• http://twitter.com/manuelmartin Manuel Martin

    Fantastic post David thank you.

  • petercohen

    Very useful analysis, David.

    A few quick comments:

    1. In addition to complexity, companies should also factor in the speed of the sales process. How long does it take for the customer to actually start paying them? For companies selling SaaS solutions in particular, a delay in cash flow can have a significant negative impact. You're exactly right that CAC in excess of LTV is a start-up killer; so is running out of cash while waiting for the LTV. It would be interesting to run a few scenarios showing the impact of delays in cash flow.

    2. You made good suggestions on how to cut sales and marketing costs. I've seen companies make use of cost-efficient marketing to actually replace high-priced sales resources or to maximize sales effectiveness. For example, an on-line demo can reduce the need for more support engineers to show the product. Or a published document on security policies can cut the amount of time sales people need to spend addressing those concerns, making it possible for an expensive sales rep to handle more opportunities.

    3. I like your suggestions about re-engineering the product where possible to make it easier to sell. I've also seen companies engineer marketing elements directly into their product that encourage users, particularly trial users, to upgrade. Marketers actually like it when they can enlist engineers for help!

    Just one caution on your comment that SaaS solutions eliminate the need to include IT in the evaluation process. That may be true in some cases, but in instances when the solution will be broadly deployed (e.g. web conferencing, CRM, HR), IT may interject with legitimate concerns about security, performance, or integration. SaaS providers should be prepared in advance to address their concerns.

    Peter Cohen
    SaaS Marketing Strategy Advisors
    http://www.saasmarketingstrategy.com

  • Stephen Hobbs

    Hi David, This is excellent information. Particularly appealing is the way you quantified and graphed the assumptions using the log scale. Keep these insights coming. I enjoy your articles very much.

  • http://www.jimdeterman.com/ Jim Determan

    Peter, great point on #1. Its sad to see a company run out of cash with sales in the pipeline and being forced to make quick financing deals at bad terms. Along with time to get paid, you also have to factor in the resources it takes to get paid. As the number of corporate customers goes up, the amount of resources needed to babysit your receivables goes up. It also adds a fair amount of stress :)

  • Charlie Ungashick

    Very thoughtful analysis as always. Streamlining the funnel to achieve a predicatble marketing and sales 'machine' is often far easier than adapting an enterprise product to be more channel-ready, mid-market friendly, downloadable, etc. Brainstorming sessions are a great way to see the entire process – from initial demand to closed sale.

  • davebrock

    This is an interesting post, I've mixed feelings about it. The biggest problem is that ignores how customers buy. Any company, in bringing it's offerings to market must understand how their customers buy, building their sales models around this. Using a channel that offers an attractive cost of customer acqusition is meaningless if it is not aligned with how customers buy.

    One of the biggest problems organizations(start-up through established) fase in this area is they build their sales processes from an inside-out point of view (largely driven by a cost model), rather than starting from an outside-in (then assessing cost alternatives/cost savings). Using this latter approach usually results in a shorter time to revenue, and overall reduced sales expense (by avoiding retinkering and fixing).

    A separate point, I like the concept of “making it easy for the customer to sell themselves.” However, I would tend to change the focus in “making it easy for the customers to buy.” While it seems like wordsmithing, the answers one gets by focusing on “how do customers buy, how do we facilitate the customer buying process, how do we make it easier for the customer to buy,” will be very different than focusing on “how do we sell.” It leads to faster ramp times, and ultimately lower cost of customer acquisition. Again, we tend to take the hard/expensive route by defining the process backwards.

    A related consideration is where the maturity of your “problem/solution” category–or where it is in its life cycle. (Note I am focusing on the category, not your product). This is a long discussion, I won't go into in this comment.

    On another point, an important consideration is the timing of cost/expense, and risk. In many cases the cost of using a channel (when you fully look at all the costs of developing, training, managing and supporting a channel) may not be signficantly different than another approach, but the timing or shifting from fixed to variable. For example in the comparison of a reseller and direct sales organization, the costs may not actually be that different, but many of the costs for a reseller organization are incurred when the order is placed, versus with a direct sales organization which are incurred up front.

    There is no doubt, the complexity of sales impacts all organizations' viability, not just start ups. Cost is an important element, but it is not the starting point in assessing routes to market and risk.

    Thanks for a provocative article.

  • kylelussier

    Another home-run! Particularly the CAC vs Sales Model. Would be so amazing if someone could collect a lot of hard-data related to those data points.

  • http://cdan.posterous.com/ Craig Daniel

    This was a great read. I love the depth, diagrams/charts, and overall analysis. As someone who is currently trying to figure out the right “step” in your model, this has helped to crystallize my thinking. Many thanks!

  • http://www.forentrepreneurs.com David Skok

    Dave, I could not agree with you more about the need to define the sales process from the buyers point of view first. If you read a different section of my web side called Building a Sales and Marketing Machine, you will see that I have very strongly recommended that approach.

