At the pitch session for Microsoft Accelerator’s next batch, more than 35 startups presented at today’s event at 91Springboard in New Delhi ( May 30th 2014).
I was really impressed to see that the number of high-potential startups – great teams driving meaningful concepts addressing large market opportunities – was much higher than the number of average or not-so-good startups. The startup eco-system in India is certainly moving in the right direction.
Most entrepreneurs with online businesses focus only on online marketing for customer acquisition. However, even if your business is online, your consumers live in the real world.
In many cases, especially for the initial user base, it is possible to use off-line marketing. E.g. offering it to a employee base of a company with some incentive, doing posters and leaflets on campuses, etc.
In countries like India, where the cost of customer acquisition for e-commerce sites is estimated to be around INR 1500 [USD 30], a few companies have successfully experimented with passing on a part of the customer acquisition cost to the user. E.g. Offering an INR 500 or USD 10 voucher to just signup, etc. The likely result will be higher conversions.
These methods may not be scalable or sustainable in the long run, but they can give you a decent start.
Invest in creating well-designed communication material – digital or printed. Practice your pitch well – focus on the value proposition, not just product features.
The entrepreneur is the most important sales person of the company, even if he/she is not heading the sales department.
By the way, while we are discussing enterprise sales in this article, in its entirety selling is not restricted to customers as the entrepreneur has to also ‘sell the concept or business case’ to potential employees, vendors, trade associations and media.
As with any other sales person, the entrepreneur has to be extremely passionate and excited about the company and product/service. Enthusiasm is infectious. People usually are more attentive while listening to a person who is enthusiastic about what he/she is talking.
Large customers usually do not buy from startups. Largely because the perceived risk of buying from startups is higher. And the perceived risk is not just about product quality. It is usually a doubt about whether the startup would be able to provide after sales service, updates, and also whether the startup will survive or, as is the case with many startups, wind up after trying a bit.
How important is the role of PR and Marketing in acquiring customers? Tune in as Prajakt Raut discusses how you can plan your PR and Marketing roadmap.
The answer to this question depends on the stage of the startup, the nature of the industry, the current team’s capabilities and competencies and the resources available for hiring and retaining the appropriate sales person.
Sales people typically like to work with companies where the processes are well defined, the value proposition has been proven and the marketing material and sales packages are all working smoothly. They usually like to achieve their numbers and targets, measuring themselves against their peers and their own achievements on the basis of how well they have achieved their targets. Hardcore sales folks do NOT typically like to be trapped in working and reworking processes, strategy, pricing, sale packages or even experimenting with different value propositions to different customer segments.
Ideally, you should hire a sales person (senior or junior), when some of the uncertainties of the business have been tested and proven.
In the initial phase of the business, you will not / cannot know what price points will work, which audience segments will respond better or what communication messages will deliver better results. As a result, a new sales team tends to interpret this phase of ‘experimenting’ as “the management is undecided and unclear about what they want to do”, and hence start looking around for more stable opportunities. A sales team or the head of sales, leaving the company soon after joining, sends a wrong signal to the market – not just to other sales folks, but also to other members of the team, customers, vendors and investors.
Also, if you don’t have a challenge big enough for your sales head, he may not enjoy the work. You should therefore start hiring sales folks when the organization is really ready to leverage their skills and competencies, and provide them enough motivation and material to go and win in the market.
However, it’s not always possible to wait for things to settle down, before you hire a sales team.
So, if you really do need a sales person at the early-stages of your journey, make sure that you explain the current stage to the sales person, clearly define what his or her roles and responsibilities will be in this phase (e.g. could be – to help define the marketing and sales packages/programs) and honestly apprise them on the role that they will have to perform in the initial phase. Enlighten them that every startup goes through this phase of discovery, and emphasize the FACT that they will learn a lot from this phase than they would in just any sales management role. Position it as a positive and do not be defensive about it.
Even if you – an entrepreneur, are not a sales person, recognize and appreciate that the sales people are motivated differently and that you need to understand their mindset to be able to challenge them, motivate them, encourage them and reward them.
Happy Hiring !
In the context of a founder or entrepreneur, sales are not just about selling to customers or consumers. And it is not about just a transaction.
