Is Your SaaS Sales Model in the Red?

Key Takeaways

• Imagine your sales strategy on a graph: The Y-axis is price, and the X-axis is complexity. [3:00]
• Your SaaS model will typically fall under one of these categories:
  • Self-Service Model [4:00]
  • Transactional Model [4:35]
  • Enterprise Model [5:00]
• Whichever model you choose, make sure you don’t end up in “the startup graveyard.” [6:00]
• The right levers to pull varies from model to model. For example, the enterprise model demands a sophisticated sales force, while the self-service puts more emphasis on web marketing. [9:15]
• Annual revenue models help build predictability and stability in your cash flow. [10:45]

Listen Here

Labcast 124: Get Your SaaS Sales and Pricing Strategy Right with Ray Grieselhuber

Transcript

Kevin: Hi, everyone, and welcome to this edition of Labcast. I’m your host, Kevin Cain, and today I’m joined by Ray Grieselhuber, to talk about how to get your SaaS sales and marketing pricing strategy right.

If you don’t know Ray, he’s the CEO and Co-Founder of Ginzametrics. Ray has over seven years experience in organic search, social, and paid search marketing, and has helped both Fortune 500 companies and start-ups alike drive growth, increase revenue, and expand to global markets.

Hey, Ray, welcome to Labcast. Thanks so much for joining me today. How are you doing?

Ray: Very well, thanks. Thanks for having me.

Kevin: It’s great, you know, it’s interesting to have someone like yourself, with a background in SEO, and really an SEO expert, here to talk to us about something actually quite different today, in terms of putting your CEO hat on and talking a little bit about SaaS companies, and sort of how their sales and pricing strategies work.

Ray: Yes, I mean aside from online marketing, and SEO, this is probably one of my favorite topics, so I’m looking forward to it and happy to be here.

Kevin: Great. Well, you know, one of the things I wanted to kind of kick off with is this whole discussion that you’ve kind of led on your blog about this idea of there being Four Horsemen of SaaS, which is basically, you know, the four different things that are going to kill a SaaS start-up.

Ray: Yes.

Kevin: Can you kind of describe what you mean by that, and what those things are?

Ray: Yes, sure. And I guess I would preface it by saying that the Four Horsemen really come into play only after you have a viable product up and running, and you’re kind of getting into the scale phase of your company, where you’re starting to try to figure out how to take a product that’s been proved as viable early on, and sell it to a lot more people.

Kevin: Sure.

Ray: And really grow your company. So on that side of things, really the Four Horsemen of SaaS are characterized as, one is basically a lack of investment on the sales and marketing side. Another one is just overall cost of customer acquisitions. So if your CAC is very high, then obviously economics don’t make very much sense. Total cost of service for you to provide, which obviously can eat into your operating margins and insurance, which is probably one of the biggest killers that not enough companies pay attention to early on, and it can really hurt you, over the long term.

Kevin: Sure, and you know, I think it would be really interesting to talk about all of those, and we probably could talk about them all for a very long time. But why don’t we hone in on two of them?

Ray: Sure.

Kevin: And specifically, I’m thinking of customer acquisition costs and total costs of service, which are two issues that really kind of tie back to this whole idea of sales and pricing strategy.

Ray: Yes.

Kevin: So can you kind of, you know, walk us through, first of all, what the different types of sales models look like that a SaaS company might want to pursue?

Ray: Yes, and there’s a really good blog post out there. There’s a blog called Chaotic Flow, run by a guy named Joel York, who really put this together in a way that I think makes a lot of sense. And so, I rely pretty heavily on his framework, but it’s something that I see a lot of companies still struggling with. And characteristically, a lot of them end up going through the three phases that he talks about.

So he basically breaks things into two major kind of axes, in terms of figuring out your sales strategy and your model. The first axis, the Y axis, is essentially price. How much are you charging your customers? And then there is complexity, which is kind of the X axis. And complexity, at first, especially to SaaS product creators, sounds like a product statement, and it’s not. People think, “Oh, I’m like the simple version of X, in the enterprise world.” And that’s not what it relates to at all. The fact that that’s usually not a great strategy, anyway, is a different conversation altogether.

But complexity refers to the cost to acquire new customers and the overall cost to service those customers. And so complexity, framed that way, makes a lot of sense when you’re comparing it against the other axis of price. And so, basically, on the low end, meaning that it doesn’t cost much to acquire customers, and you’re not charging them very much, you essentially have self-service customers, where you can’t and don’t want to try to afford putting a salesperson involved in that acquisition. You basically entirely rely on your customers to find you on the Web, sign up, and convert on their own. So this is very much like the, you know, 37 Signals is kind of the canonical example here.

