Author Archive

Startup Business Growing Pains | Staying Focused

startup business focus There are a few good things in life that you can never have too much of, and at a startup business that good thing is growth. However, we all know there is always a price to pay for overindulgence. To my way of thinking, the key to being a glutton is to balance your consumption with an equal amount of discipline. If you eat a lot, you gotta exercise a lot. This is the first post in a series that will explore some of the more common startup business growing pains and present strategies and tactics to manage them for maximum success.

A startup business is all about capitalizing on opportunity. When you’re growing, opportunities abound. The challenge is to focus on the right opportunities without getting distracted by all those other shiny objects. The challenge of focus pervades the entire startup business from the big strategic choices of product development and org design to everyday decision making and productivity. Moreover, focus must be balanced with flexibility, because startup businesses generally compete in rapidly evolving markets. Too narrow a focus for too long a time can be just as deadly as no focus at all.

Here are nine battle-tested tips for keeping your startup business focused and on the path to success.

Startup Business Focus Tip #1: Choose to Do a Few Things Very Well

It is the very heart of focus that you should strive to be great at few things, not mediocre at many. This principle is universal, applying to your core competitive advantage, your high level strategic goals, your tactical plans, your everyday priorities and your enduring cultural values. Complexity is the enemy of startup business success. The ability to crystallize the chaos into clear, simple goals and action plans is the essence of focus.

Startup Business Focus Tip #2: Align the Organization to Strategic Goals

There are many complex, competing concerns that go into designing an effective organization for a startup business: markets, products, processes, functions, geography, skill sets, and even personalities. But, the number one criteria is executive accountability for strategic goals.

startup business strategic alignment

Startup organizations with strong strategic alignment ensure accountability and focus.
Organizations with poor strategic alignment require lots of coordination on the part of the CEO
and encourage bureaucracy, finger-pointing and politics.

Those few things you choose to do at the highest level must get done cleanly and quickly, without excuses. There is no forgiveness for bureaucracy or finger-pointing in a startup business; you simply fail. Look at your strategic goals and look at your key executives and ask yourself this simple question: is there a single executive accountable for each strategic goal AND is that executive responsible for the essential resources required to deliver it? Save the competing organizational concerns for the next level down.

Startup Business Focus Tip #3: Over-communicate the Strategy

Startup business executives spend hours and hours talking strategy. They think about it on the way to work, in the shower, and when they should be listening to their spouses. Unfortunately, it is easy to forget that most of your team doesn’t. Most of your team members don’t even have the whole picture of what’s going on, because their job’s are only pieces of the larger puzzle. It’s very difficult to over-communicate your strategy, goals and plans and very easy to under-communicate them. Whatever your method, whatever your culture, you should over-communicate the larger goals. Without the big picture, your team won’t know a bad decision from a good one or a distraction from a real problem. A pervasive understanding of your strategy creates leverage, because the more your team understands the larger goals, the more independent and self-motivated they will be.

Startup Business Focus Tip #4: Look for Everyday Reinforcements

Any good trainer will tell you that classroom learning doesn’t stick without practice. If you want your team to stay focused on an everyday basis and recognize distractions that aren’t worth their time, then look for opportunities to point out how everyday activities and progress relate to the larger strategy. When you congratulate your team for launching that new website, remind them how important it is for demand generation and making your revenue goals. When you fix a record number of bugs, remind your team how it contributes to reducing churn.

Startup Business Focus Tip #5: Make Simple, Concrete Plans

Keep your plans simple. Plan only things you will do and avoid over-planning things you won’t do. Wasting time planning things you simply don’t have the bandwidth to get done is a waste of time, but more importantly it creates distractions. Keep your plans concrete. While your strategy may be lofty and difficult to tie to anything short of revenue or costs, your plans should be concrete with very specific deliverables that can be clearly marked done or not done to facilitate execution.

Startup Business Focus Tip #6: Link Plans to Strategic Goals

It’s common to create high level strategic goals at the top, then create plans and budgets from the bottom up, even if it is the CEO personally creating all three. Bottom up plans tend to be framed in terms of activities, e.g., upgrade product UI, create webinar, expand ppc campaign, etc. and budgets tend to be framed in terms of expense line items, e.g., web development, travel, advertising, etc., neither of which are clearly tied to your strategic goals. Make an effort to tie each concrete deliverable in your plan to at least one strategic goal. Separate out deliverables that do not produce immediate results, but are preparatory, infrastructure or long term in nature, and look for the right balance between immediate progress toward strategic goals and longer term investments.

Startup Business Focus Tip #7: Concentrate on Bottlenecks

These tips are all great in theory, but achieving them in practice is incredibly difficult for every startup business given the natural imbalance between the huge number of opportunities and problems on the one hand and the excruciatingly limited number of resources on the other. You will not do them all well. So, how do you decide what to do? Concentrate on the bottlenecks.

startup business focus bottlnecks

Improvements in areas that are not bottlenecks do not impact final results
anymore than enlarging the bulb of an hourglass or adding more sand increases the flow.

It’s a waste of time to create requirements for a product enhancement that engineering has no time to build. It’s a waste of time to reduce sales cycles when there aren’t enough leads for reps to make quota. Look across your startup business and continually ask yourself this question: what are the primary constraints to achieving our strategic goals? Then, concentrate on removing those bottlenecks like a laser beam to the exclusion of all those other nagging opportunities and problems.

Startup Business Focus Tip #8: Measure Progress against Strategic Goals

Startups are busy places. Good startups exhibit a constant sense of urgency to get things done: to get anything and everything done. Hence the focus growing pain. Aligning your organization and plans against goals is only half the battle, because you must test theory against reality. Are your plans actually achieving your strategic goals? Are your sales reps achieving their quotas? Are your marketing campaigns producing the expected number of leads? Are your new products generating the expected revenue? If you don’t measure it, you won’t know. If you don’t know, you can’t adapt your plan to address the problems. On the flip-side, if you don’t plan to do anything about it, then it’s a waste of time to measure it. Concentrate your measures on your strategic goals and the bottlenecks that are keeping you from achieving them.

Startup Business Focus Tip #9: Filter Distractions, Don’t Create Them

One of the biggest mistakes executives make is to communicate every request and great new idea they have to their subordinates without context or priority. Then of course, the politically savvy subordinate moves the boss’s request straight to the top of the list, regardless of its relative impact on achieving strategic goals or removing bottlenecks. Never underestimate your own ability to create distractions by inserting non-critical projects, when you may be more effective encouraging your staff to focus more exclusively on the most critical ones. When you make a request or share an idea with your staff, be sure to consider the context. Is it more important than current projects? Is it urgent? Or is it just your latest good, but not critical idea?

Keeping a rapidly growing startup business on track in a changing market is hard work. What tips, tricks and words of wisdom have worked for you?
Cheers,
JY

Cloudburst Expected on Wall Street | Xignite Raises $10M

xignite market data cloudWhen not moonlighting at Chaotic Flow and Cloud Ave, I’ve been toiling away at Xignite for the better part of the last three years, and I’m happy to announce that the company has successfully closed $10 million in B round funding. The round was led by of Starvest Partners‘ Deborah Farrington who is #77 on the Forbes Midas List and was the lead VC for Netsuite, and John L. “Launny” Steffens, former vice chairman of Merrill Lynch. Previous investors Altos Ventures, Startup Capital Ventures and Peter Caswell, CEO of Netbase and former CEO of Advent Software, also participated.

