B2B vs. B2C SaaS: Which should you build?
Most new founders obsess over finding the perfect idea and underinvest in researching their target audience and potential business models.
When it comes to SaaS businesses, there are significant pros and cons in selling to consumers (B2C) vs. selling to other businesses (B2B).
The truth is building a tool for businesses can often be slightly easier, particularly for bootstrapped or mostly bootstrapped business owners. In this post, we'll explain the key differences between B2C and B2B businesses, along with an alternative approach.
What is B2B SaaS?
What companies come to mind when you think about SaaS businesses? There’s a great chance all of the examples you could think of are B2B. For instance, you have companies like Salesforce, HubSpot, Loom, or Slack.
All of these companies are selling Business-To-Business.
As a general rule of thumb, you can charge potential customers more, churn is lower, and your digital marketing playbook opens up since you have more money to spend to acquire new customers in B2B SaaS companies.
Let’s use a hypothetical example to illustrate why this is the case.
Say you are a B2B SaaS startup building a CRM for dance studios.
You have 100 customers paying you $80 per month. That’s $8,000 in monthly recurring revenue (MRR) or $96,000 in annual recurring revenue (ARR).
Now, let’s say you have a visitor to free trial conversion rate (with credit card up-front) of 1% and a 50% free trial to paid conversion.
This means you need 20,000 visitors to generate 200 free trials and 100 paying customers.
And if you have an average churn rate of 3%, this means you are losing 3 customers each month. So, you need 600 visitors at a 1% visit to free trial conversion rate to get 6 new free trials and 3 new customers to make up for the ones that churned out (and to keep from plateauing).
With a 6 month payback period, you can also spend $480 to acquire each customer, so you have enough budget for quite a few marketing strategies.
This is an average example and doesn’t even get into the fact that there are a lot of B2B SaaS at scale with great product-market fit that have net negative churn. This means that they are growing—through expansion revenue—even when they are churning more customers than they are gaining in a month.
Building a Micro B2B SaaS
An added benefit of B2B SaaS companies is you can build a micro B2B SaaS because the unit economics work. Micro SaaS businesses can be insanely profitable without requiring the founder(s) to shoot for the moon and become the next unicorn company.
Here are some common characteristics of micro SaaS businesses:
Smaller total addressable market (TAM): Typically, these companies have a smaller growth ceiling. Most micro SaaS companies will max out and hit their growth ceiling somewhere between $10,000 - $50,000 MRR.
Narrow purpose-built tool: Most of these businesses are a feature or a small group of features. They do one or a few things extremely well.
Less competition: While the lower growth ceiling might sound like a downside, it can actually be your biggest strength since it will keep large companies from entering your market.
Single marketing channel: Most of these businesses have one dominant marketing channel, which is usually either Google or a third-party app store. For instance, they are a WordPress plugin and get 90% of their traffic and customers from WordPress.
Single point of failure: Of course, there is a downside to being overly reliant on one marketing channel or being built on only one platform. If the platform penalizes your app in its search algorithm or delists your app, your business is screwed.
Small team: Most of these businesses don’t need any full-time employees. If you are really small, you are probably doing all the work yourself and at a larger scale, you can likely get by with hiring a few freelancers.
Fewer costs: Your three main costs will likely be hosting/infrastructure, marketing budget, and/or freelancers/contractors.
Pro Tip: Looking for the perfect micro SaaS idea? Check out our list of SaaS ideas here.
What is B2C SaaS?
When you think about B2C SaaS, you likely think about Netflix, HBO Max, or Spotify. However, these are actually content businesses with a subscription model, not true SaaS companies.
B2C SaaS companies are selling to consumers.
Many of the most successful and well-known B2C SaaS companies, like Dropbox, Canva, and Later, actually have a hybrid model. (We’ll cover more on that later in this post.) They have a consumer or prosumer tier, but the majority of their revenue is coming from businesses.
Or, you are building a B2C SaaS to be a loss leader or an ancillary revenue generator, like Apple iCloud. iCloud is less than 2% of Apple’s revenue. They can afford it because of the sheer amount of hardware and products that Apple has.
That wasn’t the case for an iCloud competitor like Dropbox. Dropbox started as a B2C SaaS and still has a big (free) user base. However, 80% of their paid subscribers are now businesses.
True, successful B2C SaaS companies are actually quite rare because the only way they work is at a large scale. Most are VC funded, like Duolingo, since you often need to be willing to burn a lot of money each month for years until you hit the scale where you have a sustainable business.
In fact, the only successful bootstrapped B2C SaaS that we could think of is Readwise. As one of the founders alluded to in this excellent Twitter thread, it took them from 2017 to 2021 before they really hit their stride.
Let’s use a hypothetical example to illustrate why B2C SaaS companies are so rare.
Say you are a B2C SaaS startup selling an app to help consumers learn Spanish.
While you have three pricing tiers, most of your customers are paying for your middle tier at $8 per month. This means you need 1000 paying customers to reach $8,000 MRR or $96,000 ARR.
If you have a 3% conversion rate, you’ll need 33,000 free users to get to 1,000 paid customers.
Since consumers tend to churn more than businesses, let’s say you have a 7% churn rate. This means you are losing 70 customers each month.
At the same 3% conversion rate, you’ll need another 2,300 paid users just to avoid plateauing at $8k MRR.
You need well over 100,000 visitors each month to get to that list, and with a 4 month payback period, you only have $32 max to spend on acquiring a new customer. That means the marketing strategies and tactics you can use are quite limited (if you don’t want to go into the red).
What are the key differences between B2B and B2C SaaS?
While both B2C and B2B SaaS are expensive to build and get to product-market fit (if they reach it at all), it is slightly easier to do this with a B2B SaaS company since you can charge more, have higher average revenue per users (ARPU), and customers tend to churn less often. Not to mention, you can reach the elusive point of net negative churn where your existing paying customers grow in size and revenue (expansion revenue) over time.
On the other hand, B2C SaaS customers tend to be more price sensitive, pay a lot less, and have much higher churn rates.
And you don’t have net negative churn in B2C SaaS. Instead, you have carrying capacity, which is "the number of users where the rate at which you lose users equals the rate at which you gain users."
Since growth is always linear, there is a real cap to how big your B2C SaaS company can be, especially when you consider it is extremely rare to be able to charge more than $20 per month and get churn lower than 2%.
Going with a hybrid approach
One of the mistakes many new founders think is that you have to have either a B2B or B2C SaaS. When in reality, many of the most profitable SaaS companies have both. They have a dual funnel, like the Dropbox example we just shared.
Companies like Dropbox, Trello, Canva, Castos, and Squadcast are all B2B SaaS, but they also have a large consumer or prosumer tier.
If you can pull it off, a hybrid approach comes with tremendous advantages, including:
A more stable growth curve: You have a lot of small customers paying less with higher churn rates and a stable of businesses at higher price points with lower churn.
Bigger brand presence: The consumer side of the business means you have a lot of customers. This means you can build a large brand following and reap the rewards of word of mouth marketing at scale.
Higher ARPU: The mix of customers means you have higher ARPU numbers than a traditional B2C SaaS. So, you can spend more on sales and marketing.
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There is no right or wrong answer when it comes to building a B2C or a B2B SaaS, but the economics of B2B are much more in your favor as a bootstrapped or mostly bootstrapped company.