And then, as you go towards higher price points, but maybe not super complex, in terms of how expensive it is to acquire those customers, you can still rely very heavily on things like inbound marketing, and e-mail marketing, and basically, you know, the Web-marketing, to bring people into your funnel, and you’ve set up our product in such as way that serving those customers is not super expensive for you as a company. Then that moves into what is called the “transactional model”.

Then the third category is, basically, as we’re climbing up the price axis, now we’re kind of over to the right, in the upper right quadrant, where essentially, you have a highly complex product, in term of it’s expensive to acquire them. You know, you basically have in-the-field sales reps taking people out, you know, taking them to parties and you know, getting them drunk, and everything. Basically, hopefully, getting them to sign off on a big, you know, multiple-hundred- thousand-dollar annual contract, at the end of, you know, maybe a six-month or 12-month period.

And serving those customers, they’re very high maintenance. You have to have a support team, professional services, and everything else. And, accordingly, obviously, if you’re not charging enough money, to support both the sales and operations of that distribution strategy, you’re dead.

So those are kind of the three areas where its’ viable to exist as a SaaS company. And then the lower right quadrant is where you don’t want to be, which is called “the start-up graveyard“, where basically you have a product, and this is probably the most important part of the description, which is, most companies, having more complex product than they realize, in terms of how expensive it is to acquire a customer, and how expensive it is to service those customers, and they’re not charging enough. And so, nine times out of ten, when I look at other Saas start-ups out there, the number one problem I see happening is they’re just simply not charging enough money.

Kevin: So, if we look at the sort of three viable models, you know, can a SaaS company be successful in any of them? And sort of live and end there? Or does it have to be sort of an evolution, where they go from one to kind of move their way up through to becoming the enterprise?

Ray: I think they certainly can be successful, in any one of those buckets. Doing them is harder in different ways, you know, for different reasons. And so almost all SaaS companies kind of start off in the self- service model, and quickly realize that their complexity is high enough that they have to start charging money. So they go through this arc, where a lot of them will turn into a transactional-type company. And then some of those companies are like, “You know what, we’re just full-on enterprise. We’re just going to go for that.” And, it’s probably helpful to put some boundaries around what this means, from a pure price perspective. It’s not the only way of defining this, but it’s helpful to have kind of a rule-of- thumb for looking at some of these.

Kevin: Sure.

Ray: And so, what you see at the self-service level is price-points that are in the, you know, $19 a month all the way up to maybe like, you know, like, $100, maybe $200 a month, at the high end. Then there is transactional, which is, typically, more than 500, generally you’re looking at about $1,000 a month, on up to $3,000 a month. That’s what your customer would pay in the transactional model.

And then the enterprise model. True enterprise, most people out there today, kind of in the newer version of SaaS that we’re talking about, would consider “transactional” to be “enterprise”. And they make that definition, usually because it’s a combination of higher price point, and also the fact that you’re typically selling to larger companies. But that’s not really a great definition of enterprise, because it doesn’t fully deal with the complexity, the complex nature of dealing with those customers.

So I would define enterprise as anything on the very, very low end, and it would probably be, like very risky to operate at this break point, like maybe 70K, on an annual deal. And a much safer bet for an enterprise model is nothing less than 100K in an annual contract, and even that’s still kind of in the low end. So, generally with enterprise, you want to be kind of shooting for that 200 or 300K annual revenue, per customer.

Kevin: Now, regardless of whatever model you choose, I mean, your ultimate goal right, is to grow your business. Now, when we’re speaking about sales specifically, are there particular levers that a company could pull to make that happen, regardless of what model they’re using?

Ray: Yes, there’s a lot. Obviously, again on-going product innovation is kind of the foundation of all this, so you have to have that. But, from a sales and marketing perspective, depending on where you are, you really want to figure out what your top two or three levels are.

So if you’re self-service, you know, don’t ever look at sales, really. But if you are self-service, then things like Web-marketing, obviously SEO, content-marketing, those are all things that are going to be super valuable, viable for you. All of those things are probably going to be almost as important, if not even more important for companies that are in a transactional model, in a highly-competitive environment, where many times your content, the quality of your content marketing efforts are going to be the only thing that really differentiates you, in a lot of cases. And so, that becomes super important. But also, in order to really scale, you’ve also got to turn on the outbound sales, lead generation, and sales. And the price points at that stage start to justify that investment, but you have to do it in a very specific way.

And then enterprise, most companies, I would say still need to rely quite heavily on marketing, online marketing, off-line marketing as well probably. But can rely much more on having a highly organized and sophisticated sales force going out and talking to customers. And there are many companies out there in the enterprise that you know, sell and do very little marketing, and are still successful. So it’s definitely a model that can work.

