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SaaS Startup Strategy | Three SaaS Sales Models

Choosing the right go-to-market sales model for your SaaS startup can be a make it or break it decision. Choose right and you grow smoothly from seed funding to A round to B round and beyond. Choose wrong and you spend precious cycles chasing your tail as cash runs out. While most B2B SaaS startups that offer recurring revenue subscriptions gravitate toward a transactional sales model characterized by inbound marketing and inside sales, this is not always the case as pointed out in this recent article entitled the Debunking the SaaS Sales Model Myth by my esteemed colleague Jeff Kaplan. But, how do you go about choosing the right SaaS sales model for your particular SaaS startup?

saas sales model

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

Price is Paramount

What’s your average selling price? I don’t know any single statistic that provides more insight on a SaaS startup, or any business for that matter, than average selling price (ASP). Average selling price is the intersection of supply and demand and as such it measures external factors like customer value and competitiveness, while it constrains operational metrics like costs, volume and risk.

Your ASP places a ceiling on your customer acquisition cost, which in turn limits your SaaS sales model options. If your ASP is $500 annual recurring revenue (ARR), then you are unlikely to be able to fund a direct sales force, because your sales rep would need to sell 1000 deals per year to come close to covering your customer acquisition costs. Whereas if your ASP is $500,000 ARR you only need to close a single deal, so you can afford to fly out and wine and dine your prospect to your hearts content.

Price has an inverse relationship to deal volume. For example, achieving $10M in total revenue with a $1K ASP requires 10,000 customers, whereas a $10K ASP only requires 1,000 customers. The volume requirement implied by ASP flows back through the sales process to put pressure on every upstream metric. Low ASPs require large target markets, more leads, more pipeline, higher conversion rates, shorter sales cycles, and so on to deliver a high volume of customers. High volume also requires more customer self-service, more automation and less labor, because labor is expensive, slow and has poor economies-of-scale.

Conversely, price has a direct relationship to risk. High ASP means high risk. The more risk, the more your customers will desire a personal relationship. It is the rare customer that will part with $50,000 through a self-service portal (although the Google AdWords customer does come to mind). Lacking the brand security of an established player like Google or Salesforce.com, a SaaS startup must put a human face on its service to overcome this fear. Luckily, high ASP pays for the sales and support labor required to create the personal relationship.

Complexity Constrains

How difficult is it for your customer to buy your product? Is your SaaS offering easy to find, easy to understand, easy to try, easy to buy and easy to use? Every hurdle that stands between your product and your customer reduces your sales velocity, decreases close rates, and increases your costs. The more complex the purchase, the more help the prospect will need. And, the fewer choices you will have regarding your SaaS sales model.

You can make every effort to eliminate complexity, but at any given time the amount remaining must be surmounted by your SaaS sales model. For example, a new social collaboration SaaS may appear so foreign that prospects have difficulty understanding what it is, let alone what it can do for them. Onboarding a SaaS ERP might require the customer to alter internal business processes before any value is realized. In both cases, it will fall to your SaaS sales model to help prospects navigate the complexity.

Three SaaS Sales Models

Price and complexity define a strategic spectrum of sales approaches for SaaS startups that gravitate strongly toward three distinct SaaS sales models: self-service, transactional and enterprise. While a mature SaaS business may employ all three, a SaaS startup will have the resources to master only one. However, this choice is not always straightforward when you are entering or creating a new market, because you must first find balance between price and complexity.

Price and complexity are natural adversaries. Higher complexity means higher costs, thus requiring higher ASP. But just because your product is difficult to buy doesn’t mean your prospect is willing to pay more for it. Getting the right alignment between price and complexity means ensuring the value customers place on your product always exceeds the price, time, fear and frustration they must pay. Once you achieve the right balance for your market, your choice of SaaS sales model will be obvious. Fail to find it, and you end up in the Startup Graveyard.

Customer Self Service
Achieving significant revenue at a low price point naturally entails driving complexity and cost out of the purchase to clear the floodgates for high volume. The ideal SaaS sales model is complete customer self-service. However, this requires that your customers be willing and able to service themselves. Able such that they understand the value of your product, how to buy it and how to use it. Willing such that they see little or no risk or frustrated effort in the purchase. Good examples come from well understood commodity office productivity tools that are easily adopted by a single user or department manager, such as those offered by Zoho and 37signals. The customer self-service SaaS sales model typically breaks down across customer-facing functions as follows:

  • Sales: None.
  • Marketing: Full revenue responsibility, creating awareness, educational content and automation capable of driving business through the entire purchase process from awareness to close.
  • Support: Provides automation and tools for easy on-boarding, plus templates and educational content that allow customers to resolve any issues they encounter on their own.