Here’s why…
For a founder, ‘selling’ will have many dimensions, and in most cases it will involve selling the vision, aspirations and competencies of the startup to a whole bunch of stakeholders. These stakeholders could be family/spouse or potential investors, employees, landlords, vendors, partners AND customers/consumers.
For example, when you meet potential employees (or when you are interacting with an individual or a group of people who could be potential employees), the entrepreneur should aim to convince the person that what their startup aims to do is compelling and has a large potential, that they have a sensible plan, and the competence and resources to implement that plan in the market. The entrepreneur has to convince the potential employee, that they have the resources to take care of salaries and investments required to get into the market. In other words, the entrepreneur has to ‘sell’ the startup to the employee.
One of the areas in which the sales skills of an entrepreneur will be tested is when they pitch to investors. Primarily because what they present to investors will be largely about the future that they want to create and not just showcase what they have currently done or achieved. This is where fundamentals of selling – understanding the audience, presenting a sharp case, articulating it well, communicating it effectively, exuding confidence without appearing arrogant, giving the comfort of trust and reliability, etc – will all have to be brought into play.
Yes. An entrepreneur must have selling skills.
However, an entrepreneur may not enjoy doing customer/consumer sales, or may not be good at say cold calling, or negotiating, or paper work, etc…. and that’s acceptable. As long as you acknowledge what you can and cannot do, or are not keen to do, an entrepreneur could be excused from the sales function. However, in the initial phases of the startup, there will be none better than the entrepreneur to passionately communicate the value proposition of the product/service, and give the potential customers the confidence that his team will deliver. Hence, in the initial phases, entrepreneurs must lead the sales process, or at least be the face of the organization, even if another employee is leading the sales efforts operationally.
Moreover, whether the entrepreneur does the actual sale process, or has a team that does sales, one of the founders MUST be responsible for meeting the sales numbers.
Happy Selling !!!
Often entrepreneurs attend conferences and industry meetings where they have an opportunity to network with and meet investors. But, often these opportunities are not well utilized and entrepreneurs fail to get the complete attention of the investors.
Here’s why:
Through the day, investors are flooded with proposals, calls, mails and face-to-face interactions, where entrepreneurs request for meetings.
It is impractical for investors to accept all requests, and therefore, they end up using some criteria to filter and select, who they would like to meet. And, in the absence of any other criteria during one-on-one interactions in business conferences, the criteria used is the entrepreneur’s ability to clearly articulate the concept and the degree of passion driving that concept. For example, during the brief interactions at conferences, investors tend to seek more information, either through a longer conversation (rather than just giving a card and saying “Send me a mail and we will see” ) or calling for a follow-up meeting, from those who leave them with the feeling “Ah, this seems like a good concept, a good business case and this person seems to be sensible and smart enough to build a business”.
Here’s a list of things you may want to consider, when attending networking meetings where you may meet investors. The key message here is that you need to PREPARE a brief pitch, practice it and deliver it as if it is extempore.
Be specific about how much money you need e.g. “We are currently past our concept stage. The model is proven and we are now ready to go beyond the pilot stage. We are now looking for USD 250,000. This will be used for building our team for expanding our reach to 5 more cities and marketing. This money will last us for 18 months, after which we plan to raise another round for growth.”
Most importantly, after attending business conferences and industry events, be disciplined about writing to those you interacted with. Keep the mail message short and personal. DO NOT CUT-AND-PASTE A STANDARD MESSAGE ABOUT YOUR ORGANIZATION. No one reads through that. The intention of the follow-up e-mail is NOT to spread information about your company. It is to gain their attention and establish a relationship, or at least get an opportunity for a follow-up meeting.
Happy networking.
By Sean Wise, Managing Director of Wise Mentor Capital- http://www.WiseMentorCapital.com and www. SeanWise.com.
There is a famous maxim that says “The shortest distance between two points is a straight line” and while no doubt a truism, the shortest distance is not always the best route to take. The same can be said for sales roll- outs with regard to the decision between building an internal sales force, and leveraging a pre-existing group of resellers.
