Category Archives: SaaS

Starting with an SMB focus vs. enterprise for SaaS companies. Which is better?

In the initial days of your SaaS startup, when you are doing user development, you may find that your product will help both SMB (Small Medium Business) users as well at Enterprise users.

There’s a tendency to then focus more on the “customer” development than the user. Assuming you have spent enough time on the user, there is a serious possibility of getting distracted from your mission by doing “both” at the same time.

Here is a dichotomy for entrepreneurs – Knowing that the milestone of Monthly Recurring Revenue (sans Churn) is the most important metric for SaaS companies, many entrepreneurs try to take the “relatively” easy route to try and get more larger enterprise deals for their product, if that’s what they know.

I have found that most entrepreneurs with an enterprise background end up finding 5-10 early customers who are willing to pay for a good product, but in the bargain they end up flexing their enterprise sales” muscle instead of building the “SMB marketing” muscle.

There is nothing wrong with choosing either market, but there is a big enough difference between both.

The enterprise SaaS market will end up with longer sales cycles (even if you know the decision makers), larger deals and request for integration with many existing tools and processes.

The SMB SaaS market will end up with smaller individual sales, an inbound marketing driven “self service” approach to vending and a extreme focus on seamless “on boarding” of users (sans training).

Many entrepreneurs also convince themselves that they can do both at the same time.

Which cannot be farther from the truth.

So, the question I usually get asked is “Which one do investors prefer“?

The answer is either one, since investors care about quality and quantity of revenue, but above all they also care about empirical evidence that they money they invest in will generate the consistency in the business for the chosen model.

Inconsistencies kill fund raising cycles.

So, if you chose to say you will build an enterprise sales model, you need to show your financial, product, hiring and operational model to support that type of business.

If, however you say your company will build a try and buy model for SMB sales online, with minimal or zero human touch from your side, driven by digital marketing, you need to show evidence that you can do that over a 3-6 month (or more) period.

I have seen many entrepreneurs confuse any revenue with good revenue. Consistency matters.

You have to show investors that you have done what you want to do.

Empirical evidence trumps theories.

So, my suggestion is to pick a model, stick to it for some time, before you decide to pivot if that does not work for you. Before you raise money, showing that the model you are choosing is one you have relevant expertise and knowledge in running is going to be critical.

Should I pay my sales commission on bookings, revenue or margin?

Yesterday I was at Chicago running a workshop for TechStars alumni (about 12 companies) on SaaS sales. The companies were largely B2B, selling to mid-sized or larger organizations. Most were trying to go beyond the founder being the primary sales person and were getting ready to build out their sales team. One or two of them even had a couple of sales people on board.

The section of sales compensation generated the most questions. Obviously most of the entrepreneurs were founders who did not have a background in sales, so they were curious as to why it was so complicated. Most were used to paying out salary + bonus or more likely salary + stock options for their engineering staff.

Sales compensation does not have to be complicated, but it can be made to appear so. Obviously it starts out fairly simple – most sales people like cash and are motivated by cash more than anything else. Entrepreneurs should like sales people that are motivated by making as much short term money as possible.

On Target Earnings (OTE) is the term we use for total compensation for sales people. OTE comprises of Base salary (fixed, paid monthly or every other week), which is typically between 40-60% of the OTE and Commission, which is variable making up the remaining amount. Sometimes a bonus is added to the mix to achieve certain objectives the company has – for example, an objective that is important, but does not generate revenue – getting reference customers or supporting a marketing program.

OTE = Base Salary + Commission (+) Optional Bonus

The question, specifically was about when and at what conditions is the commission paid?

1. Early in enterprise software, most companies paid commissions on bookings. When the purchase order has been signed by the customer, the sales person gets paid. That’s usually good for perpetual license deals, where the customer pays an upfront fee for the software and amortizes it over the life of the usage. Since most customers who could afford this were large, the possibility of them defaulting the payment was rare, so it made sense. Most large enterprise software companies did this.

