Why SaaS founders should take Marketplace Listing Optimization seriously

I wrote about the 3 things to do before your SaaS product launch to increase inbound leads before and also talked about How you can use Marketplace Listing Optimization (MLO) to increase your inbound leads for a SaaS product.

One of the things I forgot to mention was why you should take MLO seriously. I will outline that in this post.

The market for SaaS applications will be about $130 – $150 Billion by 2020 according to IDC. That compares to $5 Billion for IaaS (AWS, Azure – compute, networking, storage, etc.) and $12 Billion for PaaS (Meteor, Angular, etc.)

The second way to segment this is by size of company purchasing SaaS solutions. Enterprises greater than 1000 people will account for 48% of this spend, Mid-sized companies 100 to 999 people will account for 28% of this and 24% by companies with 1 to 99 people.

Another way to segment this is by type of SaaS application. Customer facing applications (eCommerce websites, etc.) will account for 59% of this spend and 41% towards internal, employee facing applications (ERP, etc.)

Yet another way to segment this spend is by location. The US is expected to be 37% of the spend, Europe about 29% and the rest of the world about 34%.

Finally if you segment by the “cost” of the application purchased by user per month, then SaaS offerings that cost < $25 / mo / user will account for 61%, $26 – $100 will account for 31% and > $101 per user, per month will be about 8%.

So, any way you cut it, SaaS is a large market, with global purchase capability focused on your clients customer, and for smaller $ per user per month.

One segmentation that none of the analysts cover is the segmentation for the SaaS provider by channel of opportunity. What I mean by that is what % of that spend will be direct, versus through a channel.

If you look at the top 100 software companies overall, in the B2B space, 64% of their revenues come from direct customers and 36% from channels (VAR’s, resellers, SI Partners, etc.)

In SaaS currently, that’s the other way around. Thanks to SEO, Google based search results, direct marketing and online digital marketing, 70%+ of the purchases are direct to customer. VAR’s, channel partners and others have yet to figure out how to sell and partner in this new era.

That will change though. There is a new class of larger partners (Salesforce for example) who have a large base of installed customers and can help SaaS and other companies sell “through” them.

The value add to the customer (buyer) is obvious – they get to buy from a trusted brand (Telstra, Microsoft etc.) and they have an existing relationship with the partner.

Cloud Marketplace Brokerage Services

Cloud Marketplace Brokerage Services (image credit)

The value add to the SaaS provider (seller) is also obvious – instead of having to go through a lengthy process of getting on the vendor list and get empanelled, etc. they can sell using the existing relationship the brokerage or large company has with the buyer.

This is what many of the analysts predict will happen by 2020.

So the Direct vs. Indirect business will again get to 70-30 mix.

Which means if you the SaaS company has a good relationship with the brokerage or listing provider, you can expect 30-40% of your revenues to come from that instead of direct.

This will lower your cost of sales, support and service.

Which will help you grow faster and bigger with lesser capital raised, and hence more profitable.

The 5 most important questions to ask before you price your SaaS product

Over the last few weeks I had a chance to review 89 of the companies to understand their free to paid conversion and also a chance to talk to 13 companies. What I learned was that time spent on the pricing page was a key indicator of conversion and you can A/B test your pricing page for colors, position of your highest and lowest prices, number of plans showed, feature listing and your call to action. The names of your pricing plan also has a significant signalling effect on your customer’s perception of your product. I believe the future of SaaS pricing will move from pay-per-usage to pay-for-outcomes.

The most frequent question I get asked about SaaS companies is how to think about pricing for the product. Here are some constructs to think about and 7 questions to ask before you come up with a pricing model or a price for your product.

1. Understanding your customers current solution and options and their “cost per unit of activity” is the most important thing you should do first. For e.g. if you sell a Sales force automation solution, the customer might be using an Excel spreadsheet to track their sales because they dont have too many opportunities. So in their minds the “cost per unit” is zero, since they have already “paid” for Excel.

2. SaaS pricing is a marketing function not finance or operations. If the team that determines the value of your offering to the customer is another them, then it is their responsibility. The reason for this is that value of your product determines how much you can charge, not what customers are willing to pay. Value cannot be determined as a absolute, only relative. Which is why you have to compare it to their current solution.

3. At the early stages (less than 50-100 customers) optimize for more customers and quicker sales cycles not for profit. To get data and buying patterns you need enough data and a meaningful sample size. When you go beyond the early customers, it is time to optimize for LTV and CAC.

Here are the top 7 questions to ask before you come up with a pricing model for your SaaS product.

1. What are the current options for your customer?

Find out how are they solving the problem your product addresses currently and how much does it cost them to do that.

2. What are the different segments of your customers?

Find out if there are different problems your product can solve and the value associated with those problems. That would be the best indicator of

3. What is your goal from your pricing?

It is not always obvious to say that your goal is to get the “most money” or to be the most expensive product. Some companies want to be the 80% functionality at 20% of the cost option. Determine your pricing goal – profitability (after customer acquisition costs), value creation, marketshare, etc.

4. What is your cost of customer acquisition?

For most parts, your cost of development tends to be fixed (if you hire 3 people, you have to pay their salaries regardless of how many features the ship), but the cost of customer acquisition tends to be a variable. So if your costs dont take CAC into account, you will have a model that wont be profitable.

5. What is your sales model?

Linking Sales and Pricing for SaaS

Linking Sales and Pricing for SaaS

I usually use the price and complexity of sales / marketing on two axes to understand the sales strategy for a SaaS company.

If you are a company with a lower price point and low complexity of sales, you will have to rely on customers to try and buy (freemium) the product on their own and work on obtaining customers at a low cost.