Every entrepreneur dreams of the day when their sales rocket up from $500,000 to $35,000,000. Along the way however, every entrepreneur is faced with a key strategic sales decision: ramping up firm sales by building an internal sales force (the Direct Sales Model), v. leveraging third-party market intermediaries to sell on your behalf (the Channel Sales Model). In pondering this decision, founders need to ask themselves several key questions, including:
To tackle some of these issues, I sat down with Les Hansen, Vice-President of Sales & Marketing for Gavel & Gown Software, a venture capital-backed software firm selling enterprise solutions to the legal profession. Since joining Gavel & Gown, Les has managed to triple G&G’s customer base to over 20,000 law firms in over 50 countries around the world. G&G have sold more than 250,000 licenses through a well- managed sales and distribution program, which leverages both a small dedicated internal sales team, and a small army of resellers around the globe. Les shared with me “The 5 C’s” – which he believes entrepreneurs need to consider when pondering the Direct v. Channel sales decision.
1: Cost: What’s the best way to spend your money?
The cost of building a direct sales force internally can be daunting. Not only do you have to hire, train, and support them, you also have to allocate additional funds for draws, employee benefits, and sales support. In addition, you must do all of this before a single unit of product is sold. Giving up a percentage of future sales revenue in the form of reseller margin may seem cheap in comparison, but “you must think this through,” cautions Hansen.
“You need to first calculate the breakeven point on the direct cost of a sales force vs. the margin cost of the channel,” says this experienced sales strategist. “Remember that, for the most part, direct sales costs are fixed (apart from the commission component), and channel costs are variable. This also means that direct sales costs can be leveraged while channel margin costs cannot.”
In this way, you need to be able to look at the long-term picture; seeing not only the short-term sales costs, but also the long-term revenue potential. You also need to allocate fixed costs to areas where you can get the highest ROI.
2: Customer: How much customer interaction do you need?
Finding a customer that is willing to buy is hard. Building a relationship that will ensure they continue to buy – much more so. Channel partners provide your venture with a much larger reach, but you need to balance the channel’s ability to leverage pre-existing relationships, with your need to access direct customer feedback – especially in the early days of product development and beta testing, when customer feedback is vital to ensure long-term viability of the product. However, in the end, you need to weigh the long-term impact of keeping your customers at arms’ length vs the ability to have a larger number of feet on the street hawking your product.
3: Calendar: How long do you have?
Building an internal sales force takes time. Even once you have them hired and trained raring to go, it will take still more time for them to go out, meet customers, qualify targets, build leverageable relationships, and establish enough customer credibility to actually close a sale. Do you as a start-up have that much time, or do you need to leverage a channel that is already selling similar products to your target audience?
Investors want scalability (the ability to ramp up revenue fast, and to do so without proportionately ramping up costs) and maximizing scalability often means deploying a channel sales force.
“Without those extra feet on the street, most VC’s will have a lot harder time believing in a venture’s ability to scale up to $35M+ in 3-5 years. It just takes too long to scale up internally, and without scalability, the VC will have a hard time getting their head around an investment,” confirms Phil Reddon, a VP with Covington Capital, a venture capital fund with more than $500-million under management.
4: Complexity
The more complex the product is, the harder it will be to drive sales through a channel, or so one might think. “There’s a myth out there that if your product is complex, you have to sell it direct. But that simply isn’t an absolute truth,” says Hansen. “In many cases, when the product is complex, you need channel partners to not only sell the product, but also to integrate the product into the client’s existing infrastructure, to service and update the product on an ongoing basis and to provide end-user training on functionality.”
This makes sense to me, as a direct sales force, which just makes commissions on moving sales units, may not focus on after-sale support. “In complex sales, you may need your channel to not only sell your product, but to also sell additional products and services that, when packaged with your product, create a complete solution offering for the customer,” Les shares: “This can be a real advantage for you. Many channel resellers will make 5 to 10 times as much money on the consulting services they sell alongside your product as they do on the margin you give them. This means that they will have significant incentive to sell your product, and it can save you margin dollars. It also allows you to focus on your core competency. If you are not an integrator you shouldn’t try to be one. You should partner with someone who is.”
5: Control: Who owns the Customer?