Kevin: Now what about, you know, you’ve talked a bit about, you know, sort of the value of having an annual revenue model, as opposed to a monthly recurring revenue model. Can you talk to that a little bit?

Ray:Yes. It really comes down to managing your cash flow and what it takes in order to scale your business out, and building predictability. It also helps to kind of dovetail that with the idea of annual contracts with your customers, so you provide a lot more predictability and stability around the business as a whole.

Basically one of the major reasons for acquiring a customer on an annual basis is that if you are, say you actually are in a price point that looks something like self-service. And you charge them $200 a month. Well $200 a month, it’s really hard to get you know, someone going after a customer to potentially close a $200 a month deal. But if they’re charging annual contracts, and they’re getting money paid up front for an entire year, then suddenly you’re looking at a few thousand dollars. Where, you know, if you’re compensating your reps, base salary, at you know, maybe 4, 5, $6,000 a month, they only really need to basically sell two or three of those deals in order for you to be cash, you know, cash-flow positive, not for those people on a monthly basis.

Kevin: So, you know, some of the other sort of things that I think about when I think about how you might want to grow your business through sales, would be things like, as we were talking about before, managing your customer acquisition costs, trying to increase productivity, maybe figuring out ways to better train or drive retention among your sales teams, focus on up-sale, cross-sale, those types of things.

Ray: Yes.

Kevin: Does anything like that come to mind for you, and would you mind speaking to that?

Ray: Yes, a lot of times, you know, we’re still a relatively early-stage company, so other people’s experience may be different, but my experience so far. This year we started to see a lot more up-sale opportunities happen, where before, it was just a struggle to get people to agree to become our customer. And as our product has matured, you know, over the last 12 to 16 months, we’ve had a lot more people say, “Hey, this is working for us at a, you know, lower level. And now we want to upgrade to a higher level of service and get even more value out of it.” And so that’s obviously a great thing to see, both internally, and also if you’re dealing with investors. So, that sort of account maturity matters quite a bit.

And it’s also, there is another phrase out there that’s, I think it might have been Joel York, actually, too, who coined this is basically like “inverse churn”, where “churn” itself is bad enough. But even if you have, you know 100% retention, on a monthly basis, you’re still not really growing the way you should be as a SaaS company. You almost want 102, 103% retention over the long term, in order to really scale things up. And so, account maturity is one of the best ways to do that, because you’re already selling to an existing customer who likes your product or service.

Kevin: Now are there specific things that you recommend, or that you, yourself have done, to try to manage your customer acquisition costs?

Ray: For us, we’ve been really successful so far, in acquiring our customers entirely inbound. So we have, are just basically putting in a sales force, now. And that’s starting to work really well. But the major way we still acquire those leads are through inbound channels. And so, we do a lot of marketing on the Web, on our own. And basically get our leads into our funnel that way, and then our sales people basically follow-up with them to close those deals. So that’s been a great way, because you’re not spending a lot of money on lead research, you know, outbound lead generation, and everything else.

That being said, you know, outbound lead generation, if it’s focused and targeted at the right people, obviously can be a way to essentially print money as long as you’re doing everything right. But the key for us has really been building very organized processes, getting the data management to really be clean and organized inside. That’s an on-going battle. And building automation wherever possible. So even if it is a transactional, we’re basically a transactional business, so even if it is a transactional business, from a customer’s perspective it feels in many ways like it’s all a service business, which is good for them because that’s what a lot of people are becoming used to. And so that keeps our costs down. It keeps customers happy, because they don’t have to come to us, you know, every time you need something.

So, investing in automation, trying to keep your team lean, keeping your data clean, so that you’re not spending a bunch of extra hours just trying to figure out what’s going on, are things that, on the back end, all really have a big impact on your overall ability to deliver, you know, quality at a lower cost of acquisition.

Kevin: Great. Well this has been really interesting, Ray. I really appreciate your time today.

Ray: Sure thing.

Kevin: Before I let you go, can you just let our listeners know where they can get a hold of you?

Ray: Yes, sure. So the name of our company is Ginzametric. So we have customers that are e-commerce companies and agencies that use us every day in order to increase their own brands’ fundability. We are at GinzaMetrics.com. That’s G-I-N-Z-A- M-E-T-R-I-C-S dot com. And we’re at Twitter Flash GinzaMetrics. And my name is really long, so if you just type in Ray@GinzaMetrics, you’ll find me. And I’m out there on Twitter and everything else, too.

Kevin: Great. Well thanks so much, Ray. I really appreciate it.

Ray: Thank you, as well.