Transactional Sales
As price increases, customers become less willing to part with their cash without at least knowing there are actual trustworthy human beings behind your website URL. Higher ASP brings higher expectations for the business relationship, such as signed contracts, premium SLAs, invoicing, and the ability to speak to a human when problems arise. The risk-driven need for a more interpersonal business relationship drives the SaaS sales model away from customer self-service into a transactional sales model characterized by efficient, high volume sales and support operations, short sales cycles, and rapid onboarding—all supported by automation that allows for as much customer self-service as possible were customers willing and able to service themselves, which they are neither. Good examples come from products that automate a well-defined business process or function with a bit of an Internet twist, such as those offered by Marketo, Zendesk, and Xignite.The transactional SaaS sales model typically breaks down across customer-facing functions as follows:

  • Sales: Inside sales reps supported by online content and automation, tools, training, incentives and metrics that enable high efficiency and many transactions per rep.
  • Marketing: Feeds highly qualified leads to the sales team to build pipeline and improves efficiency by removing roadblocks through educational content and automation that drive complexity out of the purchase.
  • Support: Inside support reps that meet a range of SLAs from limited pre-sale support through premium post-sale support with tools, training and metrics that enable high efficiency and many transactions per rep, complemented by customer self-service tools, templates and educational content.

Enterprise Sales
While most SaaS startups gravitate toward transactional sales or customer self-service, some SaaS startups have products that provide so much value per customer and are so complex to buy that their natural starting point is traditional enterprise sales. Two good example categories are cutting-edge Internet marketing tools employed by big brand consumer marketers, such as BazaarVoice and BrightEdge, and feature-rich suites that automate strategic, core business processes for mid-to-large enterprises, such as Netsuite, Workday and Passkey. The enterprise SaaS sales model typically breaks down across customer-facing functions as follows:

  • Sales:Territory sales reps focused on a narrow set of target prospects directly supported by product marketing and sales engineering resources at a deal level.
  • Marketing:High-end marketing that facilitates brand awareness, education, relationship building and trust, complemented by direct support of the sales team, including telemarketing speeding access to target prospects and detailed sales tools such as product roadmaps, ROI calculators, etc.
  • Support:High touch support up to onsite issue resolution complemented by educational tools and training tailored to the specific needs of individual customers.

Avoiding the SaaS Startup Graveyard

Regardless of your price, your SaaS sales model must provide sufficient support to enable prospects to navigate the complexity of the purchase or you will not close business. You can give your product away in a Freemium price scheme, but if the purchase is too complex, you can still find yourself hand-holding every single free customer akin to an enterprise sale. You just can’t give away complex software. Only customers that are willing to pay an exorbitant price for your hugely valuable service will also pay exorbitant amounts of time, fear and frustration to wade through the complexity of getting it. When complexity forces you into a SaaS sales model where the costs exceed your ASP, your business is destined for the SaaS Startup Graveyard.

saas startup graveyard

SaaS startups that combine low price and high complexity end up in the SaaS Startup Graveyard.

There are three strategies for avoiding the SaaS Startup Graveyard, all of which amount to aligning price and complexity, so you can gravitate safely toward a viable SaaS sales model.

The SaaS startup holy grail lies on the opposite end of the spectrum from the SaaS Startup Graveyard. High ASP combined with low complexity characterizes the most wildly successful SaaS offerings like Google Adwords and Amazon Web Services (cloud in this case), where customers routinely write six figure checks with the most minimal amount of personal interaction with sales and support reps.

SaaS Startup Evolution

As a SaaS startup evolves into a mature SaaS business, growth aspirations naturally lead to the desire to expand market reach to new prospects and to expand product footprint with current customers. The SaaS startup that enters the market with a customer self-service SaaS sales model represents the origin of a natural evolutionary path. The theory is straightforward. The nimble SaaS startup that has built a large self-service customer franchise for a super simple product starts pumping in new features, develops modular pricing schemes, adds a few sales reps and sets off on a quest to increase ASP from $10MRR to $100MRR to $1000MRR to $10,000MRR and beyond!

saas startup evolution

A SaaS startup that aspires to evolve beyond a single SaaS sales model
faces the challenge of mastering multiple competitive strategies.

However, the straightforward tactics belie the tectonic strategic, operational and cultural shifts required for success. Underlying the simplicity of the customer self-service model is a mass market, low cost competitive strategy. Whereas, the enterprise sales model assumes a highly differentiated product, usually characterized by cutting-edge Internet-enabled innovation. Maintaining the simplicity of the customer self-service model as a successful SaaS startup introduces more complex products and purchase processes in close proximity to the originally simple, self-service product and purchase process requires careful planning and execution. Should the products be separate offerings or modules of a single offering? Should transactional sales arise by skimming the cream of customer self-service prospects, or should entirely new lead generation vehicles be put in place. Are enterprise customers just transactional customers who are all grown up, or an entirely different species? It is often said that it is easier to move up market than down market. This is probably true, but it is NOT easy to move up without inadvertently abandoning the down.