While most of the public Silicon Valley buzz in recent years has gone to B2C startups like Facebook, Twitter, Zynga, and the like, I believe we’re at the beginning of a B2B renaissance led by a prominent list of rapidly growing cloud plays like Xignite. B2C startups tend to happen very fast or not at all, and consumers will often forgive their growing pains, even if they’re posting the fail whale on a daily basis. Not so in B2B. B2B startups spend their A rounds very carefully to make sure their offerings are rock solid before they scale. When I joined back in 2008, Xignite had about 150 clients. Today it has more than 900 customers in 47 countries.

The Financial Market Data Cloud

Market data is the life blood of the financial markets and is essential to every financial technology from algorithmic trading to iPad portfolio apps. Unfortunately, every year the financial markets create more of it. A lot more. In fact, the amount of data spewed off by financial markets has increased 10,000% in just the last 5 years. Plus, redistributing that data globally is getting harder with the increasing number of applications, particularly mobile apps. Xignite relieves that burden by pushing all that big data and associated infrastructure to to the cloud. The Xignite market data cloud platform transforms financial market data infrastructure into a utility just like electricity, allowing companies to build financial applications on top of enterprise-class cloud APIs. No fail whale allowed!!

Democratization of Financial Market Data

Before the cloud, only the largest firms could afford enterprise-class applications. Today, anyone can sign up for Salesforce.com and get the same application used by Dell, Prudential Financial and Sprint. Just as SaaS democratizes access to applications, the Xignite platform democratizes access to financial market data. This isn’t just great for the little guys. Big banks, hedge funds and money managers can significantly lower their costs by eliminating on-premise infrastructure. Exchanges and trading venues that put their market data onto the Xignite private-label cloud platform, such as NASDAQ OMX and CME Group, achieve immediate, global distribution through new online channels and superior market transparency as demanded by many of the new regulations resulting from the recent financial crisis.

The funding will be invested in sales and marketing to continue Xignite’s strong growth trajectory and to accelerate the addition of more data and more private label partners onto the Xignite platform. In particular, the company will be opening offices in New York City and Chicago and will be significantly expanding it’s Silicon Valley and China operations. So, Xignite is hiring!!

What is SaaS? | Software-as-a-Service Myopia

It seems a little late in the game for me to be asking a question like “What is SaaS?” But, I’ve always harbored a few embarrassing little secrets on the subject and I think it’s time I came clean.

There is a classic Harvard Business School case study called Marketing Myopia by Theodore Levitt that is familiar to every MBA student since the 60′s–the moral of which is not to define your business too narrowly lest you become obsolete. Well I don’t think software is going away any time soon and neither is service, but what about software-as-a-service? Between the rise of the cloud and the fall of the browser, SaaS seems so passe’.

What is SaaS?

Is SaaS software delivered as a service? As in renting, not owning the software. Or, is SaaS a service layered over software? As in a complete solution, not a tool. SaaS is both.

what is saas

Software delivered as a service means on-demand. It means eliminating the feed and caring of the software itself through automation. Notice that I say eliminating, not obscuring or outsourcing. Automated deployment. Automated maintenance. The software simply arrives and runs as needed in a fashion that is all but invisible to the customer, so the customer realizes the benefit of the service without incurring the headaches of managing the technology.

Service layered over software means the software solves a problem without creating new problems of its own. Not only is the customer freed from managing the technology, but the customer is freed from understanding the technology. A service doesn’t require the customer to master a bunch of technical mumbo jumbo in order to use it.

Software-as-a-Service Myopia

One of my embarrassing little SaaS secrets is that I’ve always harbored a fondness for desktop anti-virus and security software. It doesn’t run in a browser. It has a huge client footprint. Yet the best desktop security software I’ve used takes care of itself without any help from me. It updates the virus definitions everyday. It updates the client. It cleans my computer in the background. It maintains a firewall and figures out what applications should get through. And, it keeps intruders from co-opting its own processes. Yes, I have to click OK here and there, maybe turn it off to install OTHER software, but by and large it runs and runs without interruption. I have always viewed it as SaaS. It certainly requires less deployment, maintenance and technical know-how than a lot of enterprise SaaS solutions.

Now along come mobile apps. Yes, you have to click OK once in a while, but this is largely about permission and privacy. The seamless-ness of the process is what counts. The more service I get and the less software I have to understand, the more SaaSy it is.

SaaS is software transformed into service, regardless of the technical architecture.

Whether it comes through a browser, a smart phone, or a tablet does not matter as long as the software remains invisible and the service is valuable. Restricting the definition of SaaS to software applications delivered through a Web browser is marketing myopia. As Internet bandwidth expands and mobile clients evolve, the distinction between client and server will continue to blur. The software flows effortlessly throughout the network. What matters is the service it delivers.

SaaS succeeds when software IS service.

B2B Blog Strategy | Ten Be’s of The Best B2B Blogs

Blogging is one of the easiest, cheapest and most effective ways to engage the New Breed of B2B Buyer, yet so many B2B blogs miss the mark. Here are ten “be’s” of the best b2b blogs. It isn’t the first top ten list of best B2B blog secrets, and no doubt it will not be the last. But, it is mine and it’s what I personally strive for Chaotic Flow to be.

B2B Blog Be #1 : Be Interesting

b2b blog interestingYou would think that making your B2B blog interesting would go without saying…well, I’m saying it. Let’s face it, there is a lot of crap out there on the Internet. Don’t be that. Whether you are creating a community blog, a corporate blog, a support blog, or your own professional B2B blog, you are in the publishing business and all good publishing basics apply. You must understand your readers and you must connect with their interests. Not casually, but completely. I considered lots of runner-up best B2B blog be’s like “be funny”, “be visual”, “be concise”, etc., all good advice for the right B2B blog audience, but there is no single B2B blog tactic that will connect with every audience. You must know your audience and publish content that is inherently interesting to them.

B2B Blog Be #2 : Be Prolific

b2b blog prolificMaintaining a steady stream of interesting content is essential to building and maintaining readership. This blogging fundamental can be approached from many angles, but the conclusion is always the same: a successful B2B blog requires prolific authors. Building readership requires a strong Internet presence. How many Web pages exist on the Internet? What fraction of that is your B2B blog? How many keywords are your potential B2B blog readers searching? What is your keyword coverage? The chance of finding your B2B blog online is directly proportionate to your content-share. Once you have readers, you want to keep them. Publish sporadically and your readers get bored and wander off. Publish regularly and your B2B blog becomes part of their routine. No matter how you come at it, even the best B2B blogs must publish or perish.

B2B Blog Be #3 : Be True

b2b blog trueAs in “to thine own self be true.” Creating a great B2B blog is hard. It requires creativity, energy and persistence. If you can’t align your own personal interests and motivations with those of your B2B blog audience, you will fail. To create a great B2B blog, you have to blog about something you know and love or you won’t blog enough and what you do blog won’t be interesting, because your heart won’t be in it. If you need to create a B2B blog for a particular audience and you don’t know and love the topic, then find someone who does. Conversely, if you are creating your own professional B2B blog, write about what you personally know and love. Your right audience, big or small, will gravitate to you.

B2B Blog Be #4 : Be Useful

b2b blog usefulWhereas a great b2c blog might be useful, a great B2B blog MUST be useful. This is by definition. If the only value of your B2B blog is entertainment, then by definition you are only appealing to the personal interests of the reader, not the business interests. Appealing to business interests requires helping your B2B blog reader solve real business problems. That means being useful. The single greatest failure of most B2B corporate blogs is that they simply are not useful. They focus on the company instead of the customer. They go on about products instead of solving problems. They are marketing brochures masquerading as blogs.

