On December 13, 2019, Sprout Social listed itself on Nasdaq, becoming the first social media management software company to be publicly traded.
At the time of IPO, Sprout Social has more than 23,000 customers and annual recurring revenue of just over $100 million. In comparison, Buffer has about 70,000 customers but is at $20 million ARR now. Keep these numbers in mind as they will be relevant to our analysis below.
Since then, Sprout Social's stock price has grown from $17 to about $29 at the time of writing. I believe Sprout Social will grow to own most of the market share in the social media management space while leaving pockets of profitable opportunities for smaller companies like Buffer.
Sprout Social's one-for-all software
Sprout Social's key strategic strength is being able to provide a single piece of software to businesses of almost all sizes—from small companies to enterprises like Shopify, CASIO, and The Ohio State University.
This provides several advantages for Sprout Social. First, it can capture the widest range of companies of different sizes because its product can be used by both small businesses and enterprises. On the spectrum of company size, Buffer focuses on the individuals and very-small businesses segment while others like Sprinklr focus in the very-big businesses segment (e.g. McDonald's, IBM, ESPN). Sprout Social competes with them and covers every business size in between.
Second, the scalability of its product allows Sprout Social to avoid the "graduation problem", where companies switch to more sophisticated tools as their business grows. A startup can use the product from its inception all the way until it becomes a publicly-traded company, so Sprout Social doesn't have to worry its customers would outgrow its product. This also describes another advantage. Sprout Social can acquire many small companies as customers through self-serve; some of which would become enterprises and, over time, pay Sprout Social more. Sprout Social is hence able to gain bigger customers without investing heavily in sales.
Third, Sprout Social doesn't provide per-customer customization, which significantly reduces its product and support cost. It sells the same piece of software to businesses of different sizes by creating three price plans with varying amounts of functionality. Having just a single product allows Sprout Social to easily improve its product for all customers at the same time while also being able to keep its cost down.
A crucial component that made this strategic strength work is its simple and scalable pricing. It has three plans ($99, $149, and $249 per user per month) with several add-ons. This pricing strategy makes Sprout Social affordable to small businesses but, at the same time, allows it to charge big businesses way more for more features and more seats. For example, companies that provide customer support on social media would usually hire a sizable team for that, and the per-seat pricing enables Sprout Social to charge them much more. A key metric that Sprout Social reports during its earnings call is the number of customers contributing more than $10,000 in ARR—or more than $833 per month, which is a few multiples of its basic pricing.
The success of Sprout Social going forward will depend on two things. One, whether they can improve the single product and remain useful to small, medium, and large businesses. Two, whether they can scale up their pricing to charge bigger companies more while keeping the pricing simple enough for small businesses to get started.
Buffer, creators, and small businesses
While Sprout Social is well-positioned to cover a big part of the market, there are opportunities for other companies like Buffer. The creator segment is, in my opinion, an increasingly more attractive customer group but is largely ignored at the moment. There is a good reason for this. This segment hasn't been as lucrative as the business segment because most creators were not highly profitable. Sprout Social has been focusing on businesses while Buffer, for a long time, was focusing on individuals like bloggers and solopreneurs. Sprout Social with 20,000 customers makes five times more revenue than Buffer with 70,000 customers.
But thanks to the Internet and better creator and payment tools, we are seeing more individuals creating highly profitable one-person or small-team businesses selling their courses, books, and music. Ben Thompson, the classic example of a single-person publisher, is estimated to be making millions every year with Stratechery.
Buffer is in the best position to support this creator segment because of its existing branding. First, Buffer is still most popular among individuals, which makes it easier to get creators as customers. Second, Buffer has been focusing on small businesses. Creators are essentially running small businesses that heavily rely on their own personal brand online.
The product, however, has to be built differently from Sprout Social. For small teams, efficiency is more important than collaboration. In many small businesses, not only does one person do the social media work, but that person also has other jobs such as email marketing, events, and customer support. Instead of building the product to allow more and more people to collaborate in Buffer, I think Buffer should focus on helping small businesses be more efficient with social media. For example, this group of customers would want to do more things with the mobile app so that they can easily work on social media wherever they are. They would prefer a quick summary of key metrics to the ability to slice and dice their social media data.
Going down this route will help Buffer distinguish itself from its competitors since they aren't focusing on this segment and likely won't because it's less profitable than their current customer segment. As I wrote in Be Unique, Not the Best, being different from your competitors and doing it well is better than competing to be better than them at the same thing.
Social media APIs are not the biggest risk
One of the most often discussed risks for social media management tools like Sprout Social and Buffer is the reliance on social media platforms' APIs. If the social media platforms were to shut down their APIs or change them significantly, Sprout Social and Buffer would be rendered useless and the entire business will be affected.
I believe that will not happen. Facebook depends on millions of small businesses that use Facebook and, more importantly, advertise on Facebook and Instagram. Facebook uses its APIs to enable third-party companies to build marketing tools that Facebook itself cannot build. For example, most businesses want to manage their social media profiles all in a single place. But Facebook cannot build a tool to manage Facebook, Instagram, and its competitors such as Twitter, LinkedIn, Pinterest, and so on. The most they could do, and did, is to build tools for managing Facebook Pages and Instagram profiles (Facebook Creator Studio). Just as social media management tools rely on Facebook for its APIs, Facebook relies on these third-party companies to build tools for small businesses on Facebook.
Furthermore, millions of small businesses are using these social media management tools now. Cutting off social media management tools could mean losing a sizable amount of small businesses for Facebook. The more businesses use social media management tools, the higher the cost would be for Facebook to shut down its APIs. Facebook doesn't want to compete with social media management tools; it wants to work with them to attract more small businesses to use Facebook. Facebook also encourages social media management tools to add advertising features into their products so that it can eventually collect more ad revenue.
While I have described Facebook above, the same can be said of other social media platforms such as Twitter, LinkedIn, and Pinterest. Twitter, which charges for its premium and enterprise APIs, is even less likely to cut social media management tools off while it is still struggling to grow its revenue. It might continue to raise the price of its API but it wouldn't want to price itself out of the market.
The biggest risk for Sprout Social and Buffer is if consumers change their social media usage faster than the social media management companies can adapt. We are already seeing a glimpse of this with TikTok. TikTok grew to a billion users in just three years, twice as fast as Instagram. But more importantly, unlike the other major social media platforms, TikTok doesn't provide APIs for scheduling and automatically posting to its platform. This means businesses that want to be on TikTok have to use the TikTok app directly and skip social media management tools. In fact, this isn't the first time we are seeing this. Snapchat also didn't provide similar APIs (but it was a smaller concern because it has much fewer users). We can expect new social media platforms to eventually compete with some of the major players today (though there's a good chance the major players would acquire them before they do). The new social media platforms, like TikTok, might not adopt the same strategy as Facebook with their APIs, which can cripple social media management companies.
Each to their own
Sprout Social and Buffer are two very different companies and should adopt very different strategies. Sprout Social, with a big team and lots of funding, can be more aggressive with targeting multiple segments in the market. Buffer, on the other hand, has fewer than 100 employees and isn't planning to take on more funding. It should make use of its existing branding and be hyper-focused on very small to small businesses. The market is big enough for several companies to coexist as long as they carve out their own niche.