If you liked this post, then you’ll love the eBook of the complete SaaS sales model series. And if you like it, please share it!

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19 More Comments at Chaotic Flow:

  1. Shalin, 16. November 2010, 10:00

    I Like how you have differentiated the cases from a perspective of sales, marketing and support viewpoint. Takes a lot of ambiguity out for getting the right pricing model for a SaaS application based on the strength of the company & the product.

    I wrote a post on SaaS pricing models with some examples: http://tenmiles.com/blog/2010/04/pricing-your-saas-application/

    I think this fits as a perfect primer for that article.

     
  2. Steve Noll, 17. November 2010, 10:18

    Joel, I can really appreciate your analysis here. I spent a few years at a SaaS startup and we struggled with some of the decisions you outline in this throughtful outline. Thanks for the concise review.

     
  3. Axel Schultze, 18. November 2010, 22:27

    Joel, the right sales model makes or brakes any business, not just start-ups and not just SaaS businesses. But wow you put a very comprehensive model together – not sure though I completely understand it. I had the luck to get seven companies from start to exit or still running. Two public, two sold, one very healthy, and two I’m currently running.

    We all know that the best technology was never the leader in the end game. But the best go to market approach is. I guess to provide a short answer:

    * Don’t focus on the solution you have but on the problem you solve

    * Sell the first units yourself

    * Use marketing before you burn through sales people

    * Make your early customers to advocates

    * Don’t follow any advice – because it makes you a follower right there

    * Now turn into a leader and only you know how to take it from here

    Yes, it’s very simple, but simplicity was something you advocated ;)

    Axel
    http://xeesm.com/AxelS

     
  4.  

    [...] benchmark if the SaaS sales rep is the only person orchestrating the sale and indicates a highly transactional SaaS sales model. If your SaaS sales organization includes ancillary staff, e.g., lead qualification, technical [...]

     
  5.  

    [...] 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. [...]

     
  6.  

    [...] 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. [...]

     
  7. sanskriti, 16. September 2012, 0:11

    Do you have examples of companies who are in startup graveyard?

     
  8. Sapu Gee, 11. October 2012, 15:16

    Excellent blog and thanks. We have couple of Cloud based SaaS Enterprise products and we are trying to sell those in small to medium size companies. Looking for the silver bullet to target first set of customers but having tough time and continuing the search. However, following simple rules of sales as Axel said and hoping for the best.

    Sapu
    http://www.punchmytimecard.com
    http://www.reqtool.com

     
  9.  

    [...] guru, Joel York describes the 4 types of SaaS business models that exist as shown in his chart [...]

     
  10. David Szabo @SaaSinCloud, 22. November 2012, 5:46

    Great post – very practical, a must-read for startups and ISVs

     
  11. Surendra, 5. December 2012, 21:21

    A very nice article.. SaaS model is a must for business where they only partially depends on technology.
    for eg: GPS vehicle tracking system solutions. No company unless they are very big in business volume cannot sustain to go for an independent server and other maint by themselves.
    In these cases the SaaS model which suits well for small and medium sized organisations comes into picture.

    Thanks
    http://www.assettl.com – for GPS vehicle tracking and Cab dispatch systems

     
  12. Rustam, 18. February 2013, 2:12

    Thanks, Joel!
    Very interesting article. I like your system approach.
    And your e-books are great as well!

     
  13. Sales for Startups–intro « SaaSy Sales (Pingback), 19. February 2013, 12:55
     

    [...] one of my favorite leads about 3 SaaS Sales Models. It talks about how pricing, complexity vs self serve influence whether your process should be more [...]

     
  14.  

    [...] you are ever asking yourself this question, you should read this post by Joel York. Self Service works very well for low complexity, low price point applications. And as [...]

     
  15.  

    [...] explanation than the one provided by Joel York, who runs the Chaotic Flow blog. He has a article on SaaS sales strategy and sums up the various strategies with this [...]

     
  16. Alain Mevellec | Service Catalog Toolkit (Pingback), 1. August 2013, 17:38
  17.  

    [...] Resources on What is a good benchmark for B2B SaaS sales cycles: http://chaotic-flow.com/saas-startup-strategy-three-saas-sales-models/ http://www.bvp.com/cloud/law2 [...]

     
  18. Selling SaaS tips and tricks | Service Catalog Toolkit (Pingback), 1. August 2013, 18:41
  19.  

    [...] of the reasons why SaaS has seen a rapid growth in the past several years is precisely because of the approach that they take to their sales. Instead of providing customers with a one-time product, SaaS [...]

     

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