B2B Blog Be #5 : Be Original

b2b blog originalThe new breed of B2B buyer is busy, impatient, impulsive and awash in a sea of online information competing for her attention. The best B2B blogs demand that attention by standing out from the crowd with original content. While it is smart to surround your B2B blog with lots of complementary feeds, tweets and friends to round things out, you must maintain a bright shiny kernel of creativity at the core or your site is just a mashup, not a blog. Moreover, if you want other B2B blogs to pick up your syndicated content to complement their sites, then you need to offer something that they can’t get anywhere else: expertise, insider information, humor, whatever. You gotta have schtick.

B2B Blog Be #6 : Be Consistent

b2b blog consistentWhether you know it or not, you are building a brand, and people like their brands consistent. If your B2B blog is all over the map in subject matter, content quality, and publishing frequency, then your readers will get frustrated. If your readers can’t figure it out, then they won’t remember your blog. If your readers can’t rely on it, then they won’t return to your blog. And, if your readers don’t remember and return to your B2B blog, then they certainly won’t share it with their colleagues.

B2B Blog Be #7 : Be Clear

b2b blog clearYou might be The Most Interesting Man in the World, but if you can’t write, you can’t blog. Stick to selling beer. Yes, your B2B blog should show some personality. Yes, your B2B blog should be written in plain language. Yes, your B2B blog doesn’t require perfect spelling or grammar. But, there are limits. Your blog posts can be long or short. Your blog posts can be text or video. But, your blog posts cannot be difficult to read. They must be clear. Poor focus, poor writing, and poor formatting all add up to a poor use of the busy B2B buyer’s time.

B2B Blog Be #8 : Be Found

b2b blog foundIf I did my job right, some of you are first time visitors to Chaotic Flow who were looking for advice on how to create a great B2B blog. Welcome! I hope you find this post interesting, useful and clear. However you got here, my guess is you clicked on a link: a link from a B2B-related search, a link from a B2B tweet, a link from B2B discussion group, a link from another B2B blog, or a link from an email sent by a B2B colleague. Well it didn’t get there by accident. This post is SEO-optimized up the B2B wazzu. And, I used every trick in the book to make sure this blog post was syndicated and shared as widely as possible. Creating interesting, original and useful content is only half the battle. A great B2B blog must get its content in front of its intended audience and that means mastering the tools and techniques for being found on the Internet.

B2B Blog Be #9 – Be Sticky

b2b blog stickyYour new B2B blog reader is so excited, because she just found the best B2B blog ever. It’s interesting, useful, original and clearly written for a change. Unfortunately, she is out of there after reading one post never to return. Why? She couldn’t search. She couldn’t comment. She couldn’t share. She couldn’t subscribe. Couldn’t subscribe??!!! The RSS button is huge! Well…she likes to subscribe by email, so she bounced. She’s the impatient new breed of B2B buyer and she demands efficient self-service. Being sticky is about maximizing the interaction between your B2B blog content and your B2B blog reader. If you don’t give her the tools she prefers, she won’t stick around.

B2B Blog Be #10 : Be Social

b2b blog socialA great B2B blog is a focal point of a conversation that extends out to the rest of the Internet and beyond. You’ve learned all the tactics: encourage comments, comment on other popular B2B blogs, promote posts on social networks, publish a newsletter, create your own social group, build a badge for back-links, conduct surveys and reviews, make it easy for readers to like, retweet, plus and share, and so forth. However, it’s easy to lose yourself in this bewildering array of social media tactics and actually forget to be social. Being social means expanding the conversation beyond the brilliant insight of your latest B2B blog post to include your readers, thereby increasing the value and richness of the discussion while spreading the word to potential new subscribers. The best B2B blogs are reflections of their authors and the best B2B blog authors are socially accessible. They reply to emails. They don’t censor comments. They continue the conversation offline in coffee shops, meetups, panels, and presentations. Great B2B blog authors socialize with their readers.

Customer Self-Service | The Holy Grail of SaaS

self-service holy grailOne hundred percent customer self-service is the holy grail of SaaS. Everyone looks for it, but it is never found. Even if your product is simple enough to provide complete self-service purchase, you are unlikely to get away with complete self-service support, because you can’t hang unhappy customer’s out to dry or you will ruin your reputation. Nonetheless, the divine power of the Internet to help customers help themselves combined with the promised land of lower customer acquisition cost and lower cost of service will always enrapture the true SaaS believers and hasten them on their quest.

SaaS Top Ten Do #3 : Accelerate Organic Growth depicts the SaaS self-service holy grail as revenue generation with zero marginal costs, because your customers can find, try, buy and use your product even if no one shows up for work. But just because your customers can, doesn’t mean they will. It’s very hard to build a product that enables one hundred percent customer self-service. In some cases it is impossible. Imagine your frustration when you finally achieve it and those pesky customers simply refuse to do it.

The Self-Service Maturity Model

The closing post of my recent New Breed of B2B Buyer series introduced the concept of the self-service limit in B2B sales. The self-service limit is that point where a customer’s desire for instant gratification is thwarted by the complexity of purchasing and using your product. Purchase complexity comes in two flavors: informational and emotional. Informational complexity arises when the buyer requires education to consummate the purchase. Emotional complexity arises when the purchase entails a personal risk to the buyer. When either or both of these purchase barriers becomes high enough, the buyer simply will not make the purchase without the aid of a salesperson.

Complexity, however, is a subjective measure that is different for every single customer. In particular, and this is the point of this post, it is very different for the novice and the experienced buyer. An experienced buyer knows your company and trusts your brand. An experienced buyer knows your product and fully understands both its value and its use. As your customer base increases, so does the percentage of experienced buyers in your market, your knowledge share.

saas self-service

The percentage of experienced buyers in the market, knowledge share,
increases as a SaaS business matures.
Experienced buyers that trust and understand your brand,
are not only capable of one hundred percent self-service,
they usually prefer it, bringing you closer to this holy grail of SaaS.

Increasing knowledge share reduces both the emotional and the informational complexity of buying your product. A strong brand reputation reduces purchase risk and alleviates buyer fear, eliminating the need to be reassured by a salesperson that your company is the real thing. Whereas deep comprehension of your brand gained through experience, eliminates the need to be informed by a salesperson about what your product can do, how to buy it, and how to use it. Consider the tens of thousands of dollars the experienced Google AdWords customer spends today without speaking to a salesperson as compared to when the service first launched. Experienced buyers are not only capable of one hundred percent self-service, they usually prefer it. Therefore, the greater your knowledge share, the closer you come to the SaaS holy grail of complete customer self-service.

Mindshare, Market Share and Knowledge Share Drive Organic Growth

While most SaaS executives understand the basic marketing concept of brand awareness and are all about getting out the buzz (mindshare), far fewer understand the importance of brand comprehension and getting out the knowledge (knowledge share). In the fight for market share, it is strategically important to build knowledge share as well as mindshare through deep market education and engagement with your customer community. Otherwise, you may find that everyone has heard of you, but no one is buying from you.

Many SaaS startups compete directly with enterprise software versions of the same basic product. In the beginning, they service SMB segments that their enterprise software competitors cannot reach. But as they mature, they compete more and more for the replacement market held by the incumbents. Prospects know your competitor’s product at a very deep level, because they have been buying it and using it for years. They don’t know yours. This gap in knowledge share creates a switching cost that favors the status quo. It’s just a lot easier to keep doing things the way you know how than to learn something new. Without a true understanding of your product at an experiential level, promises of rapid deployment, simplicity of use, easy maintenance and low TCO are simply that: promises.

Mindshare, market share, and knowledge share comprise a positive feedback loop that drives organic growth. The greater your mind-share, the more prospects come to you of their own accord and become customers, increasing your market share. The greater your market-share, the more experienced buyers, increasing your knowledge share. The greater your knowledge share, the more your experienced buyers share their trust and knowledge with your future prospects, enabling customer self-service and driving organic growth.

