It’s easy to think that all you have to do is provide a big enough ROI to your customer. However this is not enough on its own – you also have to move the needle for the customer’s business. Your ROI might be fabulous but if you don’t move the needle for your customer then it’s going to worth your customer’s effort dealing with with you.
For example let’s say you are selling sales leads for second hand cars. You are selling the leads for €25 euros each and you expect 10% to convert to sales, so it costs about €250 for each car sold. The dealership makes about €750 per car, so the ROI of 300% is great. You’d naturally think that you could sell these leads to anyone, after all you are effectively selling €750 for €250. But there is another dimension – volume.
Let’s say you only have 20 leads a month to sell. A small regional dealership that only sells 20 cars a month will happily do business with you because you are likely to boost their sales by 10%. However for a large chain dealership that sells 1,000 cars a month you are only going to grow sales by 2%. You don’t move the needle for them, and it’ll be hard to get them to do business with you because the potential upside isn’t interesting enough.
So how much do you need to move the needle by? I’m sure this varies a lot from industry to industry but in my experience it needs to be about 5%. That’s not necessarily 5% of the whole businesses revenue or cost – it’s the individual’s personal target. So if you are selling into a sales manager then it’s 5% of their new business, if it’s the facilities manager it’s 5% of the cost that they are trying to reduce, etc.
Below 5% you simply don’t move the needle enough to warrant their attention. However, your importance increases the more you move the needle. I have found that at 20% you can even insist on fundamental changes to the customer business, such as changing their procedures or even business model. Simply put, at 20% you are so important that they can’t afford to lose you.
The appeal is obvious – anything that lowers the barrier for a potential customer to sign up has to be a good thing, right? It’s attractive when you are scrambling for sales, any sales, that month to month subscription without a long term contract has become the default business model for young B2B SAAS businesses. Unfortunately it’s the wrong model for nearly all of them. Personally I blame the Signal 37 guys at Basecamp for embedding this in start-up culture, but that’s another story.
Why is it such a Bad Model?
- No upfront cash means as sales scale so does the level of investment required to fund the sales channel
- Lack of customer validation creates an onboarding bottleneck and high early churn rates
- The customer is not invested in your mutual success leading to more failed customers
- Commission modelling and payment become messy leading to salesperson disatisfaction
- Revenue modelling is more uncertain meaning that financing becomes more difficult especially debt
Caveat – Month to month contracts can work well if there is a purely automated sales channel.
Fund the Sales Channel with Sales or Investment
Imagine it costs you €1,200 to make a sale, i.e. it costs you €1,200 to find a potential customer and complete a sale. Now imagine that you only have €1,200 and your monthly subscription is €100. On Day 1 you spend your €1,200 and make your first sale. When do you make your second sale?
You make your second sale in Month 13, when you have collected the €1,200 to fund it from your first sale
Now think about the exactly the same scenario, except this time you charge a €1,200 annual subscription upfront. On Day 1 you spend your €1,200 to make your first sale. When do you make your second sale?
You make your second sale on Day 2 using the subscription collected on your Day 1 sale. By the time month 13 rolls along you’ve made about 230 sales – a 23,000% improvement over the first example.
I accept this is contrived, however the core message is valid – you either finance your sales channel with investment cash or your customers’ cash and it’s nearly always preferable to do it with your customers’. After all, earning money from customers should be your company’s core competence, not getting investment.
Lack of Customer Validation
If a salesperson closes a month to month subscription, then what exactly have they sold? Maybe they sold a three year revenue stream or maybe just one month’s fee that won’t even pay the sales person comp. The only thing that’s definitely validated is that the customer is willing to pay for the first month. Should you even regard them as a customer at all? Maybe it would be best to think of them as being on a trial until they have paid a certain number of invoices and are actively using the product. This makes a difference because your customer success and onboarding teams will get frustrated and will rightfully demand that they not be handed half completed sales.
The Customer is not Invested in your Mutual Success
Okay, I’ll admit that getting a months subscription off of a customer isn’t nothing. It’s a lot better than a free trial. But what proof do you have that they are committed to your mutual success? The first month fee is a trivial amount and there is no long term commitment. No wonder your onboarding team have difficulty getting them on the phone and engagement is weak.
Contrast this to the customer that signed up to a one, two or three year contract – there’s a committed customer. There’s a customer that will call you angry when things aren’t working. There’s a customer that will fight to make sure they receive value. There’s a customer that you want.
