Your B2B cost strategy must match your B2B revenue model, or your business model won’t click. Let me explain.
I wrote in the past about B2B revenue models (here) and the differences between the perpetual licensing and subscription pricing models.
The summary is this. If you charge $1 for your software, a licensing model lets you get that $1 one-time and up front. The cash is great, but assuming no ongoing service revenues, you then have to find new customers at the start of every quarter. For that $1, you’ve given the customer “perpetual” use of the product.
A subscription, say, over three years, gives you $0.33 a year. You get less cash up front, but the ability to have more predictable cash in the future as you collect $0.33 each year and build sales backlog. You have the ability therefore to better predict future revenues. And, your VCs love predictability.
However, if customers churn at a high rate, you get less cash over the life of that engagement with the customer than you would have with the perpetual model. Your subscription model has then effectively subsidized the customer.
And, here’s the rub. Many start-ups have embraced the “new” subscription pricing model but have retained the “old” and expensive go-to-market cost structure. They still have tons of very expensive sales people who do “direct” sales. They do not have the slick web-download-freemium-lead-gen-inside-sales cost structure that better fits with the “less cash now” subscription model.
That happens not because they don’t want to but because they cannot. The market won’t let them. The market isn’t ready for their product and they must invest a great deal of resources to educate customers.
We do a great deal of B2B and B2B2C investing, and we see a lot of business plans in those areas. So, the questions we often ask entrepreneurs are these:
1. Are customers in pain?
2. Is there an identifiable decision-maker with a budget to solve that pain?
3. Do they know solutions exist?
I know these sound like plain-vanilla questions, but I find analyzing markets is very tricky. And, different phases in a market have enormous cost implications for start-ups. Here are some examples:
Customers are in pain, but it is a low priority. As a result, they’ve not organizationally appointed someone to solve that pain, and your customer acquisition strategy becomes really expensive as you kiss a lot of frogs hoping to find someone with power and money. In other words, your sales reps’ productivity numbers will be abysmal, as it’s hard to get customer to buy when they’re not ready to do so.
The pain rises and someone at a customer prospect is asked to start to look at solutions. But, no budget exists yet. So, the decision-maker who loves you then has to jump a lot of internal hoops to get money from somewhere. Long sales cycle ensues. Budgets are heavily negotiated internally and asking for an exception can be problematic.
Or, pain/decision-maker/budget are there, but no one knows the problem can be solved. You then have to educate the market that a solution exists (and, that among all the vendors, you’re the best). A good example is when Chrysler launched the first mini-van. Families have always needed a larger vehicle that drove like a car (rather than a truck). But, they didn’t know a solution existed. What did Chrysler do? A huge advertising campaign. Fortunately, they were fresh from bankruptcy and loaded with cheap government money. With that pot of cash, they educated consumers on “this is a mini-van and here’s why you need it.”
So, if you’re an entrepreneur building a cool, new B2B product, it is super-important to try to figure out where the market is in its evolution. It is very hard and expensive to accelerate a market’s development. And, frankly, I find that many entrepreneurs under-invest on this front. They overly focus on product and under-focus on where the market really is in its adoption cycle.
I’ll close with a relevant suggestion: check Google keyword volumes and price points as you write your business plan. If customers are in pain and have anointed decision-makers with budget, they’ll be searching online for a solution.
You’d love to find spaces where Google keyword search volumes are rising but where price points are low. That suggests that customers are seeking solutions (there is demand for your product) and there aren’t tons of providers bidding up keyword prices (few competitors for you). That demand-supply imbalance is gold.
And, if customers are seeking solutions, then you can employ search engine marketing and optimization techniques to get prospects to you cheaply. In other words, they come to you. You thereby have radically cut your go-to-market costs.
Of course, an expensive missionary marketing and sales process can work, but that best fits a traditional perpetual licensing model where you maximize cash up front. Which is the point of this blog post: your pricing hypothesis and your go-to-market plans must fit.
What do you do if you already are all-in on a subscription pricing model, but find that a market’s immaturity is forcing you to hire expensive sales reps to do a missionary sale process?
There are some ways around that, but I’ll save that for another blog post. Ohio State and Oregon are about to play for the national championship. Bucs vs. Ducks.