If you are a very complex product or have a complex sales process and your product costs a lot, you will have to hire a field sales team to help you sell.

If however, your product is priced high and your complexity is low then you will build an inside (phone) sales team.

If you have a high complexity product and sales model and low price, your company will die.

Use this model to determine where you want to be and price the product appropriately.

How to name your SaaS pricing plans? A primer from 89 examples

There are over 7500 SaaS companies according to angel List. Over the last few weeks I had a chance to review 89 of the companies to understand their free to paid conversion and also a chance to talk to 13 companies. What I learned was that time spent on the pricing page was a key indicator of conversion and you can A/B test your pricing page for colors, position of your highest and lowest prices, number of plans showed, feature listing and your call to action.

I did notice that of the 89 companies, 82 of them gave their pricing plans “names”. Each plan had a name so their customers could associate the name with the plan. Most (over 80%) used standard and conventional names but it was interesting to see the spread. Here is the data from 89 companies and 251 plans.

Names of SaaS Pricing Plans

Names of SaaS Pricing Plans

The most important points you want to take away are the following:

1. Even though SMB and SOHO (Small Office, Home Office) users are the first few to sign up for a SaaS service, 3 of the top 5 names were named Enterprise and Business and Large. I would imagine this has to do more with the inside out naming (the plan is large or enterprise, not the company buying it).

2. The plans named “Small or equivalent” were largely in the bottom quartile of the distribution. Even though over 70% of companies had 3 plans, only 35% of them named the smallest plan as “Startup”, “Starter” or “Lite”. The most common starting plan was named “Standard”.

3. Of the 20% of companies that used “custom” names like Boutique, Tyrannosaurs, or Garden named all their plans uniquely. The surprising element of the companies that used custom names was that most of them had images to convey the “size” of the plan.

There were some other surprising things I learned as well in my discussions.

1. In naming plans, understanding the end customer’s billing and invoicing was key. Most customers got an email invoice (a few sent PDF invoices) and they would either file them or expense those invoices (if < $50) or would send the invoices to an accounting team.

Ensuring that the “accounting” team did not ask any questions was the consistent mention among 3 of the startups with custom names for plans.

2. Naming the plans to support your payment gateway is also critical. Getting too cute with names means the payment gateway will support a higher refund request that were marginal.

3. Many of the companies had to setup standard names so their marketing and product management teams could do better analytics and research on the backend, consistent with their reporting. Surprisingly, if the names were “standard” the companies found it easier to have a conversation to understand conversion rates, pricing options and changes with their finance teams, design teams and other outsourced companies as well.

The top 5 things you need to do after you are hired as the first #salesperson at a #startup

This is a follow up to the post top 5 things a founder should do after hiring the first sales person at their startup. Congratulations. You have been hired as the first salesperson at a hot startup. Here are the top 5 things you need to do before, during and after coming on board.

1. Speak to as many customers as possible to understand “Why did they buy”? Ask the founders to help connect you to existing customers before you join so you can clearly understand why customers are buying. Is it because of the relationship the founder has (most likely at early stage startups), or are they solving a real pain point? Is it obvious there is a pain? Will there be budget allocated for this pain? Help the founders document the set of steps in the sales process during this phase as well.

2. Find out what your disciplined schedule will be for the first 30 to 90 days. Besides building your pipeline of business, there should be nothing else you should be working on. Whether it is researching 20 prospects, cold-emailing 20 potential targets or engaging with 20 candidate customers on LinkedIn, figure out the basic unit of activity and the way to measure it consistently.

E.g. Your basic unit of activity might be to spend 5 min researching a prospect on LinkedIn and understanding what your subject line should be to them and 5 min to craft an email that will help you send a response, followed by reviewing all the people in your suspect list from the previous day. Follow the disciple consistently.

3. Write down 10-20 A/B test headings, subject lines and messages that you will test during your pipeline development phase. You will need to test your Subject lines, the time you email prospects, the call to action, the collateral you will use to incent prospects to engage with you. The founders may already have a message they use, but dont take that at its face value. You will need to find the top 3-5 things your prospects will care about and the top 3-5 things they are willing to do as a next step or the 3-5 things they need to be educated about during the sales process. You job is to try and have enough permutations and combinations of these pain points, calls to actions and collateral till you hit the top 3 combinations.

E.g. Try the 3 top industry news items as headlines rotating and also your top 3 benefits, then the top 3 pain points or the top 3 questions on their mind as your subject lines.

4. Align on a system (Excel works just as well, if you dont like CRM systems) you will use to track your activity with your founders. Initially you will not have an immediate term wins, so in the absence of sales, activity will have to be measured as a proxy for outcomes. Whether it is # of sales calls per day or the # of demos per week or the # of responses to emails and phone calls that you will have to track, find a way to measure it, and track it diligently.

E.g. Put a simple spreadsheet with names of companies, target people, status (1st email sent, No response, Not interested, Call back in 3 months, No budget, etc.) and use a color-coded system for follow ups.

5. Network religiously to find a way to help potential partners who will help you after you help them. Many of the folks in your existing network may be able to help, and they may have an inclination to do so since you are now at a “startup”. Use the fact that you are at one to your advantage. Most people I know love helping and engaging with entrepreneurial-minded people and want to help early stage risk-takers. Even if you dont have a prospect in your network, it does not hurt to ask.

E.g. Last week, many of the participants at our customer day, at the accelerator were not prime targets for one of our companies in the Health care segment, but many had “friends” or “ex colleagues” who were now in hospitals and they were willing to help.

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.