Another key sales maxim is: “He who is closest to the customer owns the customer.” This means that down the road, your channel partners may own your customers and therefore, if they walk, so may some of your customers. So you need to consider the impact of this. Is this a business risk that you can live with? While customer poaching does happen when internal sales reps switch to a competing firm, the terms of most employment contracts can mitigate this significantly. Accept that you will have much less control over your channel partners than you would over a direct sales force, which can be a challenge. Will you be able to exert enough influence over your channel partners, to comfortably achieve your business objectives? If not, can you live with this?
Control also addresses your ability to make adjustments on the fly and to influence the sales messaging quickly when needed, according to Hansen. “In start-up software sales, you may not get your go to Market plan and message perfect right out of the gate, so you need to be flexible and be able to respond quickly. It is a lot easier to control your external communication through a sales team that reports directly to you, than through a channel with which you have an arm’s length relationship. Managing a message through a channel can sometimes be a lot like that game ‘broken telephone’. You need to be concise and clear, or the message may get distorted as it disseminates.”
So, there you have it – “Hansen’s 5 C’s” – which outline the key matters you should consider before choosing a go to market strategy; but what about the timing of the decision?
Evolving the Approach
In the venture capital world, where scalability and rapid growth are prerequisites for investment, the channel sales model seems to be preferred. “From a VC perspective, I like to see companies which can leverage other people’s sales forces to grow. Yes, your company will give up some points in margin and also lose some control over customer relationships, but will hopefully make up for it in terms of more volume,” posts Ed Sim, Managing Director at New York City’s Dawntrender Ventures, in his blog BEYOND VC.
Stephen Pollack, CEO of the Toronto based venture backed PlateSpin and an IT Veteran with a wealth of experience in creating and delivering software and software service, agrees with Sim: “We found that establishing a global business model was only possible through a channel approach. That was a main driver for us along with the desire to work through trusted sources (that) the customer can rely on instead of a ‘startup in some far away place’. We now have 1000 customers spread all over the world through our channel model”
Therefore, if you decide on building channels, the question then becomes when to focus on such. Covington’s Reddon comments: “Companies need to land, usually via direct- initiatives, commercial reference-able customers first. Then once they have enough proof of concept installs, they can turn to channelizing the process.” Mike Green, President, Greenco Investments Corp. (and former Chair of the Toronto Angel Group who now works closely with several young software companies on issues including sales rollouts), echoes this notion: “There is no point in moving to an indirect channel until AFTER you have got it right with your own direct sales efforts. Once you understand what it takes to sell, can communicate the typical sales cycle, your key selling points, and … handle the standard sales objections, then you are ready to give the indirect sales channel the ammunition they need to be successful…but not before!”
Tips for Managing Channel Sales:
Once you’ve got the ammunition and information from those first 20+ reference-able customers, you are ready to start building out your channels. To do this, Les says that the fastest way is to find a group of like-minded individuals who are already in deep with your target customer base. The best way to do that? “Ride someone else’s channel. Never build when you can borrow,” Hansen comments. “Take a look at the products that your target customers are already buying, and find out who they’re buying them from. Chances are that someone has an established distribution channel into the market segment you want to get to.” Remember – if you have a product and are looking for a channel, somebody out there probably has a channel and they are looking to push more products through that existing channel. Even better – if you can establish integration between your product and theirs you can improve the revenue generating capability of a single sales call, allowing the sales reps to ‘double-dip’ their commissions.
However, channel management does not end here. Once you have the channel, you not only need to maintain it – you need to motivate it. Hansen gives three pieces of advice to future channel managers: “Be fair – your channel partners expect it. Be consistent – your channel partners will talk to each other, so accept it. Be friendly – relationships go a long way, so invest in them.”
The Bottom Line
There are definitely pros and cons on both sides of the Direct v. Channel debate. A direct sales force allows you more customer interactivity, but may cost more (in terms of both time and money). Harnessing a channel sales approach allows you to leverage on pre-existing relationships, but does not offer up as much control. Neither model is perfect, nor can either be applied in all cases. The shortest distance between two points may be a straight line, but the shortest distance is not the only route to take – and it certainly is not the best route to pursue under all circumstances.
