Had a great dinner last night in the Valley with a group of founder/CEOs. At one point in the evening the conversation shifted to a topic that’s near and dear to my heart as I continually find myself challenging entrepreneurs to rethink their sales models and look for ways to reach initial scale with less cost and risk. Around the table there was general agreement that one of the simple strategies to consider is shifting the way a business engages its customers.
The typical sales pitch is a cost/benefit conversation that focuses on the benefit. Millions of sales people have been trained to talk benefits and make the customer realize the necessity of the costs. This is the only way to go when the product or service being sold has either a high up-front cost (money and/or time) or has non-trivial ongoing costs. Examples would be a car or a ERP deployment or a Salesforce.com subscription.
The biggest problem with this sales model is that it is slow. It requires research and, more often than not for more expensive products, lots of conversations. It is also susceptible to interference, particularly in the case where the discussion in category has already been framed by a competitor. Both of these are bad news for startups that need to suffer the core burn + grow a sales team to see whether the dogs will eat the dog food.
With the advent of ad-supported business models online and SaaS in the enterprise, a number of businesses have taken a different approach. Rather than asking a customer “how much are you willing to pay for these benefits?” the conversation has shifted to “if the cost is $0, how much benefit must we deliver for you to adopt?” Can we call this a cost-oriented selling approach? I guess so.
Flipping the value proposition from pay now, benefit later to don’t pay but still get some benefit is a no-brainer for consumer plays but it also can work miracles in the enterprise as demonstrated by the scalability of, say, LogMeIn‘s freemium model. (LMI, a Polaris portfolio company, offers consumers remote access to their PCs for free. They make money through upgrades for more functionality and enterprise deals.) It is a particularly good approach for entering areas with established competition where a benefit-oriented as opposed to a cost-oriented sales approach will bog down selling.
The challenge under this model is to find a monetization strategy. Online, for ad-supported businesses, the first step in the rule book is plugging in an ad network. The next step typically involves hiring an ad sales team–a difficult, expensive and slow undertaking, which is why many startups choose to sell to big players with good ad sales teams at this point. In the enterprise it typically has to do with value-added services such as manageability, SLAs; pulling through additional products; and building data businesses that leverage network effects in the deployment footprint (most commonly seen in security with anti-virus/spam/phishing).