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AppFolio Shows That Niche B2B SaaS Is Serious Business

Drawing lessons from AppFolio, we uncover B2B SaaS opportunities in the health and personal care niches

5 Minute Read

What you need to know

  • In a technology landscape increasingly dominated by industry-agnostic software giants, opportunities still exist for B2B SaaS services addressing niche markets. Since its IPO in June 2015, AppFolio — which creates B2B software for the Real Estate property management niche — has more than tripled its revenue and outperformed top tech stocks.
  • Niche B2B SaaS businesses typically have smaller total addressable markets (TAM), but benefit from: 1) avoiding the attention of major tech players; 2) stickiness with end users; 3) tight customer feedback loops that improve the product. 

How you can capitalize

  • After analyzing more than 700 software categories, we identified B2B SaaS opportunities servicing the Health (Dental Practice, Electronic Medical Records (EMR), Hospice, Vet) and Personal Care (Fitness, Spa, Salon) niches.

Let’s play a quick game of “Which one of these does not belong?” Facebook. Amazon. Netflix. Google (Alphabet). AppFolio.

If you guessed AppFolio, congratulations. You are correct and we owe you a set of steak knives

Like the famed FANG group of stocks (FB, AMZN, NFLX, GOOGL), AppFolio (APPF) is a tech company. Unlike FANG, AppFolio is not a consumer-facing business servicing billions of people. 

Rather, it is a niche business-to-business (B2B) SaaS service that primarily caters to the real estate property management industry.

Oh, and since its IPO in June 2015, it has sharply outperformed FANG in the public markets.

As of 11/08/2019

Over this span, AppFolio has seen its revenue more than triple to a projected $251mn by end-2019. The company has also avoided the Silicon Valley “growth at all costs” mentality with its EBITDA and Net margins improving from double-digit negative territory in 2015 to double-digit positive territory in 2018 (and beyond).

AppFolio Filings, Trends Analysis

Based on its strong performance in recent years, what can AppFolio teach us about the niche B2B SaaS business?

AppFolio’s Strategy Avoids Tech Giants While Giving Customers Exactly What They Need

According to the company’s website, AppFolio creates “Cloud-based software built for specific verticals” (we’ve interchanged “niche” for “vertical” in our analysis). 

The reality is more than 90% of AppFolio’s revenue is attributed to its real estate offering with the remainder coming from its foray into legal tech (following its 2012 acquisition of MyCase).

Chief among the real estate offerings isAppFolio Property Manager (APM), an all-in cloud solution used to manage multifamily, single-family, student housing, HOA, condo, and commercial properties.

APM provides basic industry-agnostic services such as communication, billing, and accounting but also has a suite of real estate specific tools—such as tenant screening, tenant payments, renters’ insurance, lead generation, lease templates, vacancy postings, work orders, utility management etc.—to make the product unique and sticky.

In its pre-IPO S-1 filing (2015), AppFolio highlights why niche B2B software is a sound business strategy when targeted at industries stuck with legacy systems (bold mine): 

In certain industries, day-to-day operations may be managed through inefficient manual processes and disparate software point solutions. This lack of automation and integrated  technology results in a significant administrative burden on these businesses, particularly in industries that involve unique workflows, relationships among multiple industry participants, significant data inputs and management, and compliance or regulatory requirements. 

AppFolio S-1

The reference to industries with “unique workflows” is a good encapsulation of why niche B2B SaaS opportunities exist. The world’s largest B2B software companies (eg. Microsoft, Oracle, SAP, IBM, Salesforce) create solutions with the widest possible applications across many industries; when these companies do focus on niches, it is only for massive Total Addressable Markets (TAMs).

One of AppFolio’s competitors, RealPage, estimates that the TAM for US Real Estate data analytics and on-demand software is $10B. While nothing to sneeze at, the Microsofts and Oracles of the world are unlikely to reorient an entire corporate strategy and devote significant resources in an attempt to corner that market. 

As of 11/08/2019

The S-1 continues:

While larger enterprises and consumers have been experiencing a transformational shift into the digital age, the legacy systems and manual business processes currently used by many other businesses are lagging behind in terms of technological sophistication and ease of use.

