instead of just selling them a code license.

You’re surely using apps like Slack or Microsoft Teams, Salesforce or HubSpot, Drip or EmailOctopus, Loom, Trello or Asana or ClickUp or WorkSwift. These are all examples of companies that target businesses rather than consumers.

The main reason is that businesses can afford to pay a much higher price point than a consumer. This counts as an expense and can be deducted from taxable revenue as a bonus, but SaaS products usually help them make money, save money, save time, and/or save effort, which is great for any company.

I wrote more about these benefits here, but the idea is that your SaaS needs to focus on at least one or, ideally, a combination of them to make it worth its price:

But there sure are negative sides, too:

• Larger companies have more decision makers, which turns into longer sales cycles because of these extra approvals that are required.

• You have to run highly targeted efforts and maybe even employ sales teams, which requires a higher customer acquisition cost.

Some apps like Notion, Dropbox, Canva, and Adobe’s Creative Cloud Suite may initially seem like B2C and they do usually have a plan geared towards them, but the majority of their revenue is made from business customers, so they’re actually using a dual funnel!

Unit economics for a B2C SaaS

Most B2C products have pricing plans between $5 and $10 per month. Assuming an average of $7/month (most will go for the lower tier), 1,000 customers will bring $7,000 MRR.

As an indie developer, this sounds pretty good already, but let’s dive deeper.

Since most B2C use a freemium model, we’re going to assume a high conversion rate from free to paid, so 3% is a good figure. In other words, we need 33,400 free users to get 1,000 paying customers that bring in that $7,000 MRR.

How about churn? Consumers cancel much higher than businesses, so anything between 8–12% is not unheard of, but we’ll go with the lower number here.

So every month, out of the initial 1,000 paying customers, at least 80 of them will be gone. To replace them, we need almost 2,700 extra free users at our 3% conversion rate. Every month. Just to maintain the $7,000 MRR.

Cool, but not everyone who visits the website will sign up and assuming a high, 20% visitor to user conversion rate, that’s 13,500 qualified visitors that need to be brought every month.

We’re not even talking about growing the MRR. We’re only calculating how to maintain it since no customer will stay with your forever.

This traffic can’t really be acquired through paid channels since a payback period of 4 months (you can wait as long as 6 months if you have enough cash available) would mean you have to acquire paid customers for not more than $28, which is a very low amount, leaving you with only organic methods.

But going back to the original 1,000 customers, you’d have to drive 167,000 qualified visitors to get there to begin with. Are you sure everyone you send to the website will really fall in this category? Probably not, so your target will most likely have to be north of 200,000 people.

The actual number of people your marketing should reach is even higher since not everyone who sees it will visit your website.

Unless you have access to a huge audience (or very deep pockets), working by yourself to both develop and market an app to consumers does not sound like the best option.

Unit economics for a B2B SaaS

On the other hand, let’s say your average revenue per customer is $70 with a B2B SaaS — the numbers will look much better since you now need 100 customers instead of 1,000 to hit the same MRR.

We’ll swap the freemium model with a free trial (card upfront) as that’s quite common, which gives us a 1% visit to trial rate and a 40% trial to paid rate (these are pretty typical values you can find with B2B).

Working backwards, we need 250 trials to get 100 paying customers and 25,000 visitors to activate those trials.

As a B2B SaaS, churn can easily go between 1 and 5%, so we’ll pick 3% for our example here to make the calculations easier. All of a sudden, we’re only losing 3 customers every month instead of 80.

This means we need 8 trial activations to replace them or 800 visitors.

But this is not all.

Not only is the number of visitors much smaller than for B2C, but we also can spend up to $280 to acquire a paid user while maintaining the same 4-month payback period.

We can now open up multiple extra doors that were closed for our B2C example, including paid channels.

What should you choose, then?

Although both B2B and B2C can be profitable, it’s easier to make the unit economics work with a B2B and we haven’t even talked about higher price points for bigger companies. Many small businesses can afford to pay up to $100/month without even blinking if the product solves an important problem that can bring them (or save them) a 5x multiple.

So really think about what your situation is.

For example, I don’t have a large audience, so for me, B2C is definitely out. At the same time, I’m not interested in long sales cycles, so large businesses are out as well.

I’m more interested in prosumers and small businesses where I can charge at least $30/month all the way up to $1,000/month, but not more than that since that’s where we enter sales teams territory and a big increase in time to close, so I’d rather build a portfolio of smaller companies instead.

But if you do have contacts at bigger companies and know a problem you could solve for them, by all means, go for it. Selling something for $5,000/month or more is really amazing and can help you scale the most.

The opposite is also true: if you already have a very large audience and know you can build something for them that will make sense to sell between $2 and $20 a month, definitely go for it!

No matter which direction you want to go, just reach out to me on LinkedIn if you need help with the technical side. I’ll help you validate your concepts first before spending a fortune on a product that may not work.

Here’s a story about a founder duo who almost made this mistake, but I managed to convince them to revize their plan: