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Archive for October, 2013

Does Your SaaS Company Have to Have a Sales Force?

Posted by Bob Warfield on October 7, 2013

used_cars_SalesmanAny time absolutes are being bandied about, I have to do the fact check.  Sorry, it’s just an automatic reflex.  We live in a world that is largely gray and seldom black and white.  This was never more true than in the world of startups.  Entrepreneurs need to see both sides of every coin before they cast their lot in any particular direction.  BTW, I get Jason’s posts directly via email thanks to Google+ (bloggers, take notice), so I seem to disagree with him fairly often.  It’s really more that his posts get to the top of my queue more often than others–I love a great deal of what he writes.

Fellow Enterprise Irregular Jason Lempkin just penned a post, “Curse of the Middlers:  Why Happiness Officers Can’t Stand in for True Sales Professionals.”  It’s a decent article if you start out a priori thinking you must have a Sales Force, but it never really delves into the question of whether you need a Sales Force.  That’s a pretty darned important question that goes to what your basic business model is going to be.  There’s a little bit of hand waving about the possibility of companies like Atlassian or 37Signals which have not needed sales forces.  Jason basically says:

Well maybe you can.  More power to you.  As long as there is enough momentum in your business to hit your revenue goals without a true sales team, then by definition you don’t need one.

I don’t think this is right.  It isn’t a question of whether there is enough momentum and it certainly isn’t the case that adding sales can always increase momentum.  Sales is not something you can necessarily add to any business and expect it to make a difference.  It is integral to what the business model is in the first place.

Let’s drop back a few paces and you’ll see what I mean.  I was with a startup one time who had the luxury of having Geoffrey Moore (Mr Chasm Crosser) come in to advise us about the business.  If ever there was a guy who understands the arcane alchemy of how to combine products, markets, marketing, and business models in successful combinations, it’s Geoffrey.  His view of the whole Sales thing is that it is a question of ASP’s.  Below a certain ASP, a Sales Force won’t work.  The numbers we talked about were along these lines:

0 – $15,000:  Forget the Sales Force.  Focus on reducing the friction to purchase.  This is where the Atlassians and the 37Signals thrive.  These are pure Marketing plays, and there are zillions of successful businesses that work this way.  One could argue most successful businesses do.

$15,000 – $100,000:  No Man’s Land.  It’s too much money to expect the buy to put on their credit card, yet it is too little to field a Sales Force profitably.  You can argue Telesales works here, and it can towards the upper end.  This is also traditionally good territory for Dealer networks, which is yet another business model.

Over $100,000:  Prime Sales Force Territory.  When I worked for Oracle, Sales used to tell us product people that if they couldn’t charge at least $100K, they wouldn’t even look at the product, even as an add-on to something else.

Looked at in those terms, it becomes fairly straightforward to understand whether you need a Salesforce or not.  Let’s consider some potentially extenuating circumstances, and also consider as an entrepreneur whether you want to try to steer towards one of these or some other (realizing you probaby wouldn’t ever want to steer towards, “No Man’s Land”).

I Just Started My SaaS Company and No Way Am I Getting $100K.  None of Them Do.

Yep, it’s true.  Welcome to the world of needing reference accounts.  You don’t start with $100K sales day 1.  Not even year 1.  If you have an offering capable of commanding such sales,  You won’t be ready to take them down until you’ve gotten enough credibility through reference accounts to satisfy they buyers you’re worth betting on.  The last Big Sale + Sales Driven company I worked for was Callidus.  I was with the company from $12 million in revenue through IPO.  You could see tangible results each time a bigger customer was signed up.  Nobody ever liked being your biggest customer unless there were no alternatives or it was such a screaming deal they couldn’t lose.  But, as soon as you could point to someone bigger, suddenly you had almost infinitely more credibility.  Steadily climbing that ladder of bigger and bigger sales is important to a Sales Driven company.  Until you get there, you won’t be very capital efficient, which is a big problem when Bootstrapping Enterprise SaaS that has a Sales Force.

What if I Tilt Slightly Up-Market?

Jason has another good post, “Why Tilting Just a Smidge from Self-Service Can Grow Your Revenue 30x.”  I like the post a lot and think about its ramifications for my own company, but I’m skeptical of a lot of the numbers in there.  For example, Jason says single seat SaaS churns at a rate of 2.5% to 4%.  Annualized, that comes out to 24-36%.  He goes on to say that 5 seat deals churn at 1-1.5% a month and that over time the churn will be negative because some customers will add seats faster than other customers churn.  My problems with this are four-fold.

