Few key points with respect to the Software as a Service dynamics extracted from the transcript of NetSuite Q4 2012 Results – Earnings Call
- The higher end of the market seems ready for more complex, scalable, global OnDemand software solutions.
- The software industry is leading the adoption of SaaS solutions and eCommerce to follow
- Suite of products offering increase ASP(Average Selling Price) – increasing willingness to pay because a more complete solution reduces cost and increase productivity
- Suite of products offering enables going up the market, replacing disparate system (in one case as much as 14)
- Should SAP be worried?! Probably others should too.
- Going up the market increases the length of the sale cycle (is that a concern?). This is interesting point. The price(paid monthly) should theoretically reduce the risk, however it is not the only factor in the buying decision(more people are involved in the buying process on the high-end of the market).
- Going up the market increases demand for professional service
- The quality and size of the NetSuite partners (MSP, VAR) is growing. This enable both going up the market and sales leverage.
- There is strong demand for sales rep also in a SaaS model, whether selling to the channel or directly to the customer.
There were more gems in this transcript.
A sales process does not have a single path. It is not a simple, one time, sequence of events. A sales process from lead to close may go zig zag, back and forth, and in circles. Also, the customer/partner may interact with multiple touch points like, pre sale, tech support, and billing. It is not enough to just develop a single dimension sales funnel with steps going one after another from the wide top opening of the sales funnel to the narrow bottom end. In order to identified who is doing what, and when, where leads may fall between the cracks, and where there are opportunities to up-sale, I recommend mapping the sales process in the following way.
Step 1: Leads generation – the list of marketing activities that will generate leads/contact
Step 2: Referrals – identify where are they coming from
Step 3: Adding to the leads bank – some filtering/de-duping can happen here. The number of active leads is the denominator for the conversion and close rate calculation. This is where Sales and Marketing needs to work together and agree about what counts as a lead. The information needs to be time sliced – usually on a quarterly basis. Some leads that did not progress to the next step in the last quarter, despite multiple follow-ups, can go back to this pool for the next quarter. Others may be stored for a longer term follow-up.
Step 4: The volume of leads to follow-up depends on the amount of leads available and the inside sales capacity. So, here too, some leads need to slip to the next time slice. It is a good practice to keep an eye on the % follow-up = # of leads contacted # of leads available, to see that sale reps keep prospecting. The next step after following up with a lead, is getting the prospect to perform certain activity(e.g. registering to the web-site, downloading a white paper). This step split the process in two: 1. The lead is now qualified, showed interest and maybe other resources from the company to follow-up with her. 2. The lead did not react to the offer and it should be parked in the “to follow’ up pool of leads.
Step 5: Close – the prospect is on-board and productive. Here it is good to calculate the close rate (could be done from the total # of leads or just from the leads that the sales reps contacted). Here again, the prospect can go to the “to follow’ up pool of leads if the deal was not closed. Also, another base practice, and this is crucial for SaaS company, is calculating the renewal rate to monitor retention. Resigning customers should be added to the “to follow’ up pool set with high priority, and should be called as soon as possible. On-boarding is a crucial step so monitor the retention rate relative to new customer in addition to the overall customers base renewal rate.
Step 6: Closing up-sale opportunities. This is where other customer touch points possibly contribute to higher close rate. Calculating the close rate here could be tricky. It is not simply calculated based on the # of leads from step 3, but also taking in consideration the entire customer base. One of the key question that SaaS companies struggle with is how to identify opportunities for up-sale. This is where segmentation becomes crucial, and foresight thinking about what data to collect about the customers is the key.
One more thing to consider, referrals to generic leads are like jet fuel to the gas you fuel your car with. There is no question whether to invest in referral program, but it is hard to know how much. Here too, the data you collect about your referrals can help you to come up with the right answer.
In summary, the sales process looks more like a ping ball machine than a sequence of inputs and exits criteria. If your sales process is even more complicated than my example above then it is even more critical for you to spend the time mapping it.
Mapping the sales process can help with:
- Identifying where leads should be followed-up, and by whom in the organization
- Where leads should go back to the short term or longer term pools
- Where and what data should be collected along the way
- To identify opportunities for up-selling
This exercise can go a long way increasing your you revenue as a result of an increase in your close rate.
Some says that Sales is more art than science, I don’t disagree, but I will argue that sales management is mostly science. In SaaS company revenue projection could be modeled with numbers that will be fine tuned over time. For software sold as a service on a monthly basis, sales goals could be highly predictable and well monitored. With a simple model On Demand software companies can clearly connect Marketing and Sales efforts with respect to lead generation, referrals, conversion, revenue and profit.
Using the Sales Funnel to forecast revenue
- Value of closed sale – closed lead (annually)
- # of leads enter the top of the funnel
- Close rate
- Revenue per sales rep
- You now have a model that can simulate alternative revenue projections based on different close rates, lead values, MSP(Management Service Provider) sizes, and the number of productive sales reps.
- You can make it more complicated by factoring the close rate for each sales rep and the retention rate.
Using the Sales Funnel to plan and monitor the Sales process.
How many leads do we need to generate $X revenue?
Are we on track?