2. Thanks to monthly recurring revenue (sometimes billed and recognized monthly and other times billed annually and still other times billed for 2/3 years), most SaaS companies started to pay commissions on recognized revenue. This aligned the interests of the company with the sales person.

3. Still other companies actually only paid out commissions on income. That is when the money hit the bank. This ensured that the sales person would ensure the customer would actually pay the money, but then puts the sales person in a position to be responsible for some non-revenue generating tasks.

4. Some companies pay out commissions on contribution margin achievement. So, software (high margin) would get X% margins, but services (lower margin) would get less than software margins. VSOE regulations prohibit vendors for arbitrarily charging different customers, different prices (or inconsistent price discrimination as it was known) so this practice is rarely followed.

5. Finally some startups pay their commissions on implementation. This is typical in companies where there is a lot of services to get a customer up and running. Typically, if a customer takes 3-4 (or longer) months to get the software working thanks to customization, then most companies would prefer to pay their sales people after the customer has successfully implemented.

Regardless of when you choose to pay your commissions to your sales reps, the method cant change as often as you’d wish, since it confuses sales people and creates a lot of angst.

I would stick to one method and keep it consistent. Realize though, that the later you choose to pay the commission (closer to implementation) the more time the sales person spends on non new sales opportunity related tasks. The earlier you choose to pay the commission the less the incentive for the sales person to see the customer be successful.

A #contrarian view on how the customer validation phase should fine tune your #startup business model

The trend from users (businesses and consumers) wanting to buy services – software enabled services, instead of software is accelerating more than ever in my observation. Previously things that most folks would sell as software is now being packaged and sold as a service that solves a problem and is a solution than a packaged piece of software.

In the 90’s and 00’s the solution to a business problem was to develop, deliver and sell software, which was either sold as a license or an annuity. SaaS then came about to provide a change in both the pricing model and the deployment model.

The trend is more pronounced in the consumer portion of the business. Let me give you a few examples and then go into detail of one case study that I discussed with some entrepreneurs Utah.

Take the case of Uber. A decade or two ago, the prevailing model would have been for Uber founders to build the software and then try to sell it to taxi companies and help them service their customers more efficiently. They instead chose to be a “full stack” company and own the consumer experience and recruit drivers to their program.

Another example is Zillow. Instead of providing software to real estate brokerages or individual brokers, they turned the model on its head to go direct to consumers and be a lead generation engine for brokers.

Finally on the enterprise side, HackerRank is a product as an example that a decade ago, would have sold software to companies that helps them manage, deliver and attract software developers with challenges. They prefer to directly attract software developers to their platform and then engage with potential recruiters to help match the top puzzle solvers with companies that are looking to hire them.

Note that in all these cases, the companies are purely software companies, but their business model is predicated not on selling packaged software, but a set of services to end consumers.

I speak to entrepreneurs worldwide, who have heard the phrase “software is eating the world” and then immediately assume that the only way to deliver software and build their business is to sell either a subscription business to the hosted solution or to sell packaged software (yes, there are still folks that think this is the way to go). That is no longer the case and you will find in most instances, investors will prefer full stack companies to software business models in the next decade.

Only hosting your product and providing a SaaS solution does not make your business model different.

That begs the question, how does one go about creating and building a service business instead of a purely software business?

I think the most important phase of your startup journey to figure this out, is when you do your customer development and validation.

During the customer validation phase you will find many potential customers not willing to buy what you sell them (software). That’s usually because they don’t have the problem you articulated.

There are two types of problem articulation strategies. One set of folks articulate the problem they think customers have and another set share examples of the questions potential prospects have.

Let me give you an example of a company I met yesterday.

They are folks that run a theme park who had built software to better manage their park and generate better profits and returns. They were keen to sell software that helps manage a theme park to other owners of theme parks.

When they spoke to potential customers and said they had ERP software to help with theme park management, most potential customers did not care. Their customers did not have a problem that required software.  When we got talking, and drilling down to the real problem, it turns out that 20% of a theme parks budget annually was spent on renewing customers.