Much thanks to Peter Caswell, a board director at Xignite and CEO of Netbase, for introducing me to the concept of knowledge share, which I have shamelessly bent to my own designs.

B2B Sales | The New Breed of B2B Buyer Series Part 3

B2B sales has been transformed by the application of many B2C Internet marketing techniques, but there are limits to the Internet where I think B2C can learn something from B2B. For example, with so many cool, self -service real estate websites like Zillow, Trulia, and Redfin available online, why is it that the vast majority of people still prefer to use local real estate brokers to buy and sell their homes? Why not just do it yourself?

Buying a home is complicated. All real estate brokers are required to pass professional certifications, and good real estate brokers spend years honing their craft in the course of many transactions in their local markets. The Internet can serve up all the information you want, but it won’t make you an expert. Plus, buying a home is an emotional roller coaster ride. For the first time home buyer, it can be downright scary. You can get all the disclosures, appraisals, comps and inspections you desire online, but the Internet will not hold your hand and tell you everything will turn out OK in the end.

b2b sales fear

This is the third post in a series that discusses the new breed of B2B buyer that has evolved in adaptation to the Internet and explores new rules of engagement that mirror those behaviors to maximize B2B sales and marketing effectiveness. The first two posts in this series explored customer self-service and B2B marketing. In this third and final post we turn our attention to B2B sales.

The Self-Service Limit in B2B Sales

A customer’s desire for sales engagement increases in direct proportion to purchase complexity. Thus, purchase complexity is a key element in identifying the right B2B sales model for your business. Simple purchases can be consummated with 100% customer self service, whereas more complex purchases require greater sales engagement as depicted in the image below adapted from the post Three SaaS Sales Models.

b2b sales models

Price and complexity define a strategic spectrum of B2B sales approaches
that gravitate strongly toward three distinct B2B sales models:
self-service, transactional and strategic.

Purchase complexity comes in two flavors: informational and emotional, both of which are clearly present in our earlier home buying example. Informational complexity arises when the buyer requires education to consummate the purchase. Emotional complexity arises when the purchase entails a personal risk to the buyer. When either or both of these purchase barriers becomes high enough, the buyer simply will not make the purchase without the aid of a salesperson. In response, successful B2B sales reps adopt sales behaviors that complement the buyer’s purchase behavior, offering expertise and trust in direct proportion to the respective amounts of uncertainty and fear felt by the buyer.

b2b sales behaviors

When a purchase requires extensive knowledge and risk,
the B2B buyer will look to the B2B sales rep to reduce the complexity.
Successful B2B sales reps adopt behaviors that complement the buyer’s behavior,
offering expertise and trust in direct proportion to the uncertainty and fear
arising from the the respective informational and emotional needs of the buyer.

The B2B Sales Arms Race – The New Informed B2B Buyer

The new breed of B2B buyer is online and impatient. When she engages with a B2B sales rep, she’s done her research, but is stuck and doesn’t want to waste the time figuring out how to get unstuck. She doesn’t get something about your website, your product, your pricing or your company, so she sends an email or makes a call to sales. She is well informed, but the purchase complexity has worn out her patience. The worst thing a B2B sales rep can do at this point is wear her patience even thinner.

The new B2B buyer and B2B sales rep are engaged in an information arms race. Having followed the first two new rules engagement, you’ve published deep and wide and enabled efficient self-service. You’ve given in to the new breed of B2B buyer’s hunger for knowledge and speed, and in the process you’ve exacerbated the B2B sales rep’s challenge by eradicating the B2B sales rep’s information advantage. In fact, when the truly savvy B2B buyer knows more than your newbie B2B sales rep, you have a recipe for disaster. Today’s B2B sales rep must quickly assess the purchase knowledge and needs of the new B2B buyer and then lead, follow or get out of the way.

New B2B Buyer Rule of Engagement #5 – Consultative Selling

Consultative selling is hardly new. What is new is that the B2B sales rep that fails to step up to the information arms race runs the risk of becoming at best irritating and at worst irrelevant. It is difficult, if not impossible for a sales rep to assess a buyer’s knowledge and needs if the buyer knows more than the rep about the purchase. There are few things more irritating to the new B2B buyer than having to listen to a script explaining something she already knows. Or worse, having to explain the product itself to the newbie B2B sales rep with insufficient training and experience.

If there are inherent complexities to purchasing your product, then your B2B sales rep must master them. The B2B sales rep can’t win the B2B sales information arms race simply by memorizing the website content, because the new breed of B2B buyer is already there. If all your B2B sales reps does is usher buyers around your website and take orders, then you are either leaving money on the table or your website isn’t simple enough, because your business should be 100% self-service. The new breed of B2B buyer expects fast answers to questions she can’t answer for herself. Therefore, today’s B2B sales reps must be purchase experts that are skilled at consultative selling in order to adapt their expertise quickly and efficiently to the needs of the new B2B buyer.

B2B Sales is Risky Business – The New B2B Buyer is Only Human

While the Internet has wrought dramatic adaptations in the new breed of B2B buyer, its influence is minuscule compared to the millions of years of evolution that have preceded it. In the end, the new breed of B2B buyer is still an emotional creature that despite great attempts to cover it up in the form of ROI analyses, vendor comparison matrices, technical evaluations and the like is often driven by fear. Fear of the unknown. Fear of public opinion. Fear of failure. What is portrayed as rational decision making and risk reduction is often better characterized as rationalization and CYA. There is no shame in this. This is who we are. We are not machines and it is critically important to us to feel good about the decisions we make. The savvy B2B sales rep understands this.

New B2B Buyer Rule of Engagement #6 – Trust

Why is it that throughout history salespeople have had to deal with such bad raps? Because it’s assumed that they know things buyers don’t and the more they lie, the more money they make. Things have changed. This is the era of the new breed of B2B buyer. The stereotypical slick salesman is truly dead and the Internet killed him. Today’s B2B sales reps realize that open information and long term relationships require building trust, not breaking it. And while the marketing department can publish all the case studies, videotape all the customer testimonials, and get all the online recommendations it wants, when the stakes are high and the fear is real, there is no substitute for the B2B sales rep’s personal relationship with the buyer.

Developing trust with the new breed of B2B buyer is not easy, because most communication is virtual and terse. Emails must be crafted with care and skill. While the pre-millenium B2B sales rep needed to be a smooth talker, today’s B2B sales rep must be a smooth writer as well. Moreover, today’s B2B sales rep must actively cultivate opportunities to expand and personalize the relationship with the new B2B buyer. Although the days of the traveling B2B sales rep are over for all but the most expensive purchases, it is essential not to fall into the trap of hiding behind email. When it comes to building rapport and trust, chat is better than email, phone is better than chat, video is better than phone and face-to-face it better than video. When your business depends on trust, you must provide the technologies and opportunities for your B2B sales reps to engage with your new B2B buyers at a personal level. Because sometimes, they just need someone to talk to.

Note: I’d like to thank the Sales Leadership Council at ExecWorld for their conversations and contributions to this post.

The Blurry B2B Buying Process | New Breed of B2B Buyer #2

fuzzy funnel b2b buying process

This is the second blog post in a series that discusses the new breed of B2B buyer that has evolved in adaptation to the Internet and explores new rules of engagement that mirror those behaviors to maximize B2B sales and marketing effectiveness. The first post in this series described the behavioral traits that differentiate the new species of B2B buyer from its pre-millennium ancestor and explained how to align with the new B2B buyer’s expectations of independence and instant online gratification through extensive content publishing and efficient self-service. This second post describes how the Internet has blurred the B2B buying process and suggests ways to adapt B2B sales and marketing processes to increase engagement and influence.