    Thanks for your other thoughtful comments. The one area that I am not sure I fully understood was why you felt that the cost of building a channel would not be up front. In my own experiences, it costs a great deal of money up front to build a channel, and can take even longer than direct sales before you get a return on that investment. (I agree that you wil alsol incur a cost in the form of the discount you give the reseller at the point of making the sale.)

    Thanks, David

  • http://www.gossamar.com Eric

    Dave; Another of your amazing posts – don't know how you write a book like this for each one, and with such great explanations. All I wanted to add is one thought about how to speed up the sales cycle itself for a complex sale.
    High tech solutions, as you point out, are usually complex and in the end are only bought by customers who have educated themselves to the point where they are comfortable enough to make the decision. And typically, this educational exercise falls on the shoulders of the sales rep. Especially, as in your section above on Field Sales.
    But with Inbound Marketing Automation, you condense all that product knowledge the reps carry around in their heads (and on bits of promotional paper and brochures) into white papers and videos. Written, created, directed and acted by professionals, using the best practices of your best sales rep (not to mention marketing team). And then you put the material up on your site (behind a registration form), and your prospects sign up (now giving you a name and email address and slowly much more about themselves as they answer a few questions about themselves each visit). And then they start downloading the materials, watching your videos and literally educating themselves. They do so at their own rate, fed each new piece immediately without lag time, 24/7. So they progress around the cycle more quickly. But they also reduce the CAC because your sales people are now freed up from this hand holding to concentrate on the more sales ready prospects who have been nurtured around their own “buying cycle” to the point where they achieved a high enough grade and score to be promoted from the marketing funnel, into the sales funnel (fed into your CRM). So no more cold calls as each prospect in the CRM has by definition received emails from this sales rep (automatically handled by the Marketing Automation software), and the rep knows a fair amount about the prospect from his or her profile and digital footprints on the site. So a more effective sales call.

    Great work, look forward to your next post.

  • mcenedella

    Another fantastic post, David!

  • http://www.firmex.com/ Joel Lessem

    This is a great post. There are so many business (including SaaS) that make their sales process more complicated than it needs to be. Keeping the sales process simple and CAC efficient is one of our competitive advantages.
    Joel Lessem
    CEO
    http://www.firmex.com

  • Jim Kelly

    David,
    Great summary and insight on the sales and revenue generation side of the ledger for startups. I feel these issues often get overshadowed by the technology, solution, and market opportunity aspects of a business plan, yet as we all know timely revenue generation is just as critical. Having sold and managed sales teams for many years in the Field Sales category you describe, I have found that another way to lower the CAC and deal with the inherent complexities of this segment is a strong sales methodology and discipline. The best sales methodologies encompass core components such as Account Planning, Opportunity Planning and Sales Call Planning, providing a common language and process for your sales, SEs and sales management to utilize. These methodologies if used correctly can help teams shorten sales cycles and increase revenue by process driven qualification, indentifying the weakness and unknowns in your sales opportunity, and preparing call plans and specific meeting objectives in order to accelerate the sale. No more “winging it”. A successful sales call moves from “wow, that went well, I think they really liked us and our product” to “wow, that went well, we achieved our sales call objective of gaining Joe Smith's verbal agreement to sponsor a meeting for us with the CEO by next Thursday”. The methodology I have used in my career for managing complex and high ticket technology products is Sales Force Systems. http://www.salesforcesystems.com I highly recommend it.

  • http://www.forentrepreneurs.com David Skok

    Jim, Many thanks for taking the time to comment. For other readers, Jim works at Netezza, one of the companies that I list as being very successful in big ticket, complex sales. Useful to know about Sales Force Systems.
    Thanks, David

  • http://www.teamseer.com Peter Wake

    A fantastic article, thank you.

    We have found our pricing model where price/employee goes down as #employees goes up really falls over as we cross the line from inside sales to field sales. So a lot of lights went on as I read your article. They also want custom terms and conditions, SLAs, and customisation. This blows the whole model off course. We are currently in the process of revisiting our pricing model to take these issues into account.

    One comment I would add, is that where the deployment is going to impact all the employees in a company and the buyer hasn't done this before (for us this is often the HR manager) then other decision-makers will get pulled in irrespective of the deal size as the buyer looks to cover their risk.

  • http://www.forentrepreneurs.com David Skok

    Peter, thanks for your comment here. It is valuable to hear how this has worked in your own situation. I agree that there are certain situations where you just know you can't avoid pulling in other decision makers, and in that situation the important thing to recognize is that you will need to charge more money to cover your costs of selling.

    Best, David

  • http://twitter.com/karelvanderpoel Karel van der Poel

    David, a fantastic post. I can completely relate since I am running Mirror42. We have changed our sales structure from Channel to Freemium / Self Service in the last 2 years. We did this by building a free community called KPI Library that acts as a lead generator for Self Service SAAS solutions (called KPI Dashboard, KPI Benchmark, KPI Project) that are sold as credit-card subscriptions. We are now running an 8 months earnback time on our acquisition cost and operate in the green zone.

