Develop product strategy

MEMORANDUM

TO: CEO FROM: VP of Product DATE: October 24, 2023 SUBJECT: Product & Go-To-Market Strategy for Next Year

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You asked for a strategy the executive team can rally behind, and stated your belief that our future lies in enterprise.

You are wrong. If we pivot our resources toward enterprise next year, we will stall our fastest-growing segment, burn cash on an unscalable product architecture, and distract the company from our true economic engine.

Here is our reality, our diagnosis, and the strategy we should actually pursue.

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1. The Diagnosis: Where the Numbers Really Point

To evaluate your enterprise hypothesis, we have to look at the unit economics across our three segments (SMB, Mid-Market, Enterprise):

• SMB Self-Serve (6,200 customers, $1,100 ARR): This segment is an anchor dragging us down. A 34% logo churn and 88% NRR means we are running to stay in place. Worse, 62% of our support tickets come from SMB accounts who pay an average of $79/month while demanding unlimited phone support. We are subsidizing their operations at a severe net-negative margin once support costs are factored in.
• Enterprise (34 customers, $96,000 ARR): Enterprise looks glossy on the top line, but the mechanics are broken. Our payback period is 26 months, our gross margin has cratered to 64% (due to heavy support and custom engineering), and NRR is a mediocre 104%. As noted in the enterprise detail, 5 of our last 8 deals required custom features built by our core engineering team—averaging 14 engineer-weeks each. We are currently operating as a custom software consultancy for large accounts, not a scalable SaaS business.
• Mid-Market (890 customers, $14,500 ARR): This is our crown jewel. Mid-market boasts an 81% gross margin, a lightning-fast 9-month payback period, a stellar 118% NRR, and a low 7% logo churn. We win 61% of deals against our main competitor here. Expansion happens organically as clients add locations and seats.

The Diagnosis: We are suffering from strategic schizophrenia. We are spending engineering cycles building bespoke features for 34 enterprise logos while burning support bandwidth on 6,200 low-end SMBs. Meanwhile, we are under-investing in the Mid-Market—the only segment where we have product-market fit, high retention, and clear competitive dominance.

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2. The Guiding Policy

Where We Play: We will focus our go-to-market, product development, and company roadmap entirely on the Mid-Market (companies with roughly 100 to 1,000 hourly workers).

What We Stop: 1. We stop custom enterprise builds. We will not pull core engineers off the roadmap to build one-off workflows for enterprise deals. If a whale customer requires custom engineering, we walk away. 2. We stop optimizing for SMB acquisition. We will sunset active acquisition efforts for self-serve SMBs and strip away unscalable touchpoints (like unlimited phone support for $79/mo accounts) to stop the margin bleed. 3. We stop treating Enterprise as our primary growth vector. We will not hire 10 enterprise AEs or build a dedicated solutions team.

By pulling back from Enterprise and SMB, we concentrate all our capital on scaling what is already working brilliantly in the Mid-Market.

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3. Coherent Actions for Next Year

To capture the mid-market opportunity, product and go-to-market will execute three synchronized moves:

#### Action 1: Productize for Mid-Market Expansion (Product & Engineering) Instead of building custom enterprise workflows (SSO, audit logs, and bespoke routing), our engineering team will build the top three requested features that drive multi-location expansion and stickiness in the Mid-Market: * Multi-location reporting: Giving regional managers roll-up visibility across disparate sites. * Robust payroll integrations: Deepening native syncs with major mid-market payroll providers to reduce administrative friction. * Advanced shift templates: Allowing complex scheduling rules to be deployed instantly across new locations.

#### Action 2: Pivot Go-To-Market to Land-and-Expand (Sales & Marketing) We will reallocate budget from SMB acquisition and enterprise pipe-dreams directly into Mid-Market account executive and customer success headcount. * Our motion will focus on landing a mid-market business at a single location or division, then leveraging our stellar NRR (118%) to expand horizontally into new locations. * We will introduce tiered packaging that naturally captures revenue as mid-market clients add locations and seats.