The New Elusive B2B Buyer

In the pre-millennium B2B buying process, the salesperson was the gatekeeper of information. That meant that the pre-millennium B2B buyer had to engage with the salesperson early on and stay engaged throughout every stage of the B2B buying process. A prospect might go dark or a sale might be lost, but a purchase could not move forward without engaging with the salesperson. Not so today. Unfortunately for the B2B salesperson, the new B2B buying process tips the information imbalance in the prospect’s favor. The new breed of B2B buyer can find your product or service, learn about it, evaluate it, see what others think about it, and in many cases try it and buy it, all without engaging with a salesperson.

elusive b2b buyer

The new breed of B2B buyer is independent and elusive,
blurring in and out of focus and engaging directly with sales
only when there is clear value to be gained, not just to get information.

The new elusive B2B buyer spends more time going solo throughout the B2B buying process, blurring in and out of focus and engaging directly with sales only when there is clear value to be gained, not just to get information. This is made doubly complex by the fact that the “B2B buyer” is usually more than one person. Where before the salesperson could corral all the influencers and decision makers into a meeting and orchestrate a linear sales cycle from beginning to end, today’s B2B buying process is organic and diffuse with different stakeholders visiting your website ad hoc, checking your knowledgebase and support forums, calling your sales team for a quick question and then going dark, filing a support ticket on a trial account, discussing your product and company in social forums, and making internal decisions by email with no need to call a face-to-face meeting.

New B2B Buyer Rule of Engagement #3 – Measure, Model and Move

The bad news is that the Internet has made the new B2B buyer more elusive and the new B2B buying process harder to define and control. But, the good news is that the Internet has made the new B2B buying process more transparent. What? Wait a minute. Say that again.

While the new breed of B2B buyer appears more elusive to the B2B salesperson, this is not the case for the B2B marketer. Web browsers have cookies, hyperlinks have tracking codes, and every online interaction is overlaid with meta-data that indicates buyer intent. It’s a trade-off for everyone involved. The new B2B marketer must adapt to the new B2B buyer by developing better measures and models that move the new B2B buyer through the B2B buying process and compensate for the B2B salesperson’s loss of control over the flow of information.

The Marketing Automation Mandate

Marketing automation is one of the fastest growing SaaS categories. However, it isn’t because this technology is somehow cutting-edge (no offense to my SaaS colleagues in marketing automation). It’s core function is to measure, model and move the B2B buyer through the B2B buying process by tracking online activities and transforming that data into knowledge that is acted upon through automation. The underlying technology is not new and the applications could have been built ten years ago. But, they wouldn’t have been as valuable ten years ago.

Marketing automation is taking off because the behavioral traits of the new species of B2B buyer have created both the ability and the need to measure, model and move the B2B buying process through automation. And, the winners in the marketing automation category will be those SaaS companies that leverage SaaS Do #6 Reach Across the Firewall to create a seamless B2B buying process that fully integrates the elusive, external behavior of the new breed of B2B buyer with the internal processes of the new breed of B2B sales and marketing organizations. Marketing automation has gone from nice-to-have to must-have, because it creates real competitive advantage.

New B2B Buying Process Tech Tip

The New Marketing Math

The pre-millennium B2B buying process was a structured sequence of activities jointly managed and negotiated by the B2B buyer and B2B salesperson. And, pre-millennium measures and models reflected that structure. Most every B2B sales and marketing professional is familiar with the sales funnel where the B2B buyer is envisioned as being qualified and converted by the B2B salesperson at each successive stage of the B2B buying process. It is a very deterministic model that assumes a source of the incoming lead and a linear progression from one stage of the B2B buying process to the next until the deal is won or lost. Virtually every salesforce automation package now supports this model.

In the pre-millenium sales funnel model, marketing campaign success or failure is determined by lead volume, cost, conversion and ROI metrics attributed to each lead source. For example, if a successful trade show that cost $20,000 to attend generated 100 leads of which 5 closed for a total of $100,000 in new revenue, then the metrics for the show would be as follows: $200 cost per lead, 5% conversion, and an ROI of 5:1. However, this model assumes that the trade show was the ultimate source of the lead and the post-show B2B buying process consisted of the B2B salesperson skillfully escorting the B2B buyer through the sales funnel to close.

Pre-millennium B2B marketing professionals would create detailed spreadsheets of all their campaigns and rate them according to these metrics. Marketing budgets and allocations would be determined by this analysis. Well, you can throw all that out the window if your prospect is the new breed of B2B buyer, because this prospect’s B2B buying process is anything but linear, deterministic and under the B2B salesperson’s control. And, I defy you to identify anything resembling a lead source or a clean hand-off from marketing to sales.

The Fuzzy Funnel – Correlation vs. Causation

What you can measure in the new B2B buying process, particularly if you have a strong marketing automation system in place, is a long string of buyer attributes, activities and metrics that characterize the new B2B buyer’s random walk to purchase. You will find concentrated bursts of buyer activity, such as quickly browsing half your website, combined with unknown gaps and unexplainable delays. And, you will have a gut feeling that some sequences of buyer activities are more important than others, e.g., making a detailed review of pricing and registering for a free trial vs. checking out the most recent press release and bouncing.

fuzzy funnel b2b buying process

The new marketing math reflects the diffuse and random nature of the new B2B buying process. Movement through the fuzzy funnel comes in fits and starts, forward and backward with different B2B buyer decision makers moving fluidly in and out. True forward progress through the fuzzy funnel is indicated by positive metrics that are highly correlated to winning a deal, e.g., qualified buyer attributes, trial registration, trial usage, lead score, price estimation, formal sales proposal, etc.

The first goal of the new marketing math is to create a statistical model of the fuzzy funnel comprised of metrics that indicate progress through the fuzzy funnel at each stage of the B2B buying process. The second goal then is to use that model to focus marketing creativity and spend on those campaigns that drive activity that correlates strongly to them. Marketing campaigns like a trade show are not modeled as a lead source causing entry into a structured sales funnel managed by a B2B salesperson, but as a driver of buyer activity that correlates to progress through the fuzzy funnel. For example, if free trial is a critical step in the new B2B buyer’s evaluation of your product that correlates strongly to won deals, and 80% of the people who view your weekly webinar sign up for a free trial, then you darn sure want to get more people to watch that webinar. Instead of a deterministic, marketing campaign ROI predicated on the old lead source model, the relevant measure of marketing campaign success in the new marketing math is the correlation between campaign-specific buyer activity and progress through the fuzzy funnel.

The New Impulsive B2B Buyer

The new breed of B2B buyer is more agile than its pre-millennium ancestor. Cheap and easy access to online information about products and services enables flexibility in the new B2B buying process the same way the elimination of setup costs enable flexibility in manufacturing. When the up-front cost of purchase-related information was high, the pre-millennium B2B buyer was forced to orchestrate a rigid, deterministic B2B buying process that ensured the investment required to execute the process itself was not wasted and produced a positive result, i.e., a considered purchase with high ROI. Purchase decisions were made up front–only the vendor was unknown, budgets were established before the buying process began, requirements were collected and communicated, vendors were evaluated in tandem, and a clean vendor selection was made.

The new breed of B2B buyer does not face this constraint. Today, window shopping is cheap. In the case of most SaaS and cloud applications, the entire B2B buying process is cheap: trial is free and purchase amounts to a monthly subscription that can be canceled at any time. Instead of orchestrating a structured B2B buying process with a certain outcome, the new B2B buyer can start, stop, start again, turn around, go slow, go fast, whatever. The new B2B buying process carries no internal momentum. Purchases are motivated by near term organizational priorities and the relative urgency to solve a pressing business problem, which can turn on a dime.