So, most park owners had a marketing and a renewal problem not a software problem. When they went to the customers with an end to end solution to help streamline renewals and still had software at the back-end to manage the renewals their message seemed more appealing to theme park owners. Suddenly the problem was not software for automating the theme park but a solution to help remove a key headache and a solution to one of their key problems – Renewals.

The startup still wanted to only be a software company so they were not too keen to take on all the hassles of renewal processes, so I suggested they outsource the other aspects of the renewal process to other companies.

Having control of the end to end renewal process, now gives the company the data and analytics to build another stream of revenue to help end customers get discounts on other services they would like and give the theme park owner a cut of that revenue.

That’s the future. Software enabled services will be the primary business model for the next decade or so. Instead of selling it as a software product (either SaaS or otherwise), I encourage entrepreneurs to look at business models in more depth during their customer validation phase.

Where is analytics headed in 2020? An insight gathered from 25 top #startups

The most amazing part of my job is that I get to learn from the smartest entrepreneurs in the world. I cant think of too many people who get a chance to talk to 3 entrepreneurs via video conference in California at 8 am, 2 startup founders from Singapore at 1030, have lunch with 4 amazing big data analytics company promoters in Bangalore and then wrap up the night with a conference call at 830 pm featuring a recently funded analytics company in Boston.

Most VC’s get a local perspective, Silicon Valley, Tel Aviv, Bangalore, or Beijing. I get pitched from all over the world. Most investors in the valley will tell you the best and brightest come to the valley, but I believe there’s a big shift happening. More on that later.

I wanted to share one very insightful thing I learned after 25+ detailed (over 1-2 hour) briefings with entrepreneurs who are all innovating in the analytics space.

The future of analytics is in offerings based on derived insights.

I just gathered this insight, so let me explain.

Historically the analytics space was filled with services companies. In fact  consultants would take loads of data and gather insights to help their clients with their business objectives. The best known analytics companies that dont call themselves analytics companies are Mckinsey, Bain and other management consultants. Then companies like MuSigma and others decided to “offshore” this insights service. The problem with this type of offshore services business is obvious – low margins (net of 20% and since they are people intensive, they dont scale as fast).

The purveyors of the software model of analytics are those that provided a SaaS product – names such as Cognos, Business Objects etc. Companies like Kaggle crowdsourced your analytics and there are hundreds of companies providing SaaS analytics, such as GoodData, Insights Squared, etc. The problem with this type of business is that most of these software products are “generic” hyper cubes and data warehouse / data mart models. Their margins are better than services, but still nowhere near the 80% gross margins that some industries command.

Since we all know that software is eating the world, many companies in industries such insurance, banking, finance, manufacturing are all facing a threat from new age software companies, who are re-imaging the businesses.

The next generation of analytics companies are those that take the insights gathered and create an offering in that specific area so they can benefit from the insights, instead of providing those insights to others in the industry who make more money from it.

Let me take a simple example. Global Analytics just raised $30 Million. They are an analytics company. They used to provide their insights to financial institutions by way of giving them “leads”. These leads were those customers who were worth extending credit to. An average lead in this case cost their client $30 – $100 (depending on quality).

While that in itself was a big and large market, the larger market is to extend the banking facility themselves, which means with their analytics and insights can directly offer short term cash loans to those that their analytics deems are the best. The average customer in this case will make them $500 – $5000 (depending on the size of the loan). They did this via their own offering Zebit.

Now, most founders with a background in software will say “Wait a second. what business are we in? Software or Financial Services”? That’s a good valid question.

But when you get into the “Financial Services” business there’s loads of things you can re-imagine and redo the right way with a “software frame of mind” as opposed to being a “financial services insider”.

Huge difference in revenue and margins.

That’s the future of analytics.

Using the insight gathered from the analytics to offer a product / service direct to customers and not selling the insight or analysis to existing players.

Let me give you some more examples.

