January 10th, 2018 | By: Aziz Gilani | Tags: Strategy, Sales, Customers, Planning
Time and time again, I run into mid-continent entrepreneurs who think sales should be a personal experience. Out in Silicon Valley, I have found that a lot of startups stick to self-service platforms rather than human salespeople.
So who’s right? Well, it depends on what’s for sale and who’s buying.
Both approaches can work, but the key factor isn’t where your startup sits on the map. Instead, to choose the right sales strategy, take two things into account: customer acquisition cost and annual contract value.
Let’s start with CAC, or Customer Aquisition Cost, which describes the cost of acquiring a single customer. To calculate CAC, divide the cost of acquiring customers by the number of customers acquired. For example, a company that spent $1,000 on marketing and acquired 100 new customers as a result would have a CAC of $10.
Obviously, CAC should inform your marketing spend, but for fledgling startups, it plays an even greater role. If customers from a given market can’t be acquired profitably, there’s no sense in selling to them. If you’ve got a high CAC, you need a correspondingly high ACV to make the marketing expenses worth it.
That second figure ACV, or Annual Contract Value, typically describes how much revenue each customer contract brings in every year, excluding any one-time fees. If, for instance, a company has 1,000 customers who each pay $1,000 per month, it would have an ACV of $12,000.
But don’t let the definition of ACV get in the way of measuring what counts. Erik Huddleston, the CEO of TrendKite, a portfolio company of mine, tracks economic metrics on a traditional and cash basis. In particular, he looks at CAC payback period on a cash basis because it measures when the funds that were used to acquire one customer will be available to invest in acquiring another customer. This leads him to watch the total contract value and payment terms as closely as ACV.
Whether you’re based in St. Louis or San Francisco, ACV and CAC should be the chief factors in your choice of sales process.
So which strategy is the best bet for your startup?
If your ACV is under $10,000, you have to put your CAC under the microscope. Paying too much to bring in new customers can eat through your profit margins, so self-service models, which typically cost very little to set up, are the right choice for this range.
That isn’t to say, by the way, that other companies can’t benefit from a self-service option. Seventy percent of customers expect company websites to include a self-service application. Just be sure it’s the sole way you’re selling if you’ve got a slim ACV.
Conversion percentage becomes more important at higher ACV’s. At this level, you can’t count on self-service to lure in elusive sales, but you also can’t afford an in-person or named-account approach.
Startups in this ACV range often begin near the bottom and work upward. Try a “dialing and smiling” approach to start, with reps cold calling within their respective geographic territories, before migrating to inside sales, a more sophisticated process focused on high-value opportunities.
Selling via named accounts means having specific members of your sales team target specific accounts. By taking the time to understand a target organization’s approval process, your salespeople can strategize a series of touchpoints for winning the account.
Derek Hutson, president and CEO of Datical, one of my portfolio companies, sees dedicated salespeople as critical for enterprise engagement. “Not surprisingly, as ACV increases, the complexity of the sales engagement increases as well,” Hutson recently told me. “You have more decision makers and influencers involved in the sales cycle. To successfully close these transactions, salespeople must prove value and build consensus.”
But be careful. In the $50,000 to $150,000 range, the sales effort required to sell target accounts can exceed the value of the accounts themselves. My portfolio startups have made money in this range, but only because they’ve stuck to a strategy of growing an initial $100,000 win into a much larger account.
If hands-off self-service is at one end of the spectrum, at the other is the “bear hug” approach: an all-out, multinodal, team-based strategy for companies with sky-high ACV. With a multimillion-dollar ACV, there’s plenty of room to spend before CAC becomes a problem.
With the bear hug, your job isn’t just to convince the biggest fish; it’s to convince their other providers and internal leaders as well. Every enterprise sale generates internal friction, so your goal should be to reduce cycle time and risk by showing stakeholders that you’re on the same team.
A CEO at another one of my portfolio companies, Paul Schaut of Label Insight, recently proved to me the power of the bear hug. When Schaut saw that co-founder and chief customer officer Ronak Sheth was singlehandedly managing a series of relationships at his biggest accounts, Schaut decided to codify the approach. Now, Label Insight’s sales team works in concert with key accounts’ other service providers to ensure a frictionless customer experience. Yes, it takes a lot of resources, but for big-name accounts, it’s well worth the investment.
What if your startup’s sales process is already set in stone? Before you find yourself in the red, try something new. Every sale doesn’t need a smile and a handshake any more than a multimillion-dollar deal should be done in an app. So don’t just do what everyone else in your region is doing. Take a look at the numbers for yourself, and see whether there’s a better way to sell.
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Aziz Gilani is a managing director at Mercury Fund, where he focuses on investments in enterprise SaaS, cloud, and data science startups. Aziz is a recognized expert in seed accelerators and a member of the Mayor of Houston’s Technology and Innovation Task Force. He earned a B.B.A. from the University of Texas, where he was a TILF scholar, and an MBA from Northwestern University’s Kellogg School of Management, where he was an FC Austin Scholar.
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