#### Action 3: Streamline or Harvest the SMB Tier (Operations & Support) We cannot drop our existing 6,200 SMB customers overnight, but we must stop bleeding margin on them. * Transition self-serve SMB support away from expensive phone queues to a self-service knowledge base and AI-driven chat. * Raise prices on legacy low-tier plans to match the true cost-to-serve, accepting natural churn as a feature, not a bug, which frees up support capacity for our mid-market clients.

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4. How We'll Know It's Working

If we execute this focus on the Mid-Market, we will see specific operational shifts within the next 12 months:

1. Mid-Market ARR Growth: Mid-market ARR growth rate accelerates by 35% year-over-year as we direct 80% of our sales and marketing capacity here.
2. Payback and Margins: Our blended gross margin climbs back toward 80%+ as high-margin mid-market revenue outpaces low-margin enterprise custom work and unprofitable SMB volume. Payback periods across the active customer base remain under 10 months.
3. NRR Expansion: Mid-market NRR increases from 118% to 122%+ driven by faster multi-location adoption of our new reporting and payroll features.
4. Engineering Velocity: Feature delivery velocity increases by 40% because engineering is no longer interrupted by 14-week custom enterprise implementations.

Summary

Pivoting to enterprise feels ambitious, but the data tells us it is a trap. We would be trading a high-margin, highly defensible leadership position in the Mid-Market to become a low-margin, high-friction consultancy for a handful of giants.

Let’s double down on where we win, where retention is highest, and where our unit economics sing. Let's own the Mid-Market next year.

Memo: Next Year's Strategy

To: CEO From: VP Product Re: Where we play next year, and why I don't think it's enterprise

You asked me to tell you if you're wrong. I think you are, at least for next year. Enterprise isn't a bad market. But our numbers say our winning position is somewhere else, and an enterprise push would starve that position of the engineering time and sales capacity it needs. Below is the case and what I propose instead.

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1. Diagnosis

Cadence runs three different businesses, and only one of them is working well.

(Gross profit after support = ARR × gross margin − support cost. Total ARR is about $23M.)

Mid-market is the business. - It is 56% of ARR. - It pays back CAC in 9 months. - It grows on its own: 118% NRR on $12.9M means about $2.3M of net new ARR next year before we sign a single new logo. - We win 61% of the time against our main competitor. - Expansion comes naturally as customers add locations and seats.

Enterprise looks big per logo but is weak as a business today. - Gross margin is 64%, versus 81% in mid-market. - Each customer costs $21K a year to support. - CAC is $118K, payback takes 26 months, and the sales cycle is 9 months. - The hidden cost is engineering. 5 of the last 8 deals needed custom features, at about 14 engineer-weeks each, built by the core team. That is roughly 70 engineer-weeks diverted from the product that 890 mid-market customers pay for.

SMB is roughly break-even and pulling capacity away from everything else. - Each customer generates $248 a year after support. - With 34% annual churn, the average customer lives about 3 years. Lifetime contribution is roughly $730, against $740 of CAC. - SMB produces 62% of our support tickets. The cause is structural: we offer unlimited phone support on a $79/month plan, so support costs ($610) eat more than half of revenue ($1,100). - Trial conversion is 4%.

The core problem: we are trying to be everything to everyone. The cost shows up in two places. The roadmap gets hijacked by single enterprise deals, and the support budget gets consumed by SMB.

Why the enterprise plan makes this worse. Assume 10 new AEs close 20 enterprise logos next year, which is optimistic given a 9-month cycle and ramp time. - That adds about $1.9M of ARR. - It costs about $2.4M in CAC. - If 5 of every 8 deals still need custom work, it consumes about 175 engineer-weeks, or 3–4 engineer-years, on custom features alone. - That is before the work on SSO, audit logs, and custom workflows. - Most of that ARR would land late in the year and pay back in year three.

Meanwhile, the mid-market roadmap would stall in the segment where we already win.

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2. Guiding Policy

Where we play: We will be the best scheduling and time-tracking platform for multi-location operators with hourly workforces, from roughly 10 to a few hundred locations. Mid-market is the core. Every product, sales, and support decision should first answer one question: does this help a mid-market customer win, stay, or add locations?