Lets say you are foursquare. You have analytics and insights into where people check in, where they go, what their patterns are with respect to travel.

Would you rather sell this treasure trove of data to marketers (and face a bunch of privacy issues) or would you create an offering based on those insights yourself?

The value to a museum of information that a potential customer is near their location is possibly $2.5  (that’s quite high I imagine if the tickets are $25).

Instead if foursquare offered a virtual museum tour or a personal crowdsourced guide to the museum, then they could sell that for $10 and have 40% margin on that offering.

Imagine if you had driving habits data about car owners – how they drove, what time, how fast, how safe, etc.

Instead of selling the “best driver” data as a lead to the insurance companies, who might pay you $100 – $200 per lead, you could create your own insurance offering based on miles traveled, safety of the drive etc., changing the long standing model of one-size-fits-all car insurance.

There are lots of examples that entrepreneurs are dreaming up these days and the most audacious ones I am talking to want to upend large established industries. It is both exciting and scary at the same time.

That’s exciting. Software will truly eat the world.

The least action principle applied to the “call to action”

I met with an entrepreneur who has been looking to gain traction for his new SaaS application for payments. Having talked to a few of the top notch marketing and conversion experts in the Bay area to learn about drip marketing, which allows you to set a set of messages over time I was eager to help him figure out how to apply that to his problem.

The problem he had was that his “call to action” – what he wanted his prospects and customers to do was creating a “very high barrier” to prospects going to the next level with the website.

I find this often the case with many startups and SaaS applications in particular. The “barrier” for a prospect to become a customer is very high, so while you generate a lot of traffic and visits to your website, the number of conversions is abysmally low.

While you could offer better design, clear case studies, A/B test your pricing, there’s another technique that’s fast gaining traction among those that believe in a sales term called “lead nurturing“.

Its is the least action principle applied to prospect behavior. Before you “riff” me on this, yes, I believe physics gives the answers to most marketing problems.

The summary of this principle is

 “Nature is thrifty in all its actions”

So this principle applied to conversion marketing is to make users do the least amount of work to get to the “next logical step” in your progress to convert them to be a customer.

Instead of asking users in the first page to “Sign up”, which may well be your ultimate goal, ask them to view a video instead. Then sign up for a newsletter. Then send them 3 emails (over time, drip marketing, remember) to get them to review a case study, provide them with ROI analysis and finally ask them to sign up.

This entire set of steps can be done in days or in 2-3 minutes with a “guided” website interaction, instead of just a single call to action.

If you remember that most people want to do the least amount of work to get the maximum benefit, then you will appropriately break down your final call to action into multiple “Least User Interactions” each of which gets the user to commit some more (time, energy, etc.) to your application.

This is similar to the method FB for example applies to its interactions. You might just be a viewer of content, then your path to least action is a “like”, then you might comment, then set your status and finally upload a picture. There are more actions no doubt, but the path to least action is a like.

So when you look at your call you action, think about how you can break it down into multiple steps to get users to interact with your website without having to “commit” to marrying you before your first date.

How to B2B is morphing into B2A, B2D, B2M

From the broadly 2 types of companies, those that focus on consumers (B2C) and those that focus on businesses / enterprises (B2B) there is an explosion of new types. While most of the new types are still a subset of B2B or B2C, the increasing sub segmentation of B2B is creating multiple niches among those trying to sell to the “enterprise”.

The problems with B2B are fairly well documented – Long & slow sales cycles, multiple decision makers with largely different agendas (procurement wants it cheap, CIO wants it to fit into their technology stack and end users want it to be usable).

There are a 2 very interesting articles over the weekend from Dave McClure and Christina Cordova  which document the changed landscape in B2C. What I am seeing among our startups in the Accelerator is consistent with what Christina mentions in addition to the initial problem with most mobile consumer startups – which is getting users.

Essentially the marketing mechanisms (ads, PR, email) create a lot more friction to getting users to try / download the mobile app versus the web app.

