With the majority of enterprise software still on-premise or custom built, Software as a Service (SaaS) is expected to grow to a $32 billion market by 2016. Companies like Dropbox, Workday, Salesforce, NetSuite and several others have paved the way with proven and tested Go-To-Market models. In this post, I’d like to explore the three main SaaS models that have emerged and how they relate to sales complexity.
SaaS Go-To-Market models
Successful SaaS companies over the past decade fit under at least one of three distinct Go-To-Market models:
This model requires a broad base of potential customers and typically targets single users or small teams. Customer acquisition is predominantly done online with a self-service model supported by Free Trial or Freemium strategies. Examples: Evernote, Dropbox, Yammer.
Scalable price and volume
These solutions are sold predominantly over the phone by inside sales teams typically targeting departments or business units within large companies or mid-market companies. Products or services are usually highly configurable so that pricing can scale accordingly from Annual Contract Values of thousands of dollars to low hundreds of thousands of dollars. Examples: Salesforce, HubSpot, NetSuite.
Catering primarily to Large Enterprise, these offerings are sophisticated solutions with a set of features and services that justify a higher price tag — sometimes in the millions. These solutions are usually sold by field or high-touch inside sales teams skilled at navigating complex sales cycles. Hour long phone-calls, on-site visits, demos, proof-of-concepts and discussions with multiple decision makers are often necessary. Examples: Workday, Cloudera, Veeva Systems.
Note: The illustration above is a simplified visualization as these companies have re-adapted or augmented models over time.
The three models are not mutually exclusive, some SaaS companies deploy multiple product/service suites that expand across all three. At HootSuite — my company — for instance, HootSuite Pro is the self-serve product while the Enterprise suite of products and services is sold by both Inside Sales and Field Sales reps depending on the market segment. It should also be noted that it is common to go up-market and transition from a predominantly self-serve or trial model to a more complex field-sales-supported model (e.g. Yammer, now part of Microsoft).
Given the three Go-To-Market models highlighted above, let’s explore the factors that determine which model is most suitable for a given SaaS company.
Product/Market fit, the complexity of the product you are selling and buying preferences or requirements of the customer are the three main drivers here. Some SaaS products are easily purchased online via credit card while other more complex solutions will often involve multiple players within an organization and a lengthy review and procurement process. In order for the Go-To-Market model to remain viable, two key metrics should be looked at: the Lifetime Value of a typical customer (LTV) and the Cost to Acquire a typical Customer (CAC).
At the very minimum:
LTV > CAC
LTV ≥ 3 x CAC
David Skok, from Matrix Partners, has an in-depth analysis on CAC and how it relates to Sales Complexity. I will highlight a couple of the key concepts here but would strongly suggest reading David’s entire post.
Customer Acquisition strategies
As we move from a less complex to a more complex sales cycle, the model also changes to one or a combination of the following:
Freemium: The base product is offered free with the goal of up-selling or cross selling customers over time. Free users are monetized in some instances through advertising or third-party partnership agreements.
No-touch Self-Service: This approach requires a strong online conversion funnel where visitors are driven to a web site and ultimately converted into paying customers. A combination of clever Inbound Marketing, SOE, Ad campaigns and SEM is often required. It also helps if the product has a viral/team component to it and/or a strong Social reach.
Light Touch Inside Sales: There is a need for some level of human touch such as answering questions or providing support via email or minimally over the phone. In this instance, the customer is already well into the purchase funnel. This approach requires a well-oiled Marketing machine, a simple product and a value proposition that is compelling and easily understood by the customer.
High Touch Inside Sales: In this instance, inside sales reps might need to spend hours on phone calls, web demos etc. with potential clients to acquire them. In the highest touch model, Sales Engineers and Lead Development representatives are also engaged in the sales process. Rapid disruptions in information technology and evolving customer purchase habits make this model very attractive for SaaS Enterprise Sales as reps can close deals in the hundreds of thousands of dollars without a need for costly field-visits.
Field Sales: Ben Horowitz has a great blog post on the factors that affect sales complexity when it comes to much larger companies. While Field Sales reps are increasingly spending more time working as High Touch Inside Sales reps (for reasons highlighted above), multiple on-site visits, involving several Sales Engineering resources and lengthy proof-of-concept implementations are sometimes necessary. In this instance the CAC and LTV metrics should be watched even more closely. Keeping the CAC low (e.g. by hiring local territory reps or limiting on-site visits unless absolutely necessary) and LTV high (e.g. closing deals in the high hundreds of thousands or even millions) are critical for the viability of the model.
Relationship between CAC and Sales Complexity
While it is easy to understand why increased sales complexity drives up Customer Acquisition Cost, what is less easy to anticipate is that the relationship between the two is typically exponential rather than linear.
As we move between sales models (i.e. from freemium, to light touch, to inside sales etc.) the cost of acquiring a typical customer jumps about 10x:
It should be noted that different types of SaaS companies will have different cost factors depending on the solutions and services they offer so 10x is a guideline rather than the norm. At HootSuite for example, where we deploy all three Go-To-Market models, we have experimented with multiple ways to optimize conversion rates and shorten the sales cycle which can drive down CAC for the respective sales models — I would like to explore this in more detail in a later post.
- Gaining a clear understanding of Sales Complexity for a given SaaS business model is key to its long term viability.
- SaaS businesses should constantly strive to reduce Sales Complexity in order to improve margins.
- High sales complexity, while often less favored in SaaS, can be viable provided the order values are high enough to cover CAC. Conversely, high sales complexity will drive a SaaS business to the graveyard if customers are not charged (or willing to pay) enough to cover CAC.
- It all starts with a breakthrough product or service customers are willing to pay for. No clever engineering of Sales Complexity or Go-To-Market model is going to help if there is no Product/Market fit.