What we stop: 1. Custom feature builds for single deals. If a feature isn't on the roadmap for a segment, we don't build it to close one logo. 2. The 10-AE enterprise hiring plan. We redeploy that budget (see below). 3. Unlimited phone support on the $79 plan. That plan moves to in-app help, chat, and a knowledge base. Phone support becomes a paid tier. 4. Custom workflows as a product initiative. This is a services business disguised as a feature.

What we deliberately keep: - Our 34 enterprise customers, served well on the standard product. - Inbound enterprise deals that can close without custom work. - SSO and audit logs. Upper mid-market buyers increasingly expect these, so they serve the core rather than a new segment.

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3. Coherent Actions for Next Year

These actions reinforce each other. Product makes mid-market expansion easier. Go-to-market (GTM) captures that expansion. Fixing SMB frees money and support capacity to fund both.

Product (mid-market roadmap, Q1–Q3) - Multi-location reporting. This is the top request, and it directly drives location expansion, our main source of NRR. - Payroll integrations. We will prioritize the top 3–4 providers by customer count. Integrations increase switching costs and reduce churn. - Shift templates. This reduces setup time for each new location, so expansion becomes cheap for the customer and for us. - SSO and audit logs. These are table stakes for larger mid-market accounts. We will scope them tightly and avoid gold-plating. - Engineering capacity rule: zero engineer-weeks go to one-off custom builds.

Go-to-market - Redirect the enterprise AE budget. Fund roughly 4–5 mid-market AEs and 3–4 account managers whose job is location and seat expansion inside existing accounts. A 9-month payback and 118% NRR make this the most efficient growth dollar we have. - Build a competitive playbook. Codify why we win 61% against our main competitor, and target that competitor's mid-market base. - Handle enterprise inbound on the standard product. One senior AE and the existing team qualify enterprise leads. A deal requiring custom work is a no unless the feature is already on the roadmap.

SMB economics - Restructure support. Move the $79 plan to digital-first support and introduce a higher tier that includes phone support. The target is cutting SMB support cost per customer from $610 to under $350. - Overhaul onboarding and trials. A 4% conversion rate signals weak activation. Fixing onboarding should also reduce tickets. - Find out whether SMB feeds mid-market. We need to learn how many mid-market customers started on SMB. If SMB is a real feeder, we keep it as a low-cost funnel. If not, we run it purely for margin.

Enterprise - Improve margins on the existing base. Standardize their configurations and reduce bespoke support. - Track demand without chasing it. We log every enterprise request, so that if we return to enterprise later, we can build a standard product rather than custom one-offs.

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4. How We'll Know It's Working

Leading indicators (quarterly) - Multi-location reporting and payroll integrations shipped by end of Q2. - Engineer-weeks spent on custom deal work: 0. - SMB support tickets per customer down 30% by Q3. - Mid-market win rate against our main competitor: 61% → 65%.

Outcomes (year-end) - Mid-market NRR ≥ 120%, up from 118%. - Mid-market new-logo ARR grows at least 25%, with payback held at ≤ 12 months. - SMB support cost per customer under $350, and SMB contribution per customer roughly doubled. - Enterprise gross margin above 70%, up from 64%, with no logo churn among the top 10.

When we would revisit enterprise: I'm not saying never. I'd reopen the question in Q3 if either of these happens: - Mid-market customers are outgrowing us into enterprise-scale deployments, meaning enterprise becomes the natural next step for our core. - We close at least 3 enterprise deals on the standard product.

Either signal would mean enterprise has become an extension of our strength rather than a separate bet. At that point, a focused enterprise motion built on a product we actually have would make sense.

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Bottom line: The exec team can rally behind this: win multi-location mid-market, stop subsidizing segments that don't pay. It builds on where we already win, funds itself by fixing SMB economics, and keeps enterprise open as a future option rather than a costly bet. I'd welcome the chance to pressure-test this with you before the offsite.