First, Jason shows the single seat numbers with churn factored in and concludes you keep the customers for 8 mos and that therefore they are only worth $240.  He gets there by arguing the customers are only around for 8 mos on average.  But there’s a better way to do the math since one of the great charms of small ASP businesses is they have a lot more customers.  They don’t have just one or a handful like a Big Ticket company.  If we model it that way, I get an ASP for the year of $290 to $324 per seat.

Second, Jason shows no churn on the 5-seat deal after having said there’ll be 1.5% per month.  Let’s be fair and factor in the 1.5%–that means a seat is worth $331.74.  That’s starting to be a lot closer to the $324 a seat a good single seat sale company can achieve.

Third, Jason conflates the number of seats sold with the likelihood the deal will close.  He’s up front about saying that he thinks Sales will make a deal more likely to close no matter what in the Happiness Officer post.  As he says, “More deals will both open, and close, when you have a trained sales professional working with your prospects.”  But this is a problem of how you measure it.  If you count the deals closed as the percentage of Sales Leads closed, he is right.  A good sales force will do very well on that metric.  But, Sales Leads is the wrong metric for this comparison because they have already self-selected buying interest.  they were qualified six ways to Sunday else the VP of Sales excoriated the VP of Marketing for sending him crappy leads.  We should drop back and count all visits to the company’s web page and then take the percentage of those closed to get a real Apples-to-Apples comparison.  Looked at another way, there’s always far fewer but bigger transactions with a Sales Force.  For purposes of this example, it simply means it isn’t quite right to throw down 5 seats against 1 seat and call that Apples-to-Apples.  If we had to throw down # of seats, it should be adjusted by the relative close rates.  But we don’t know what they are, so I’ve got to stick to comparing single seat numbers.

Fourth, Jason says churn will be negative over time for Sales Driven SaaS.  You should be so lucky.  If that were common, why do so many SaaS IPO candidates get looked at so carefully for churn?  Why do we see so many articles about SaaS unprofitability that call out churn?  Why do so many get called on the carpet over it?  At the same time, he takes it as an article of faith that the churn rates for single seat sales must be much higher.  Why?  Where’s the data?  Let’s talk about great brands selling to individuals that have very little churn.  I’ll just start right at the top and mention Apple.  Don’t like Apple?  Well how about Google?  Dropbox?  37Signals?  Atlassian?  SmugMug?

We shouldn’t confuse nice to have impulse purchases, which can happen to Sales Driven SaaS too, with powerful brands, products with lock-in, products with network effects, and products that are just too good to be without.

Here’s what I will readily agree to:

Tilting slightly up-market may increase your multiple-seat sales revenue by 30X.

Here, I’ll use language similar to Jason’s about this case:

Well maybe you can.  More power to you.  As long as there are enough multiple-seat opportunities for your business, you might benefit from a true sales team.

It’s really a function of whether whatever team features your software offers make it interesting enough to the team that they’ll bite.  If they do, it’s great news.  Just make sure they’re closing big enough deals (back to that Geoffrey Moore business) and that they’re not deals you could’ve closed anyway without them.  For my own business, I already offer volume purchase discounts on 3, 5, and 10 seats and they sell well.  I will be adding some Team features to see how much that accelerates, but until I get some really BIG deals, I just don’t need a Sales Guy to close a few multi-seat deals.

Note that at some point, you will automatically be able to add a Sales Force.  You’ll be dealing with enough large companies that they will insist on the kind of care and feeding a Sales Force can give them, and it’ll be worth it to oblige.  Just don’t think that has to happen too early.  It certainly didn’t happen very early for Amazon Web Services or for Google.

But Won’t Sales Always Increase the Dollars I Can Sell For?

This is another one I have to differ with.  Jason spells it out pretty clearly when he says, “Sales professionals know how to maximize the revenue per lead.”  Hang on, do you really think an individual sales guy knows how to maximize revenue per lead better than say the people at Walmart who maximize revenue per shopper?  What about the people at Amazon who do the same thing?  Substitute the people that design promotions for any E-Commerce site.  Why would we assume every Sales Rep can automatically do a better job?

OTOH, having come out of the Sales Compensation business with Callidus, I will tell you that one of the most effective ways to improve the bottom line is to change the sales comp plans to give them less flexibility in what they negotiate.  Gaining alignment between an individual sales person and overall revenue and profitability is extremely difficult.

