Yesterday, we found a relationship between the sales costs of public SaaS companies and their profitability. The first part of sales is understanding the sales strategy. Sales strategies are relevant for every business including mobile apps companies monetizing through in app payments, advertising companies and software-as-a-service companies. At the end of the day, all these companies sell a product.
There are three common kinds of sales strategies that most startups use: freemium, inside sales, and direct sales. Here’s a diagram of the typical relationship between average contract value/customer spend and cost of customer acquisition (which is the cost of sales figures we analyzed yesterday).
- An effective distribution channel doesn’t exist: this is true for those businesses targeting the small and medium business software market or…
- Incubment or monopolistic competition is driving up customer acquisition costs: LogMeIn faced Microsoft, WebEx and Citrix and won spending 1% their competitors’ marketing budgets.
- Variable cost is low: the cost of servicing each new free customer is small and giving away the product is key to quickly building up a large installed base.
You should expect conversion rates of between 2 to 4% of users to pay for products. Best in class companies can reach 8 to 10%, but those are incredibly rare.
Freemium companies often build Inside Sales teams as their company progresses. An Inside Sales team harvests prequalified leads and attempts to convert them to paying customers. Quantitative marketers are very helpful in filling the lead funnels for Inside Sales team and they should be hired at roughly the same time as you begin to scale your inside sales team.
Where do these leads come from? All kinds of places. Freemium customers identified through customer base segmentation, paid customer acquisition through lead generation, distribution deals and so on.
- Making Inside Sales effective is a challenge but SolarWinds, one of the most profitable companies, shows the way. Their sales process looks like this:
- Pick a narrow target customer and sell exclusively to them at the beginning
- If you get a call from a customer outside your demo, don’t return it. Remember, you’re in the business of high velocity sales. The product should sell itself.
- Focus on businesses who are already educated: if anything delays a sales cycle it’s customer education. Find businesses exposed to similar products or who are savvy in the space. Let them educate your future customers by word of mouth and give them channels to do so.
- Productize your offering: no custom anything, only cookie cutter. Take it or leave it.
Conversion rates for prequalified customers can range from 25 to 40%, if you have an effective, standardized sales team. An inside sales rep should cost about $50 to $60k per year.
Outside or Direct Sales
This last category is the quota carrying salesman going door-to-door. The keys to building a great direct sales team is to first start with a great sales manager. Sales managers tend to be former salespeople who can hire, manage and motivate a sales team that will work for them. The sales manager should have some experience selling, and ideally should still be willing to sell the product at the beginning of their term as they build out the team.
Hiring a great salesperson is a challenge for most founders because salespeople’s skills ets tend to be much different than founders’. Look for advice and help from salespeople you know about interviewing and evaluating.
Direct sales teams effectiveness and conversion rates can be 25% or more, but typically, the sales cycles for these high priced products is much longer. Expect to pay a sales person a hefty compensation package, typically 50% salary and 50% commission.
Sales strategies should be closely aligned to your product and your market. I’ll be writing about market sizing and market segmentation next week and how conclusions from those analyses should tie into your go-to-market strategy and sales strategy.