Archives for: August 2007

08/24/07

08:18:44 am, Categories: Entrepreneurship, Sales & Marketing  

I had a moment of clarity a couple of days ago on how a start-up should think about positioning its products & services in the market to achieve the most traction. I will go into this in a bit more detail when I pen the SalesQB Diary for 2007. But even in general terms, there is a key lesson to be learnt, I think.

Take a look at how SalesForce.com evolved. It focused on providing CRM / SFA functionality to SMBs as a simple, one-size-fits-all, on-line service at a low monthly rate. Compare this to the huge, highly customized CRM implementations that larger enterprises went through at 7, 8 and 9 figure tabs. But the key point is that CRM in larger enterprises was an established phenomenon before Salesforce.com could do what it did. Yes, Salesforce.com had to invest a huge amount in marketing in its first year ($25M, according to their own financials) before it could gain traction, but that was to convince the market about the viability of the Software as a Service (SaaS) model, not about the value of CRM.

Think about other major product & service categories in the high-tech space, such as websites, Internet connectivity, network equipment and enterprise applications, and you will notice that they first gained traction in larger enterprises and then made it to mid-sized and smaller companies. You will also notice that high-tech vendors use progressively lower cost sales & delivery models as they move to the mid-sized and smaller market segments. And the numbers justify this approach. Deals in larger enterprise customers tend to be in the 6 – 9 figure range, those in mid-market customers tend to be in 4 – 7 figure range while smaller customers would be hard-pressed to justify any deals larger than $10K. This is why sales to enterprise customers are made through field sales reps, those to mid-market customers are done through a combination of field & inside sales reps and sales to smaller customers are garnered primarily through marketing & small doses of inside sales.

So, what is the point? My theory is that products & services that start of as being “discretionary” have the best shot of gaining traction with larger, enterprise customers. Once there is media attention in this space and industry / financial analysts start tracking it, then the mid-market becomes a viable customer segment. It is only after the above two precedents that the product or service category can be sold to small business customers profitably.

The catch word in the above para is “discretionary”. If a small business customer absolutely has to do something, such as tracking its financials and paying taxes, then associated products & services could well be directed at the small business market segment first. An example being QuickBooks. And if a product or service is developed only for small business customers, such as dentists or veterinarians, then obviously my theory doesn’t apply. But, if a product or service starts of being discretionary (not a “must-have”), then the ease with which traction can be accomplished in its formative years decreases as you go from large to mid-sized to small customers. And the reasons are obvious. Small business customers tend to be risk-averse and not have cash to burn. They need to be strongly persuaded about the value of a discretionary product or service, which is very hard to do with just marketing and inside sales. Field sales reps, meeting with executive decision markers in person at larger enterprises, tend to be a good bit more persuasive.

The situation is not completely black or white though. Sales cycles in larger enterprises tend be long, anywhere from a few months to a year or two. Sales cycles in small business tend to be less than 2 – 3 months, if not smaller. Field sales reps are also a lot more expensive to hire than inside sales reps. So, the sales overheads for enterprise sales are a good bit higher. Compare this to spinning your wheels with smaller customers, when that market is not yet ready for reaping, and achieving sub-par sales performance.

So, as an entrepreneur, think about what you sell, how ready the three key markets are (enterprise, mid-market and small), what your average deal sizes will be, how long you expect your sales cycles to be, what your sales overheads will be, whether revenue generation is more important than profitability, when you expect to raise external working capital, what the VCs / lenders you approach will look for in a company (revenue, profitability, number of customers) such as yours and then trust your gut.

Sampath

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