By David Skok, General Partner, Matrix Partners
There is no question that success for the entrepreneur starts with a breakthrough (or at the very least great) product or service. Yet too often, entrepreneurs fall into the “field of dreams” mentality (in the words of Terence Mann, AKA James Earl Jones: “build it and they’ll come”). But the truth is that defining the product is just the beginning. Entrepreneurs must spend significant time thinking about the complexity of their sales process and the cost of customer acquisition, as these factors will strongly impact a company’s ability to make money and attract investors.
An obvious requirement for a successful startup is that they are able to make more money from a customer than they spend for a customer, i.e. Lifetime value (LTV) should be greater than cost of customer acquisition (CAC) (see my prior blog post, Startup Killer: the Cost of Customer Acquisition). In this post, we’ll focus on the complexity of the sales cycle for various different types of B2B software and hardware products, and looking at how that impacts the viablity of startup business models by increasing CAC. And I will introduce a “zone system” that entrepreneurs can use to help evaluate different start up sales models.(Note: This post is primarily about B2B technology companies. Some of the concepts may apply to B2C internet, or to other industries, but it was not written with them in mind.)
Understanding Sales Cycle Complexity
Let’s start by looking at the sales cycle spectrum. Some products/services are easy to sell, and buyers will feel comfortable buying them online the first time they visit a web site, while other products and services require complex sales cycles with multiple on-site visits, meeting with various decision-makers, a protracted proof-of-concept trial of the product, etc.
The following diagram attempts to portray the spectrum that exists from the simple to the complex:
(Note: The categories shown are not hard and fast ways to define sales complexity, but are designed to provide a framework for discussion. For simplicity, I have also left out channel sales at this stage.)
In this model, some version of the product or service is given away, with the goal of up-selling or cross-selling over time. Think Open Source products like JBoss, MySQL, and Asterisk, and web services such as DropBox and SugarSync. (Note that only some portion of the free customers will likely convert into paying customers.)
No Touch Self-Service
Here you drive traffic to the web site using SEM/Pay per Click ads, SEO, Inbound Marketing, Freemium, etc. Visitors convert to paying customers without any need for salespeople. The product needs to be simple to understand, and have a compelling value proposition.
Light Touch Inside Sales
In this model, you might provide some light level of human touch such as email exchange to answer questions and provide customer support. A slightly higher level of touch might involve a phone call with an inside sales person.
High Touch Inside Sales
Here you still sell your product/service over the phone, but the amount of work in closing the deal requires several phone calls, sales engineers, and/or web-based demos.
Field Sales, and Field Sales with SE’s
Now you require an on-site visit using a field sales organization. You might also need multiple on-site visits, selling to several decision-makers, use of SE’s (sales engineers), and perhaps on-site proof-of-concept installations that take considerable SE time.
Impact of Sales Complexity on Customer Acquisition Costs (CAC)
If you are like me, you would expect the Cost of Customer Acquisition (CAC) to rise as sales complexity increases. So the first time I talked about this topic, I drew the following simple graph:
However, when I looked a little deeper into the costs, click here for the full article.