Online marketers lament the waning effectiveness of email. Some even claim that email marketing is dead and spam killed it. Email may be waning for marketing communications, but it is central to the internal communications of the new impulsive B2B buyer and acts as a powerful catalyst in the new B2B buying process. The new impulsive B2B buyer can research your product online, coordinate an email conversation among all decision makers, get a basic consensus without a single meeting, and then stop dead because something else came up. Then, six months later the VP of Such-and-Such decides: “This needs to get done yesterday!” And shoots off an email that reignites the urgency around the purchase. Next thing you know, a previously dead or unknown deal is suddenly very hot, and a purchase is made almost on first contact. Or, at least first contact to the unprepared who are not measuring, modeling and moving the new B2B buying process throughout its lifecycle.

New B2B Buyer Rule of Engagement #4 – Lifecycle Marketing

This new rule of engagement is a natural consequence of the three earlier rules. If you are publishing valuable online content deep and wide according to Rule of Engagement #1 and measuring, modeling and moving the prospect through the new B2B buying process with that content according to Rule of Engagement #3, then you should use your measures and models to align your valuable content with the B2B buying process to optimize its impact and encourage the new B2B buyer’s natural impulses. Map your content to the buyer’s needs at each stage of the B2B buying process and stay engaged throughout the entire customer lifecycle. Hit-and-run marketing cannot recover the control over the B2B buying process that was consciously surrendered to the new B2B buyer by enabling efficient self-service, Rule of Engagement #2.

If your prospect is actively engaged in a B2B buying process, then lifecycle marketing simply amounts to serving up the right information at the right time to keep things moving along quickly and efficiently, e.g., how to get up and running on a free trial after sign-up or where to see a video case study for a similar customer. But, if your prospect gets distracted by other priorities and stuck in the middle of the B2B buying process or worse isn’t even aware there is a need or a solution in the first place, then lifecycle marketing is about breaking the status quo and creating a sense of urgency. Unlike its rigid pre-millennium ancestor, the new impulsive B2B buyer is open, flexible and in a hurry. A compelling new idea can shift priorities and drive reallocation of budget away from lesser concerns and toward your solution.

At a minimum, marketing engagement throughout the entire customer lifecycle from latent pain to repurchase ensures you are there to capitalize on it when the new impulsive B2B buyer switches gears. At a maximum, you have the potential to nurture that impulsiveness to accelerate purchase. Inbound marketing or simply getting found by a prospect is not enough. Once you are found, you must engage with that prospect frequently and consistently throughout the entire customer lifecycle, because if you don’t, your competitors will, and what is easily found can be just as easily lost.

New B2B Buying Process Tech Tip

Lead Scoring and Beyond

Great Joel. You tell me that the new B2B Buyer Rules of Engagement say I must not only map my content to the new B2B buying process, but I must also serve it up at the right time to the right buyer persona to move the new B2B buyer along on the random walk to purchase. But, you don’t tell me how!! Well, I’m not going to tell you exactly how, because I don’t think anyone in the B2B marketing community, SaaS, cloud or otherwise has this down to a science. If your marketing automation vendor tells you they do, then they are lying. But, I can tell you how to think about it.

Most B2B marketing automation tools today offer some version of lead scoring. The basic idea behind most lead scoring methodologies is to measure B2B buyer attributes and activities, such as prospect industry, free trial registration, visited the pricing page, watched a video, downloaded a white paper, etc. Then, you assign some value to each one of these things to tally up a lead score, e.g., 35 for the free trial, 5 for the right industry, etc and you set a threshold at which a lead becomes qualified and ready for follow up by a sales rep.

This is all well and good, but how do you decide on the value of a specific buyer activity, especially if you have no history to work with? Here is the answer. You first have to decide what you are trying to predict. For lead scoring you might choose to predict the probability that the deal will close. Or, you might choose to predict a more intermediate metric along the fuzzy funnel like the probability that a sales rep will deem the lead qualified. Either way, you are using the new marketing math where your lead score measures some degree of progress through the fuzzy funnel.

Once you know what you want to predict, the output variable, you must then select the best predictors of that outcome, the input variables, and assign a higher value to those inputs that you believe have the most influence, or in terms of our fuzzy funnel terminology, the highest correlation to the outcome. You also want to avoid choosing inputs with lots of overlap to avoid double counting the same basic behavior, e.g., pricing page views and shopping cart abandonment occurring on the same website visit.

b2b buying process lead scoring

How you go about creating your lead scoring algorithm is as much art as science, particularly today because the tools do not give you much help. If you have no historical data, you just need to guess, watch and guess again. If you have lots of historical data, then you can go so far as to create a true statistical model of the fuzzy funnel. For example, a sound statistical approach to lead scoring would be to run a logistic regression to determine the most relevant buyer activities for predicting a qualified lead or won deal and the exact relative weights of each predictor. Frankly, with sufficient historical data to work with a decent marketing automation tool ought to be able to do this for you.

Qualified lead is just one B2B buying process metric you might want to predict. What about won deal? What about deal size? What about upsell potential? What about cancellation? While most marketing automation tools today lock into a rather lead-centric view of the B2B buying process with the main goal being a clean hand-off of marketing leads to sales, the general idea of the fuzzy funnel has no such limitations. With sufficient historical data, any relevant metric that represents progress through the fuzzy funnel at any point within the entire lifecycle of the B2B buying process can be estimated using its most highly correlated buyer activities as predictors. Those buyer activities then become the focal points of marketing investment to create campaigns that nudge the new elusive, impulsive B2B buyer through the blurry B2B buying process.

The New Breed of B2B Buyer

Today’s business buyers are awash in a deluge of online information. Virtually every business problem, process, product, and service, no matter how obscure, seems to have garnered at least one blog post or forum comment. One could debate the quality of this information, but not the quantity. Most business searches turn up thousands if not millions of results that include product descriptions, news articles, videos, podcasts, images, books, white papers, free trials, presentations, Wikipedia entries, rankings, blog posts, comments, tweets and so forth. Whatever your question, chances are someone online already has an answer.

b2b buyer evolution

B2B buyer behavior has evolved in adaptation to the Internet.
A new species of B2B buyer has arisen that is more connected, more impatient,
more elusive, more impulsive, and more informed than its pre-millennium ancestors.

The New Breed of B2B Buyer

The instant gratification of the Internet is so engrossing that it overshadows the long term changes it has fostered in the people that use it. People have not sat idly by as the Internet has evolved; their online knowledge, skills, attitudes and behaviors have evolved alongside it. As one of the most serious of Internet users, the B2B buyer has been transformed through adaptation to the new online environment. A new breed of B2B buyer has arisen, a species that is more connected, more impatient, more elusive, more impulsive, and more informed than its pre-millennium ancestors.

B2B Buying Process in the Pre-Millennium Era

The Internet has changed the B2B buying process so radically that it’s difficult to recollect exactly how the pre-Internet B2B buyer used to go about the business of making a purchase: paper, phone and people mostly. The process went something like this: ask the analysts about the next big thing, collect requirements into and RFP, get a list of vendors from a roundup in an industry magazine, go to a trade show and collect collateral, solicit and evaluate RFP responses by mail or fax, call in a short list of vendors to do a dog and pony show, follow up with a technical drill down meeting, maybe do a bake-off or a pilot, select a vendor, call a reference account, negotiate final pricing and contract terms, and wrap it all up by planning out phase 2 of the project: a complex and expensive implementation. It was a slow, arduous and expensive process for which consultants charged exorbitant fees that B2B buyers were happy to pay, because it wasn’t easy.

The New B2B Buyer Rules of Engagement

This is the first blog post in a series that discusses the behavioral traits that differentiate the new breed of B2B buyer that has evolved in adaptation to the Internet and explores new rules of engagement that mirror those behaviors to maximize B2B sales and marketing effectiveness.