The way to look at this is to consider who in the organization will be responsible for maximizing revenue per lead (or profit if that is more important as it sometimes is).  If nobody is responsible for maximizing sales per lead, then Jason has a point.  The Sales Guy has an advantage: he can look the customer in the eye, and if he is good, he will see how much money is in their pocket and take most of it out.  The Marketing Guy has an advantage:  he has lots more transactions than a Sales Driven company, he can measure the results of experiments much more accurately with analytics, and over time he can hone a promotion strategy that maximizes revenue per shopper.  The only way to tell who actually does better would be to compile metrics of the profitability and revenues of sales-driven vs revenue-driven companies.

Once you start thinking of the Sales Guy as the one who offers promotions by negotiating price, you’ll be a lot wiser to the issues where their agenda (make quota, go to club, buy a new car, yada, yada) may not be that well aligned with the overall company’s agenda.  For example, I find there is a certain frequency with which I can offer my marketing-driven promotions.  If I have them too often, all I am doing is lowering my average selling price.  If I have them too infrequently, I am lower my close rates as some people will only buy if they get a deal.  Can you really coordinate your salespeople to such a cycle?  Some you can, some you can’t, but you will have to work at it hard in either case.

One aside is that there is a natural tension between Marketing and Sales.  It is very hard to get an extremely high quality Marketer to join a Sales-Driven company (hard to get very high quality product people too, hence Enterprise software is often not the paragon of software virtue).  They don’t want to be under the thumb of that Sales Guy.  They don’t want to be constantly blamed when numbers are missed.  But eventually, if the CEO is good enough, he will create a situation where the company can attract and retain both and he’ll see to it that they work and play well together.  Interestingly, I have seen this work best when you have a CEO that was a Sales Guy who isn’t on his first CEO gig.

One last point here–the role of Sales is to make the market they’re in less efficient in hopes of increasing profitability.  That’s the real reason why you can’t get much real information without filling out a lead form.  This approach works, unless someone is disrupting you by making the market radically more efficient.  That brings me to my next point:

Important Counter-Example:  Lack of Sales Force as Disruption

The history of the modern computing landscape is one of increasing efficiency disrupting sales forces that wanted the markets to be inefficient.  That’s how mass markets emerge in new fields–they kick down the doors, offer unprecedented lower price points, and tell people things they never knew before.  Think IBM or DEC scratch-golfing Sales Guys having to go against the neighborhood computer store.  That was a painful disruption that neither survived when it came to the PC market (or indeed, their whole market for DEC).  They had to retreat up market.  Think the neighborhood computer store, which essentially was just smaller time sales people, competing with online sellers like Dell.  One more turn of the wheel and those guys were in trouble.

Once a market encounters meaningful disruption of this kind, it is extremely hard to put the genie back in the bottle.  After all, how do you argue that more information and lower prices are bad to customers?  The only defense is to retreat up-market.  The disruption involved in trying to change a Sales-Driven company into a Marketing-Driven company is at least as bad if not worse than going from On-Premises to SaaS.  I’m not sure I know of any successful examples where someone pulled it off.

Entrepreneurs, take note: if you can figure out how to take a crusty sales-driven market and turn it into something coin operated (insert credit card here, pay low fee, get product now), you can go disrupt a market.

So I Shouldn’t Ever Need a Sales Force?

Not so fast!

There is the matter of what your ASP’s will be–at a certain point ($100K for sure, maybe less), you will have to use a Sales Force.  To a certain extent this will be governed by the nature of your product.  Can it add enough value to relatively few people?  Will Enterprises require an all-or-nothing decision?  Such factors will dictate.

But suppose you have a blank sheet of paper.  You want to start a brand new SaaS company.  What should you aim for?

The choice here, for me at least, is easy–I’ll take the low ASP marketing-driven ideas every time.  We live in a time when you have to bootstrap on your own dime as far as possible before you can get any outside capital.  Cash flow is king.  Insights into where to double down and where to fold are king.  The web is there as a relatively frictionless resource to get the word out about your offering.  I don’t want to wait for sales cycles.  I don’t want to wait to close large enough sales to have built credibility.  I want the insights that come from analytics on large numbers of transactions today.  I want my customers lifecycle from prospect to happy subscriber to be one integrated UX on the web.

That will maximize my chances of growing a company to cash flow positive.  That will maximize my early growth potential.  Down the road, I will be able to look at whether I want to raise capital and whether I want to try to fire up a sales force to sell Team Editions.  Meanwhile, I’ve got a web company to focus on.

Posted in business, Marketing, strategy | 9 Comments »

 
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