So you have to primarily use a combination of reviews, recommendations or in-app ads to get users.

What’s happening on the B2B front is even more interesting.

B2B is morphing into B2D (developers), B2A (Architects, as an example) or B2M (Marketers).

Thanks to SaaS and Cloud pay-as-you-go services, the products are inexpensive enough to get enterprise segments without the hassles of going through the entire Purchase order process for many products.

So most B2B companies are targeting a specific user who is also the person to approve, buy and select the product / service that works for them.

The implications are obviously dramatic and ones that change the landscape completely.

In a follow on post I’ll document the ways this changes the marketing and sales techniques.

Should I outsource the sales function at my technology startup?

I am thinking of writing a series on technology sales, given that selling is my first functional love and I enjoy it more than anything else. (There, I admit it, and yes, more than development even though I am an “engineer” by education). So the next few posts will be focused exclusively on selling for entrepreneurs.

Yesterday I had a friend who came over to get some advice on his startup. 6 years into the business he’d built a $200K+ annual consulting company and had over 30 customers for whom he’d implemented various projects. The average sale was about $20K and since the company was fairly small, (15 people) the CEO and founder was the primary sales person.

Most of their lead generation was relegated to speaking at important conferences and events, after which they’d get a few interested people who were keen to leverage their expertise for implementing a project.

His question was around a proposal he got from another company, which was founded by a big-company sales person who’d built a good network of customers and prospects. The company was offering to help my friend outsource his sales and generate customers. In exchange they were asking for 30% (starting point) of the sale as their commission.

To my friend this seemed on the high side. He’d heard numbers like 10% or even 15%, but 30% seemed large.

So his question was “Is this the right number? Or should I negotiate a lower commission”?

We had an hour to chat about it. I was most surprised he never asked me the question “Should I outsource my sales”? Since I have been running the Microsoft accelerator for the last few months, I have refrained from answering questions I think entrepreneurs should ask, instead narrowly focusing on their specific question and giving them options they should consider or a framework they should look, at to evaluate their options.

Lets do some simple math, I told him. If you are looking to make $200K a year from a sales person, given that your ASP (Average selling price) is about $20K, you will need 10 (roughly) deals for them to make their quota. Since the projects they were selling were fairly complex in nature, the sales person they needed to hire would have to be someone who understood both the customer’s industry, the value of technology to that industry and build good relationships within that industry. So, a fresh out of school grad going for $10K – $15K (in India thats what they make annually) wont cut it.

He needed to hire someone who was a consultative sales person who could not only do the lead generation and selling but also some amount of initial “scoping” of the project. In India most of these people make about $40K annually. These folks would have about 8-10 years of experience (or more) and would have implemented several projects or performed the role of “solution architect”, at their previous role. About 60% of the annual pay of the sales person would be paid as base salary and 40% of it as commission on sale.

Since most of my friend’s customers were in India and primarily in the south, customer travel was going to be fairly minimal, which would cost about $2.5K annually at the high end. Assuming that 50% of his customers were outside the city he lived in and the average customer took 2 trips to close and some trips required 2 people (including my friend who would also help with the sales), the cost of travel was about $2.5K we determined.

To generate leads in a consistent manner, the sales person would have to supplement the speaking engagements my friend was using for lead generation with some events, and a few other techniques, which we estimated would cost another $2.5K.

So in total to generate $200K in business, my friend would have to spend about $45K in hiring, managing and helping his sales person.

Now these numbers are unique to India, but the model holds for the US as well. You might have to multiply each number by 5 to get to the US equivalent, but that’s the norm. Approximately 22.5% of his target or sales was going towards the sales person.

Realistically, the outsourced sales person asking for 30% seemed fairly reasonable.

Of course, I warned that my friend would still have to be deeply involved in the process so the “transparent costs” of the sale would increase the paid commission.

There are a few numbers that can change this equation dramatically. One is the average selling price, second the annual salary the sales person makes and third the target (quota), but by and large this is in the ballpark.