AppFolio S-1

AppFolio’s success in Real Estate property management and the company’s stated desire to find other “verticals” suggests that there are plenty of opportunities to help small-and-medium size businesses (SMBs) in industries with slow-moving legacy systems (read: fax machines and 122-tab Microsoft Excel files). 

What are these niches?

We’ll cover that in the next section.

In the meantime, here are some lessons from AppFolio’s strategy:

  1. Smaller Markets = Less Competition From Major Players. Opportunities abound that are huge for most ventures but tiny for the biggest software players. White space exists in many industries to support SMBs. Even without a track record in the Real Estate industry, the founding AppFolio team realized that small-to-medium sized property managers were completely ignored and successfully created a web-based B2B solution.

  2. If Niche Is Small, Growth Matters. A valid criticism of the niche strategy is “well, what happens when the market is fully served?”. Even with a TAM of $10B, AppFolio has a capped upside. In its latest 10-K, AppFolio prominently highlights the need to find adjacent markets and new verticals (eg. Legal) to continue growing. At the very least, when starting down the niche B2B path, it makes sense to target growing industries.

  3. Continually Expand Product Suite. Within the past 15 months, AppFolio has made two acquisitions (AI Chatbot, Utility Management) to improve its software offering. As growth opportunities in the US Real Estate property management market slow, AppFolio can increase revenue and reduce churn among existing clients by offering more products. As its “all-in” solution becomes even more “all-in” (is this possible?), AppFolio can secure its existing position as it searches for new growth opportunities.

  4. Narrow Customer Focus = Better Validation Process. Related to the above, one of the key advantages of serving a narrow customer base is the ability to create tight feedback loops. This helps to keep existing customers happy while ensuring the likelihood of product-market-fit for new solutions.

    In fact, the most prominent image (below) in AppFolio’s S-1 is a diagram singling out the importance of a customer feedback loop that creates a “disciplined market validation process.” To round out the corporate jargon, AppFolio calls the relationship “customer service as a partnership”; such a partnership is particularly important in industries with a lot of red tape and regulatory considerations. 

Health and Personal Care B2B SaaS Niches Look Attractive

Drawing lessons from AppFolio, the Trends team set out to identify high-potential niche B2B SaaS categories. 

The search begins with Capterra, a free software comparison site covering 700+ software categories with over 10,000 individual companies and more than 1,000,000 verified reviews. 

Capterra covers the entire gamut of software categories from industry-agnostic (Accounting software) to hyper-specific (Church Presentation software!) to solutions Logan Roy really could have deployed 

We set out to find attractive software B2B niches by using the following filters:

  • Niche. As we’ve covered, niche industries are an attractive way to enter the B2B SaaS business; big fish in the software pond (eg. Oracle, Microsoft, SAP, IBM) are less likely to enter the smaller markets. Sticking to the theme of the article, we identified 135 (out of 700+) software categories that are focussed on a single industry.

  • Fragmented. The second filter used identifies category fragmentation, as a proxy for market opportunity. Due to the high switching costs involved with niche B2B SaaS solutions, a category with one dominant player suggests that company may be grandfathered in and difficult to dislodge.

    Our methodology set out to calculate category concentration by dividing the company with the most reviews in a category by the total number of reviews for the entire category:

    Review Concentration = [(Reviews For Top Co.) / (Total Reviews)]. The intuition here is that Capterra’s main currency is reviews. Companies with the most reviews likely hold significant mindshare for a specific category (even if the reviews are negative).

    As an example, the top company in Auto Repair software has less than 10% of the reviews for the entire category. Conversely, the top company in Clinical Trial Management software has 70% of all reviews.

    All things equal, the challenge to break into Auto Repair software seems lower as compared to Clinical Trial Management software. To be sure, Auto Repair is also probably a less lucrative market (remember, there are always trade-offs!).

    We used a maximum concentration of 20% as the cut-off.

    Note: Some multi-use software solutions end up in more than one niche category. Take Carpet Cleaning software, where the software with the most reviews is from Intuit. Since Intuit’s solution is not specific to the niche, it may seem to skew our methodology but, in fact, it strengthens the conclusion that the barriers to entry for the specific category may be higher as long as a big fish is playing in the pond. This is particularly true if the company paid to be “sponsored” within the category.

