Once you have users for your online product, how do you sell to them? This an important question. I often speak to aspiring founders about their ideas and the first question I always end up asking is: “Who will give you money and why?”
The need to ask this question is a remarkably frequent occurrence. Even if the founder’s pitch was really great, I almost never walk away understanding exactly how the business will make money. The unfortunate reason is that often the founder themselves does not really know.
You shouldn’t feel so bad about that if you are just starting a company. Mark Zuckerberg couldn’t answer this question for a long time, and only figured out how to make money from the mobile Facebook app by inserting ads into the newsfeed many years into his journey.
That said, he had lots of users, which you probably don’t.
The most important reason to be able to answer this question properly is that you should value your own time. You are investing your blood, sweat and tears, not to mention lost earnings, and perhaps some actual savings, into a new venture. You really should have a very clear idea about how it will make money.
And yet all the fun is in product development. People tend to start businesses in fields that they know and understand, and feel the pain that their product solves so keenly so it’s all they can think about. This is a necessary, but not sufficient, part of building a business (and getting it funded).
You have to put just as much time into understanding how the money will flow from your customers to you. What is your ‘value proposition’? Successful growing businesses are based not just on a fair exchange of value, but on creating new value. Think about all the business value that Microsoft Office has created – this arguably far exceeds all the money Microsoft ever made from it. By rights, if they wanted a ‘fair’ price, you should need a mortgage to buy their products.
So how do you start thinking about this question? It’s not good enough just to have a pithy elevator pitch answer, or point to a group of customers.
It’s all about the details.
To follow up a good idea with lots of little ones (as ‘Father Ted’s’ Dougal might put it) you need use some structure to help. I’m going to use three angles to look at different aspects of this and I’ll compare the approaches I took in my last business (nearForm.com, an IT consultancy), and in my current startup (voxgig.com).
First, ask yourself how long it takes, as well as how much it costs, to close a sale. What does the ‘sales cycle’ look like?
Second, is your product ‘mission critical’ or can it be shelved when times get tight?
Third, how do your customers find you – what is your ‘route to market’?
The sales cycle can be a real killer. One of our best customers in nearForm took two years to decide to work with us and six months to pay the first invoice. The higher your price, and the more effort it takes to adopt your product, the higher up the management chain you have to go.
You’ll end up needing to meet multiple people, all with different agendas, and probably have to present to more than one committee. You may never even meet the final decision-maker. And after all of that, you may get handed off to ‘procurement’ who want to knock your price down by 5pc or more.
Selling custom software development is a hard business to scale (which is one of the reasons I got out of it) and revenue is ‘lumpy’. By this I mean that it comes in big, infrequent payments. Managing your cash flow when your revenue is large but unpredictable is a nightmare.
If your product or service involves large payments and long periods to close sales, then you’ll need to make sure you can survive in the meantime. It’s no good thinking up something that big companies need, without knowing how you’re going to deal with this problem.
One way, that can be wonderfully successful, is to get the big companies to pay up front and fund your product development. This is much harder to do than it looks and you’ll need to rely on deep industry contacts and pre-existing credibility. If you don’t have those, good luck.
For voxgig, we follow the alternative path of freemium conversion. Get users to see value in the free but feature-limited version and then upsell them on the professional feature set when they are ready.
This has a lower cost of sale (direct sales don’t scale here), but still have a relatively long sales cycle, as the system needs to prove itself first. This is why most software-as-a-service businesses need significant initial funding. Once you have proven the conversion to paid accounts works, you can use even more funding to drive marketing and sales activity, because you know it works.
There are many variations to the sales cycle, both it terms of timing, cost of sale, staffing and so forth. You need to really understand how this will work in your business. As a founder, you’ll also need to work the front lines to deeply understand how your customers think.
The second aspect is to understand if you are ‘mission critical’. Clearly if you sell oil to the army, you are not going to suffer much from budget cuts. But most businesses do not have that luxury. An IT consultancy is particularly vulnerable to this problem. You’re often building new projects that are unproven, without strong internal sponsors. When times get tough, nobody will stick our their neck to keep you alive. This problem would often keep me up at night.
In voxgig we sell to the marketing department – they are the people who organise events. This is also a dangerous place to be. Marketing budgets get cut ruthlessly in a downturn. Of course, on the flipside, they are very generous and relatively loose when things are going well – look at the vast proliferation of online marketing tools to see how easy it is to sell into this group, especially if you can provide some form of measurement. As the American retailing pioneer John Wanamaker (he invented the price tag) was fond of saying: “Half my advertising budget is wasted, I just don’t know which half.” (And no, it wasn’t David Ogilvy – why would he say that? He sold ads.)
The trick is to find a group of loyal internal supporters, and to become part of their daily work processes. You have to find a group of people that absolutely need your product and will defend it internally. In our case, event collaboration software, we remove so much manual labour from the running of events that our users will fight tooth and nail to keep us in their companies-they’ve said so.
The other thing you can do is be a “rounding error” compared to the business process that you are supporting. If a company spends €500,000 on events a year (that’s small for our target customer base), then spending €20,000 on us is not going to raise too many red flags. The events budget may get cut, but you still need to run events – try to be a fixed cost.
Third, consider your ‘route to market’. For an IT consultancy it is a literal route – getting on planes, flying to customer offices, doing meeting and pitches. Flying to conferences to give talks and network. It’s all hands-on because you need to build trust. The promise of an online subscription business is that you have a much lower cost of sale.
In reality, you end up with significant Customer Acquisition Costs (CAC) in the form of online marketing (content production, advertising, customer support). Especially if you do not have strong network effects.
If each customer primarily uses your product just for themselves, and does not get a better ‘service’ if other customers also use the product, then you have a steep hill to climb competing on features – better move to San Francisco and start talking to some US venture capitalists.
Alternatively, you can look for ways to make your product better when more people join it, like LinkedIn, Slack and even Facebook.
(Newsletter update: 4,928 subscribers, and an open rate of 15pc. Podcast update: 12 downloads last week – we’re just about to start taking our first steps promoting the podcast, as we now have three episodes of ‘Fireside with voxgig’ up on iTunes – this is enough to start looking credible).
Richard Rodger is the founder of voxgig. He was co-founder of Waterford-based firm Nearform
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