- Revenue forecast
- Sales funnel
- The number of leads that we need to make the revenue target
- This model help to answer if the pipeline will deliver on the revue target
- It goes back to marketing (inbound and outbound) volume of activities for lead generations(webinars, conference sponsorship, SEM) as well as referrals rate
Next: Using the sales funnel to calculate sales quota, compensation and for forecasting profit
When you think about your Software as a Service company sales, and marketing strategy you’ll need to consider the product complexity, who is your target customer segment, and what other players will be involved in the sale process(not full 4Ps analysis here). In each of the cases below different levels of effort and cost to market and sale your product(s) is needed. Partner recruiting is selling, which means, leads generation, sales cycle, value proposition, and some form of an inside sales team. Working with the channels requires investments, competing on VAR attention is selling, and the competition is growing with every new SaaS solution developed. Growing SaaS companies like HubSpot, Marketo, ConstantContact and more as well as giants such as Oracle have been already investing in capturing these channels. The alternative of going directly to the customers is not financially viable in the case of a small start-up company selling to the small and medium business(SMB). The complexity of the product will determine how long is the sale cycle, the onboarding process, and the need for Management Service Provider(MSP) participation. Considering whether the product should become a platform requires considering the implications on your go to market strategy like setting and governing the quality of the add-ons(certification) and pricing.
Here are some combinations to look at.
|Vendor Type||Billable Customer||IT Reasonability||Likely Exit Strategy||Product Strategy||Sales & Marketing Strategy|
|Startup||SMB||SMB owner||Building a cash cow – why sell?||Simple, limited functionality, self served||Online, inbound marketing|
|Large Enterprises||Corporate IT Department||M&A (sell to one of the big players: SAP, Oracle, IBM, Microsoft)||Perfecting one use case, or developing strong protected IP – proprietary algorithm||Direct sales. POC/paid pilot, partnering with other solutions.
B2B marketing: thought leadership, trade show.
|Young growing company||SMB(<;2000 employees)||MSP/VAR||Going up the market, or M&A through Vertical integration||Building Platform as Service (PaaS), OEM(embed other products)
Requires customization and integration with add-on
|Partner recruitment. Referral program.
Working with partner on developing strong value proposition and go to market strategies.
Sponsored conferences, Webinars.
|MB||MSP/VAR||IPO, M&A||Become mission critical||Ad above and recruit strategic partners|
|Large Enterprise developing SaaS||SMB||MSP/VAR||N/A||Medium complexity. Open API, web services, enabling value added services||Partner programs. Account executive to harvest strategic partners|
|Large Enterprises||Corporate IT Department||N/A||Hybrid between on premise and hosted||Direct sales, rebranding|
I’m sure that there are other combinations of vendor and customer types, product, sales and marketing strategies. However, some combinations could lead to successful outcome while other be disastrous!
- Encountering a Challenge
- Exploring Options: existing validated solutions as well as unthinkable, and unimaginable ones
- Knowing one’s core competencies or coming up with new approaches to solve a problem – with quality or by lowering the cost by an order of magnitude
- Mapping between those core competencies and the solution to the challenge we started with
- Validate – does it actually addresses the challenge effectively and differently? Is it a sustainable competitive advantage?
- Constructing every activity to be aligned with the core competencies in order to support the chosen solution
That is strategy!
Michael Porter in his What is Strategy? article wrote that “..the essence of strategy is in the activities – choosing to perform activities differently or to perform different activities than rival”.
I’m not about to challenge prof Porter here. His insightful article helps to evaluate formed strategies and to identified competitive advantages, but I claim that it is not enough to start the process of forming a strategy.
The second step in the process above is the most crucial step in forming a strategy. Becoming aware of options is the first condition to making strategic choices, so spending the time learning about options is where most people failed.
The unthinkable – Hannibal crossing the alps with elephants. Lawrence of Arabia attacking Aqaba from the desert side.
Optimizing one level up and empowerment – Walmart relationship with its vendors an no regional control. Dell and virtual vertical integration.
A brand is more than its product – a story – Ducati, Coke, MasterCard and many more.
To summarize, when you think about your strategy the key steps are to first list all the immediate options and then to spend time exploring other dimensions of the problem to come up with more opportunities to solve it differently.
Here are some numbers I gathered from the web for 2011 and also some predictions for the near future.
- World population reached seven billion in 2011 – 1.3 in China – In 2000, the middle class in China stood at 120 million. In 2009, it almost doubled to 230 million. In 2010, the number of urban employees reached 320 million.
- In 2011, the first members of the Baby Boomers reached age 65. And the Baby Boomers decreased to 25 percent of the total population. The last of the Baby-Boomers population will reach age 65 in the year 2029. By that time, the Baby-Boomers population is projected to be only about 16 percent of the total population.
- Worldwide mobile connections will reach 5.6 billion in 2011
- Online ad spending 52 Billion in 2011
- Social Network Ad Spend will Reach $6 billion worldwide in 2011 ($5.54 billion in other source) – $10 billion by 2013
- Social CRM Market will reach $1B in revenue by 2012 – up from approximately $625 million in 2010. Worldwide social CRM is projected to total $820 million in 2011.
- Facebook Inc. will generate $4.27 billion in revenue this year, more than double the $2 billion made in 2010
- Twitter Ad Revenue to Reach $139.5M in 2011 – really?
- Virtual Goods Market will reach $2.9 billion by 2012. This is an increase from 2011’s $2.2 billion and 2010’s $1.6 billion.
- Mobile commerce sales will reach a total of $6.7 billion this year
- 2011 global market size of LED lights will reach 1.2 billion U.S. dollars
- The online game market size in China – $5.8 billion for 2011
- The number of TV sets connected to the Internet will reach 551 million by 2016, up from 124 million at end-2010.
- Apple – App Store(mid year data)
- 425,000 apps
- 15 billion downloads
- $2.5 billion paid out to developers
Happy new year!
I’m not responsible for any of the predictions in this post.