  • Growing. The final filter identifies B2B SaaS niches that serve underlying assets projected to see employment growth over the next decade. Better to swim with the current than against it.

    Here, we relied on the Bureau of Labor Statistics (BLS) Employment Projections for 2018-2028. Each software niche is matched with a corresponding BLS classification then filtered for a projected 10yr employment gain of at least +10% (national average = +5.2%).

After winnowing the list from 700+ software categories down to 135 niches then applying the research filters (Review Concentration below 20%; 10yr BLS Employment Gain of at least +10%), we arrive at 9 software categories.

You can filter the analysis with your parameters in the worksheet here (make a copy to edit). 

Are Horses The New Unicorns?

Here are major takeaways from the drill down:

Biggest Opportunities In Dental, EMR, Restaurant and Vet niches; Don’t Underestimate Salons (Or Horses)

  1. Opportunities Exist In Health and Personal Care Niches
    Of the 9 software categories that fit our criteria, 7 fall under either the Personal Care (Spa, Salon, Fitness) or Health-related (Dental, EMR, Hospice, Vet) niches. The remaining two categories are Restaurant Management and …. Horse Software.

    Of note, the same scheduling software (Acuity Scheduling) tops the Personal Care categories suggesting there may be an even greater opportunity to offer a very specialized offering.

    The output of this analysis dovetails with other Personal and Health trends that we have previously covered (hereherehere and here). Confirmation bias aside, this was certainly an interesting result.
  2. Per Capterra, there Are 51 Horse Software Companies. Repeat, FIFTY-ONE. As in 50+1!
  3. TAMs May Vary. The software categories identified offer very different TAMs. Each reader will have a different background, interest level and appetite for business size. To this end, we guesstimated some market sizes below.

    By its very definition, finding accurate information on a niche is not terribly straightforward. To estimate the TAM of the aforementioned software categories, we start with the total market size of a suitable industry (using the reputable IBISWorld). From here, we assume a % (either 1%, 2% or 5%) of the industry’s total size allocated to B2B SaaS software.

    (We created a worksheet on this market, which you can see here. Feel free to make a copy and assume away!)

    Our analysis shows the biggest market opportunities are in EMR ($13.1 billion at the high end) along with the Restaurant Management ($8.5 billion) and Dental Practice ($6.9 billion) niches.

    The Vet ($2.6 billion) and Salon ($2.3 billion) niches are attractive while the Horse niche is the smallest ($100 million).

Found A Niche? Get Started!

If the above analysis has piqued your interest, two related sources may further inspire you. 

The first comes from our friends at IndieHacker. In a podcast episode from April 2019, Matt Verlaque @ UpLaunch explains how (while working as a fireman) he created a niche B2B SaaS business focussed on the modern gym owners (conveniently, UpLaunch fits under the Fitness software niche from our list).

UpLaunch offers marketing, communication, scheduling and expert advice for modern gyms and — at the time of the podcast — was doing $65,000/month! 

Verlaque gives a stellar reason as to why focussing on a niche is beneficial for those looking to start down the B2B SaaS route (bold mine):

I think the advantage of having a narrow focus to begin with as far as your market goes, having a niche or whatnot, is that if you look at the CrossFit market, that’s our beachhead market. There are 12,000 of them. There’s a pretty finite market opportunity when you think about it.

And we’re not going to stay restricted to that market forever, but when you’re trying to start it,it’s like the old saying: If you’re selling to everybody, you’re not selling to anybody. You’ve got to be able to provide that authentic product, and people are buying from you as a person.

— Matt Verlaque, UpLaunch 

If you’ve found a niche you like and are ready to get started, the Neil Patel blog has a fantastic article titled “Here’s How I Built And Launched A SaaS Company For Less Than $40k” that outlines a 6-step process (with corresponding tools/resources): 

  1. Finding A Designer (Resources: Dribbble)
  2. Create Product Requirements (Resources: Design Overview and Features Docs)
  3. Design Deliverables 
  4. Finding a Developer (Resources: UpWork)
  5. Building The Product
  6. Marketing & Sales (Resources: WordPressTwilioMailchimpFacebook Ads)

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Aleksey Alekseev

Let’s not refer to TV series not everyone has watched. This negatively affects the narrative.