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AppFolio Market Size and Moving Upmarket

AppFolio, the property management SaaS platform, piqued our interest as part of our coverage of B2B vertical market software. IGSB helped incubate the company in 2006 and still owns over 20% of the shares and ~46% of the votes. 

AppFolio was a relatively late entrant into the market. Its go-to-market strategy was to target small and medium property management customers on Yardi who were still operating using a DOS version:

Some were even using the DOS version as late as 2011. There was no real competition in the market, which allowed us to capture a significant share. It's a very sticky market with low churn, so as we captured the market, people didn't leave. This allowed us to take a dominant position in the SMB market. Even as AppFolio moved upmarket, they maintained their presence in the SMB sector, growing their customer base. - Former SVP at AppFolio

This strategy worked. AppFolio now has over 20,000 property managers using its software to manage leases, tenants, and facilitate rental payments. AppFolio manages a total of ~8.5m units, an average of ~417 units per customer. AppFolio dominates the SMB market:

But the SMB market now seems near-fully penetrated. AppFolio is moving upmarket to target property managers with 2,000+ units. This requires a different go-to-market strategy and is a longer sales process. 

In this interview, a former Yardi Executive explains how selling to larger enterprise property managers is different to SMB managers because of the different requirements of the property owners. Larger property managers are more likely to be managing units for institutional owners who require more specific, detailed reporting. This is different to SMBs where the property manager makes the software buying decision:

As you go up the food chain, institutional owners are almost always very particular about the type of reporting they receive. This reporting can influence the specific property management system selected, a decision made by the C-suite. Less sophisticated, long-tail B managers often choose the lowest-priced option they can find due to smaller margins. However, when they reach an inflection point where they need to scale and attract institutional money or more sophisticated investors, the decision is more driven by owners and asset managers. - Former Director at Yardi

Enterprise customers also have greater switching costs. This incredible stat on retention piqued our interest in this market:   

I spoke to the General Manager after he left RealPage. He mentioned a week-long outage where customers couldn't log into their property. Despite this, and an NPS score of negative 80, the churn rate for his business that year was still below 3%. It seems that even if customers hate the product, they don't leave. It's too hard to switch. The process is so ingrained that switching becomes painful. - Former SVP at AppFolio

On one hand, it seems very difficult and expensive to convert enterprise customers from competitors. On the other, AppFolio’s existing customer base has a long lifetime and can finance the buildout of a superior product to win enterprise customers over time. 

It equates to a purchase decision every 10 years, which results in a good lifetime value. However, when they did switch to AppFolio, the churn rate was below 3%. This implies a 20-year lifetime value. We were seeing 10% in the market as a whole, but within our own base, they rarely left once they joined. - Former SVP at AppFolio

We will be following how this plays out closely. 

Netflix Ads & The Trade Desk

This quarter, we're studying Netflix’s advertising business and The Trade Desk’s positioning in CTV. This interview with an advertising agency executive explores how brands are shifting spend from linear to CTV and how the buying process works. 

Today, 60-70% of CTV inventory is acquired via programmatic guarantee (PG). This is where publishers sell inventory directly to brands with privately negotiated pre-agreed CPMs. 

It typically depends on the campaign, but usually between 60% to 70% of the budget goes to programmatic guaranteed deals. The remaining 30% to 40% is biddable, sometimes even less. - Current TV Advertising Agency Executive

Most inventory isn’t biddable because the ROAS from open auctions don’t justify the higher CPMs. Also, the top publishers don’t make their inventory available on the open exchange and the measurement is unreliable and ineffective. 

The high PG mix may pose a challenge for The Trade Desk in CTV: without open auctions, TTD becomes a simple workflow tool rather than an exchange. 

Programmatic guaranteed deals are indeed guaranteed. There's no bidding involved. The DSP functions more as a workflow tool to track spend. - Current TV Advertising Agency Executive

It also directly hits TTDs revenue: TTDs take rate on programmatic guaranteed buys is 3-5% compared to ~15% for open auction purchases. This interview goes on to explore how brands are approaching the shift from linear to CTV, measurement challenges, and TTD and NFLX positioning over the next five years. 

Deliveroo Enterprise Restaurant Accounts

Here is a Former Director at Deliveroo on the company’s food delivery economics:

I just think the math doesn't work. That's why Deliveroo is getting into delivering trainers and Screwfix products because they don't have the overall loaded costs of everything else. They just have the rider logistics model, which is brilliant. It's their asset, a great piece of machinery. They'd rather charge per delivery order to another player and make pure profit. I'll give you an example. KFC, global commission fee, 20 odd percent, £15 average order value. You're making £3, right? It's costing you £4 to send the rider. - Former Director at Deliveroo

To improve the poor economics of the core food delivery business, Deliveroo offers ‘delivery as a service’ to brands such as Nando's, KFC, and Pizza Hut who take orders directly on their own website.

Around 25% of Deliveroo food delivery orders seem to come from the top 10 restaurant brands. Such relationships seem to drive an outsized portion of EBITDA for Deliveroo relative to typical food delivery orders: 

If we're simply providing them with a rider, then they're taking the money, and we've probably created a cost per rider per trip based on mileage and other factors, similar to what we did with Pizza Hut delivery…I'm just charging them a delivery fee, and obviously, I'm paying the rider. But I'm making significantly more money now. For example, when I gave you the KFC example of the £3 and it's costing you £4, that £4 isn't the only cost. There are other costs, right? You've got your marketing costs, your head office costs. I don't have any of that with a rider. If I'm doing delivery as a service, I don't have all those additional costs. I've literally just got the rider. I don't have all the numbers with me today to go through. But doing it is far more profitable than having riders deliver our own food on commission.- Former Director at Deliveroo

This interview with an executive that managed Deliveroo’s top accounts explores how enterprise contracts work and the value of exclusivity with Nando’s across the UK. We plan to continue work on TKWY this quarter given it has spun out Grubhub.