  • http://www.forentrepreneurs.com David Skok

    Karel, thanks for this feedback. It is really useful for other readers to hear how this has affected real world businesses. I can easily see how selling a product like yours could end up on the wrong end of the complexity scale. Looks like you have done a great job and have some very nice customers.

    How do you collect the data that is needed to feed your KPI tools? Do you need to install on premise adapters, or is the customer required to regularly upload data?

    Best, David

  • http://saasperspective.blogspot.com/ Dani Shomron

    David, Great article!

    One question, though about many of the graphs.
    It would seem that as the Value/Pain/Urgency (VPU) grows, the CAC should shrink – you need to invest a lot less in convincing your potential customers to become customers if they perceive the high value to them.
    Since you equate LTV with VPU, the Y axis does not reflect that, i.e. one does not see the costs flattening out at the VPU to the customer grows.

    Am I missing anything, or perhaps the the Y-axis should reelect the LTV but not the VPU?
    Thanx,
    Dani

    SaaS Strategic and Technical Consulting
    http://saasperspective.blogspot.com/

  • http://www.forentrepreneurs.com David Skok

    The way you describe things is correct, but was not the way I was using the graph. The way I planned the message to be conveyed was: if you have increasing sales costs, you will need to charge more money to cover those costs. To be able to charge more money will require at you have considerably greater Value/Pain/Urgency.

    So your observation is right. But it is just a different way of looking at things.

    Thanks, David

  • http://lifestream.abbashaiderali.com abbashaiderali

    Great spot on post! This becomes particularly tricky as a startup matures and offers multiple products which might require coexistence of different models. Managing parallel sales models is sometimes the only way to make sure that all the product lines are profitable on their own (unless there is a strategic reason not to do so) and keeping the teams separate can be quite the exercise.

    Abbas Haider Ali.
    http://twitter.com/abbashaiderali

  • http://lifestream.abbashaiderali.com abbashaiderali

    Great spot on post! This becomes particularly tricky as a startup matures and offers multiple products which might require coexistence of different models. Managing parallel sales models is sometimes the only way to make sure that all the product lines are profitable on their own (unless there is a strategic reason not to do so) and keeping the teams separate can be quite the exercise.

    Abbas Haider Ali.
    http://twitter.com/abbashaiderali

  • Ashwin Jayaprakash

    Many thanks for writing this.

    I laughed out loud on reading this – “In a strange twist of fate, charging your customers more money has the unfortunate effect of increasing sales complexity …….. involves more people in the decision making process; and potentially introduces budgeting issues.”. Spot on!

  • Ashwin Jayaprakash

    Oh and this:

    ” * Lumpy deal flow that makes revenue forecasting difficult and unpredictable
    * Deals tend to close at the end of the quarter, which can make life uncomfortable for executives and the salesforce”

  • Steve Kraner

    David – Great post for entrepreneurs and anyone building or turning around a company.

    Steve Kraner

    http://www.hightechguru.sandler.com

  • http://www.smbresearch.net Bob Eastman

    SMB Research has recognized this article as one of SMB Research’s Top 20 Favorite Reads from 2010. The entire list can be found on the SMB Research blog at http://smbresearch.net/blog/favorites2010reads/.

  • Angus

    Dave, great post. Can you provide (or point to) more information on The Low Cost Sales Model.

    SolarWinds is one of the companies we model ourselves on and I would like to get more insight.

  • Baekholt

    Since the font on your site is not zoomable, i must send it to instapaper to be able to read it. — But i like the content. thanks. 

  • http://www.forentrepreneurs.com David Skok

    Sorry about that. I used a powerful template from CrowdFavorite, and it is where that problem lies. I cannot easily change it.

  • http://blog.kwiqly.com/ James Ferguson @kWIQly

    Fantastic David – Another reason for me to keep reading.
    We are making many of these calls intuitively and are finding that rather than a big corporate sale we are doing better just by letting the client try “pilots” via our channels at very low risk.

    The difference is between pushing a wheelbarrow up a slope rather than a flight of stairs :)

  • http://blog.kwiqly.com/ James Ferguson @kWIQly

    David +100 this issue – I took screen shots and zoomed !
    It seems the CAC of your posts is enormous – at least there is LTV in the wisdom ! BTW – still looking for Product / Market fit but now trialling with 3 Global 100 channel companies. As soon as we have metrics to justify bridging the funding gap we will be in touch.

  • svovaf

    Amazing post! Really helpful abstraction.

  • Dom

    David,

    I just set up a SaaS company a year ago. I want to ask you a question about our organization chart. We have five different departments as Software Development, Partner Success Team, Sales, Operation and Product Development. These all five connected the one -CEO-. and organization chart is horizontal. Do you have any suggestions to improve this chart? How can I change it to make effective?

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