Comp Models Become Messy
What are you going to comp a salesperson selling month to month subs on and what money are your going to use to pay them their comp? If you comp them just on the month’s sub then you’re incentivising them to find customers who are willing to pay a one month sub – not customers that will be with you for the long term. If you comp them on revenue from the customer as it comes in then the reward is disconnected from the actions you want to incentivise. If you advance comp on the basis of future revenue you create a cash flow issue and de-motivational claw backs when the customer cancels.
Comping on an annual contract is easy, and paying the comp is easy if the customer pays upfront.
Revenue Models and Investment Become Difficult
Month to month contracts have no committed revenue stream by definition. Revenue models have to use average churn rates to calculate the following month’s revenue with ever increasing levels of uncertainty the further out you go. In contrast annual contract business only have to use average churn rates for revenue a year out. Having this contracted revenue stream makes financing, especially debt financing, easy when compared to month to month contract. This is all the more important as month to month contracting needs more financing to fund the sales channel.
So why do start-ups almost invariably opt for the month to month sub? Its because they are afraid to ask for the sale, so they attempt to minimise it. They don’t charge what they’re worth (more on this in a later blog post) and then they split the sale into the smallest segment possible in an attempt to make their pricing irrelevant to the customer – I’ve even seen companies split it into a weekly fee.
What if customers won’t sign up for an annual contract?
If you’re a B2B company with a manual sales process then there is a good chance that you just have to accept that you’ve got a longer sales cycle than you think you have. If you are sure that your potential customer will only sign up to month to month then accept that this is a trial period and after the trial period ends they move onto an annual plan. This division makes it very clear that during the trial period the sales process is still ongoing and you don’t count the client as a customer until they sign up to the annual plan. In this way your customer numbers stay clean and responsibility for the sales cycle is clearly defined.
Usual disclaimer: Context is king, actual results may vary, etc.
“Only Hire A Players” said the immensely successful woman on stage. I was at the Web Summit, a few years ago – back when it was still in Dublin. But this wasn’t the first time I’d heard the advice. It had become so standard in the tech industry that it was the mantra of everyone who’d exited for north of €100 Million.
This advice just serves to show how far these CEOs have travelled. The advice is so lacking in empathy with the typical startup that it can only be described as out of touch and useless.
This isn’t surprising. In general successful CEOs who have managed to exit their company have come a long way. The early years are a blur of endlessly retold, self serving narratives that makes the reality of those years elusive even for the most grounded of CEOs. That’s why the best advice from other CEOs comes from people who are at the next stage of growth to you – the memory of where you are is still fresh.
Back to the main theme – why is ‘Only Hire A Players’ such bad advice?
- A Players don’t want to work for most startups. We represent high risk, low immediate reward and long hours and to top it all of the history of successful Irish exits making employees rich is less than stellar.
- Startups are in a hurry. We can’t spend forever hiring – sometimes the right person to hire is the only one that’s in front of us. Unfortunately, it’s frequently better to do the job now moderately well than brilliantly in 6 months – because if we don’t do it now …. We’re dead!
- Finally, if your company requires A Players to be successful then you’ve built a shit company.
It is your job as CEO to build a company that brings the best out of B and heaven forbid C Players (whoever those unfortunate souls are) so the overall performance is at the top of your field. Of course, this is difficult and it’d be a lot easier if you just had A Players – but that’s dreaming.
We’ve all seen great talent destroyed by poisonous working conditions and similarly seen mediocre talent shine brighter than the brightest lights when incentives, opportunity, culture and support is aligned. We want everybody to have the right culture and ‘can do’ attitude but that is at least as much a factor of the culture that you create as of their core personality or skills.
There are no extraordinary people out there – there are only people that do extraordinary things. If you put in place the right environment you’ll be surprised how many people can do extraordinary things.
A huge win for startups can be deliberately targeting B Players that have obvious failings that make them unattractive to companies looking for A Players and bringing out the very best in them. The challenge then becomes “How many of my B and C Players can I make A Players?”.
What can Startups do?
- Hire the best you can in a reasonable time frame
- Provide a working environment and create a culture that brings out the best in people
- Zero tolerance for negativity and undermining
When you’ve done that then maybe one day you’ll be on stage saying you only hired A Players. Then you’ll have made all of your employees feel special – after all, that’s a much simpler narrative..