B2B Buyer
Trait
Rule of
Engagement
Connected Publish Deep and Wide
Impatient Efficient Self-Service
Elusive Measure, Model & Move
Impulsive Lifecycle Marketing
Informed Consultative Selling
Only Human Trust

Just as the new B2B buyer has evolved in adaptation to the Internet,
B2B sales and marketing professionals must adapt to the new B2B buyer
by mastering new rules of engagement.

The New Connected B2B Buyer

With such a treasure trove of information available online, the Internet is the 21st century B2B buyer’s first stop for researching products and services. It won’t be the only source of information for the savvy prospect, but the Internet now is a significant and recurring influence throughout the B2B buying process. The new species of B2B buyer is connected to the Internet physically, functionally, socially and frequently.

Moreover, the B2B buying process neither starts nor stops at your website. It is more likely to start at a major search engine, industry portal or social network. If you want your product or service to be considered, it’s critical that your content appear wherever the new B2B buyer goes online at every point in the decision making process. It isn’t enough to just write a blog or make a white paper available for download on your website, because your prospects may never find your website if you don’t show up in search and social media.

New B2B Buyer Rule of Engagement #1 – Publish Deep and Wide

To connect with the connected B2B buyer, you must publish deep and wide about the problems your prospect faces and the solutions your product offers. Your content must be relevant to your prospect at every stage of the buying process and be available whenever and wherever your prospect goes online. That means creating content for every depth of prospect interest and attention span from short tweets, comments and ads to detailed white papers and videos, and then redistributing that content across a wide array of online channels: websites, social networks, blogs, forums, directories, websites, ads, media sharing sites, etc.

It is important to remember that the basic needs of the B2B buyer remain unchanged, only the behavior for satisfying those needs have changed. The buyer will still need to recognize that there is a problem. The buyer will still need to investigate potential solutions to that problem. The solution will still need to fit within the business requirements and financial constraints of the buyer. And, the buyer will still look to reduce risk by getting a good price and validating both your company and your solution with independent third parties. The only difference is that much of this information now comes from the Internet. Your content should still reflect and address these buying needs, but it should be served up in the right location and the right media so it is easily found and digested online. For example, online demos and free trials replace the old-school dog-and-pony show for evaluating solution fit for SaaS and cloud providers. And, references may be solicited not just from your customers and analysts as before, but also from blogs, support forums, professional social networks, and pretty much anything anyone else has said online about your company or product.

The Impatient B2B Buyer’s Got No Time for You

The Internet has instilled the new breed of B2B buyer with far less patience than its pre-millennium ancestor. Sooner or later all that instant gratification turns into habits and expectations. If a prospect can’t find the right information on your website or figure out how to use your free trial, it’s usually goodbye. Today’s B2B buyer has to be pretty committed already to evaluating your product or service before picking up the telephone or sending in a support email. Oh, you’ll still get the early stage sales inquiry from the few remaining Internet laggards, but let’s face it, the phones just don’t ring like they used to. It’s our own fault; this is what we wanted, more self-service, lower acquisition costs, lower support costs, etc. The new impatient B2B buyer has simply adapted to the environment presented online.

New B2B Buyer Rule of Engagement #2 – Efficient Self-Service

What the new B2B buyer wants most from the Internet is independence and efficiency. When a prospect must rely on a salesperson as the primary source of information, both are lost. The Internet puts the new B2B buyer firmly in control of the buying process by allowing the prospect to regulate the flow of information. Fight this basic principle, and you’re back to goodbye. Your strongest strategy is to give the prospect efficient self-service access to your content.

New B2B Buyer Tech Tip

Search and Speed Still Rule

Despite the rising importance of social media, search is still the mainstay of online self-service efficiency. The impatient B2B buyer expects the instant gratification of search everywhere online: major search engines, social networks, discussion forums, your website, your blog, your knowledgebase, etc. Wherever you place your content, make sure that it can be easily searched. And when it’s found, make sure it can be quickly digested.

Second only to search is speed. Especially speed in combination with search. Google believes speed is so important to search that it spent untold millions developing Google Instant just to save 2-5 seconds per search. Pay constant attention to the speed at which your Web pages load and your heavy content downloads. The last thing you want is for the impatient B2B buyer to bail on you at the last minute after you’ve done all the work to create, produce and deliver your content, simply because the response time is too slow.

The self-service directive applies throughout the entire buying process from early education to stimulate latent demand to detailed product information to customer references to technical support to potential add-on purchases. Provided it is not confidential, information the new B2B buyer seeks should not be blindly hidden behind a main phone number or contact us form.

This is not to say that you shouldn’t require registration, login or some level of qualification and commitment on the part of the prospect before providing access to high value content. Creating touch points that measure buyer intent and open new channels of communication throughout the entire customer lifecycle are essential to B2B sales and marketing effectiveness. In fact, they are so important that they are deserving of much greater discussion and are the topics of the next two new B2B Buyer Rules of Engagement that will be covered in the upcoming post in this series. Stay tuned!

SaaS Benchmarks | Acquisition Cost and Churn Challenges

saas benchmarkI routinely get asked questions like the following: What is a typical churn rate for SaaS? How much should I pay my SaaS sales reps? What is a good time frame to recover acquisition costs? A few years ago, the best answers I could give were simply based on my own experience and conversations with other SaaS colleagues. However, as SaaS has matured as a category, some high quality SaaS benchmark studies have appeared.

Recent conversations with Lauren Kelley over at OPEXEngine highlight for me how SaaS companies across the board struggle with customer acquisition costs (CAC) and churn. The 2010 OPEXEngine SaaS benchmark study shows a WIDE range of results across these critical performance metrics, indicating that there is no one right way to tackle these challenges that will work for SaaS companies across all sizes and sectors. But, there are plenty of wrong ways.

SaaS Benchmark Results – Customer Acquisition Cost

SaaS companies vary a lot in their willingness to invest in customer acquisition. For example, the OPEXEngine SaaS benchmark report gives an average payback period for CAC alone of about 18 months (CAC per new customer divided by average recurring revenue per customer). However, SasS companies with expected growth rates in the 20-50% range had a payback period of only 6.5 months, while those with expected growth rates over 50% had an average payback period of….drum roll….35 months! Ouch. While it makes sense to invest heavily in customer acquisition during high growth, SaaS Metrics Rule of Thumb #6 | Growth Creates Pressure to Reduce Total Cost of Service, highlights the importance of keeping average CAC per customer in check as you grow. Even if you’re angling toward an IPO with a churn rate under 10%, I think it’s near impossible to justify a 3 year payback period just to cover CAC. Talk about negative cash flow!!

SaaS Benchmark Results – Churn

The situation with churn is similar. While the average churn rate is about 13%, there is a wide range of performance across private SaaS companies. For example, the OPEXEngine SaaS benchmark study shows higher churn rates for SaaS companies targeting the SMB market and lower churn rates for those targeting large enterprise customers. Clearly the strong correlation between adoption costs and switching costs is playing out here, as enterprise customers are both harder to get and harder to lose. Moreover, SMBs are much more likely to go out of business altogether than large enterprises.

As you might expect, churn varies consistently with SaaS business scale and maturity. The OPEXEngine SaaS benchmark report gives a median churn rate of 8.5% for private SaaS companies with more than $10M in revenue, and a whopping 20% median churn rate for SaaS companies with less than $10M in revenue. A handful of startups have reported churn rates as high as 60%! This makes sense as you would expect churn to be high as a startup is figuring out its sales and marketing model, and then to settle down as improvements are made. Many of these smaller SaaS companies are also in the high growth category. So, if you happen to be the lucky SaaS startup with a 20%+ churn rate (meaning an average lifetime of < 5 years) AND a CAC payback period of 3+ years, you've got some serious business challenges on your hands.