Customer Acquisition Costs should, like any other cost, be factored into your pricing. I.e. you have to estimate what it is going to cost you to acquire a customer, and build that into your business case.
In the initial phases of a business your cost of customer acquisition may be much higher. Here, you have the option of estimating what the eventual cost of customer acquisition be at scale, and include that into your costing. In this case, you will be making lesser margin per sale than you would at scale, but you will be able to price your product closer to your eventual selling price and not make initial adopters pay for inefficiencies of smaller scale.
On the other hand, you may take a call to load the entire higher cost of initial customer acquisition on to the customer.
Of course, you should try to continuously reduce the cost of customer acquisition. Apart from direct sales, here are things that you could try:
Invest in creating well-designed communication material – digital or printed. Practice your pitch well – focus on the value proposition, not just product features.
Apart from direct sales, here are things that you could try:
Invest in creating well-designed communication material – digital or printed. Practice your pitch well – focus on the value proposition, not just product features.
Simply put, if the idea is the ‘what’ part, the business model is the ‘how’ part of your plan. It is a clear statement of how you are going to make money from your venture.
In other words, it reflects your thinking on the following broad parameters. Of course, the parameters will vary by business:
To illustrate with an example:
For an online toy store the business model can be as follows:
“We sell & deliver toys to consumers who order online from our website. Our target consumer is the affluent family with children below 7 years. Our average ticket size per transaction is INR 1000 and we expect our target customers to buy 2-3 times a year from our online store.
We have a 50%+ gross margin on our products. Thus, we expect to make about INR 1000 gross per customer per year.”
Note: Once you have your business model detailed out, you will need to check if your concept and business model has a business case. I.e. At the startup stage of low capital-intensive businesses, it will suffice to identify at what phase does the business become operationally profitable.
Business models could vary, even for the same concept different companies could follow different business models. Let us see with another example:
Possible business models for an outsourced HR management company:
How much to charge your customers is a critical decision for entrepreneurs. I.e. pricing is a critical component of your business strategy. While getting your pricing strategy right is no guarantee of success, getting is wrong is one sure shot route for failure. Obviously, how much consumers are willing to pay is dependent on the value they see in the solution you offer, be it a product or a service.
There are quite a few Revenue Models available for startups to consider:
Cost Plus mode: where the seller decides the price of the product based on the cost of the product. This is usually done for physical goods e.g. shoes, garments, computers, pens, etc. Doing this model for online services is not feasible because there is no real cost of the physical goods. How much premium you can charge over the cost is dependent on a number of factors including competition, alternate options, the overall value-proposition that the customers see in your offering, and often, also the personality & equity of the brand.
Value based model: For products or services that do not have an individual unit price [e.g. Microsoft Office software], the seller decides the price based on what they believe is possible to be charged from the consumer. This is the toughest part and may require some experimentation and in-market tests to arrive at the price point that you could charge.
Distribute the product free but customers pay for services: In some markets telecom companies follow this model where they give away the telephone instrument for free, and people pay for the usage. In some cases, e.g. printers, the base product is not given free but is offered at a very low price, often lower than the cost price, with the hope of recovering it through sale of related products and services e.g. cartridges and printer servicing.
Free for consumers – ad supported model: E.g. Angry Birds
Freemium: Free for basic, paid for premium services. E.g. sugarsync.com, linkedin, gmail, etc.
Portfolio pricing or package price: This strategy is applicable when the seller has a range of products and/or services and may want to engage the consumer for the entire portfolio. E.g. Insurance companies which offer for corporates a portfolio comprising of life insurance + car insurance + fire insurance + health insurance
Subscription model i.e. users pay a per month/per year e.g. book libraries, dropbox and other online storage sites, SAAS platforms, etc.
Pay-per-use model i.e. users pay as they use it e.g. Platforms like Webex have a pay per use model
One-time payment i.e. users buy a license to use e.g. Microsoft Office
Tiered or volume pricing: Typically used to group buying benefits. E.g. an enterprise software where the license fee per user reduces as more licenses get bought. The pricing in this model is often defined in slabs as relevant to the category.
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