The Value of SaaS Benchmarks for Growing Companies

Studies like the OPEXEngine SaaS benchmark report are great tools for SaaS executives at both large and small SaaS companies, and are especially useful for SaaS executives that are navigating the path from small to large. When both revenue and costs are in extreme and continuous flux, benchmarks help you focus on the problem areas and avoid wasting time reinventing the wheel. In addition to the CAC and churn metrics discussed here, this particular study includes a wide range of operational, financial and productivity metrics broken out by company size and growth rate, e.g., average deal size, hosting expenses, revenue per employee, and complete cost structure SaaS benchmarks covering expenses for sales, marketing, R&D, services, support, etc. For more information on how to participate in or purchase the OPEXEngine SaaS benchmark report, please see the highlight box below.

How to Get the OPEXEngine SaaS Benchmark Report

You can currently buy the 2010 Private Saas Benchmarking Report that I used for the analysis above at www.opexengine.com. In addition, the latest 2011 OPEXEngine benchmark survey of software and SaaS has just been launched with an expanding universe of participating companies and SaaS benchmarks. In particular, there are more pre-IPO SaaS companies participating as well as larger SaaS companies up to $350M in 2010 revenues.

To participate, go to www.opexengine.com and register for the 2011 benchmarking. Upon registration, you’ll receive instructions about where to enter the survey on the OPEXEngine secure site. Participants receive a confidential Individual Company Report as well as the full, 70 page, 2011 Software Benchmarking Industry Report upon completion of the benchmarking.

Discounts for Participants, SIIA Members and Startups!
Pricing for these reports for participants is tiered by revenues and SIIA membership.
Companies with 2010 revenues under $10M: $999 or free for current SIIA members.
Companies with 2010 revenues over $10M: $1995 or $999 for current SIIA members.

Cloud Channel Challenges | SaaS Channel Compensation

I recently had the pleasure of speaking at the Retail Solution Provider Association annual thought leadership summit on the challenges faced by channel partners and vendors in the transition from purchased software and hardware to a recurring revenue service model. Not unexpectedly, one of the hottest topics on the agenda was SaaS channel compensation. In particular, how can SaaS vendors expect their more modest channel partners to absorb the up-front costs of customer acquisition and on-boarding when the SaaS vendors have trouble doing it themselves?

saas channel homer

The SaaS subscription model shifts risk from the customer to the vendor.
Shifting too much risk back onto the SaaS channel
lands the SaaS channel partner between the proverbial rock and hard place.

A Game of Risk

The SaaS subscription model shifts risk from the customer to the vendor. SaaS vendors promote low-risk free trials, entry-level subscription plans, and bundled on-boarding, whereas enterprise software vendors expect big up-front license payments and professional services fees. In fact, it is common practice in enterprise software to promote and sell a product before it is completely built or even started. Not so in SaaS. The risks don’t go away though, they just get shifted away from the customer back to the vendor. The SaaS vendor must make big up-front investments in R&D, customer acquisition and on-boarding just like the enterprise software vendor, but it often takes well over a year to recover these costs. If the product fails to live up to expectations; the SaaS vendor is left holding the bag, not the customer.

Between a Rock and a Hard Place

Enter the channel. Acting as a risk buffer is a long-standing value added service of the channel. Some channels exist almost solely to absorb risk, like wholesalers and investment bankers. Enterprise SaaS and software channel partners invest in sales, service and support capacity in advance, absorbing the risk of fluctuating demand. Sitting as it does between the customer and the vendor, the channel can absorb risk from either direction. Too much risk and the channel partner lands between the proverbial rock and hard place. Goodbye channel.

The problem arises when SaaS vendors try to apply licensed software math to SaaS channel compensation. Traditionally, enterprise channel partners net a portion of the license fee, anywhere from 10% to 70% depending on the scope of their services. Simple application of this margin-based compensation model to the SaaS channel can put a SaaS channel partner in the unpleasant position of having to make 100% of the up-front investment in customer acquisition and on-boarding, while only netting a fraction of the recurring revenue stream. Risk shifts from the SaaS customer to the SaaS vendor and right back onto the SaaS channel partner. Rock and hard place.

The New SaaS Channel Math

In my post on SaaS Sales compensation, I made the claims that SaaS vendors should a) pay in proportion to the lifetime value of the deal and b) pay entirely up-front, because the SaaS sales rep should not be asked to bear any of the SaaS investment risk, or the rep is likely to just quit and find better work. The same basic ideas holds for the SaaS channel partner with the caveat that it is reasonable to expect the channel to absorb at least some of the risk, if not all of it. So, when it comes to SaaS channel compensation, SaaS vendors should a) pay in proportion to the lifetime value of the deal and b) pay disproportionately, but not entirely up-front because the SaaS channel partner should not be asked to bear a disproportionate amount of the SaaS investment risk, or the channel partner is likely to just quit and find better work.

The trick is to apply the traditional SaaS channel margin to the lifetime value of the deal, not directly to the payment schedule. The percentage margin or revenue share still reflects the value that the SaaS channel partner brings to the table, but a flat payment schedule does not match the value-added or costs incurred by the SaaS channel partner over time.

Lifetime Value of SaaS Channel Compensation = % Margin x Lifetime Value of Deal

There are an infinite number of payment schedules for any given lifetime value, offering an infinite number of options that can be tailored to the specific needs of your SaaS channel compensation model right down to specific needs of a single SaaS channel partner. Consider the three payment schedules below with identical lifetime values consisting of a straight out 50% of a recurring SaaS revenue stream (blue), an equivalent license revenue stream of a big up front payment and 20% maintenance (red), and something in between with a 75%/35% split for initial/recurring payments (green).

saas channel homer

There are an infinite number of payment schedules for any given lifetime value,
offering an infinite number of options that can be tailored to the specific needs
of your SaaS channel compensation model.

Match SaaS Channel Comp to SaaS Channel Value Add

There is a broad spectrum of SaaS channel arrangements from simple non-exclusive lead referral to complete sales, marketing, service and support in an exclusive territory. Therefore, there is an equally broad spectrum of potential SaaS channel compensation plans. Linking the lifetime value of SaaS channel compensation to the lifetime value of the SaaS channel value add and then matching the payment plan to how that value add plays out over time is the best approach to align SaaS company goals with SaaS channel incentives. For example, a simple lead referral could be immediately paid out as one month of recurring revenue and done. Whereas, a full service arrangement could pay up to 100% of recurring revenue for the first year to cover customer acquisition, but a much smaller percentage over time to cover ongoing support and service.

No Magic Bullet

Linking SaaS channel compensation to lifetime value breaks the direct link to the SaaS customer’s recurring revenue stream and allows the SaaS vendor to provide incentives that better match the SaaS channel partner’s value add and costs. However, it is not a magic bullet. The SaaS customer’s recurring revenue stream determines lifetime value of the deal and thereby limits the total amount available for SaaS channel compensation. If the lifetime value of a SaaS deal is significantly lower than that of the equivalent license deal, the SaaS channel will still face all the usual SaaS challenges of lowering acquisition and service costs through automation and economies-of-scale. Moreover, the SaaS customer’s recurring revenue payment places an upper bound on the potential SaaS channel compensation payment, because it will be the rare SaaS vendor that will stomach negative cash flow by paying out more to the channel than it brings in from the customer. Finally, SaaS Top Ten Don’t #5 cautions early stage SaaS startups against investing in channels too early, and ensures that no SaaS channel compensation plan will overcome lack of primary market demand.

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