On Route 128 just outside of Boston there’s big neon sign for a company called “You Do It” Electronics. It’s always struck me as an odd name. It’s sort of like saying “What are you looking at me for? You do it!” It’s scary to imagine a bunch of self-taught electricians splicing together wires.
The sign reminded me of a meeting I had recently with the CEO of a web technology company. He said “people like the idea of doing things themselves, but they almost always ask for additional features, assistance with content or other help.” The company uses the common marketing pitch of “create your own in just minutes” which attracts a lot of trials but after these people have a starting point, they often ask for personal hand-holding. And as they make this shift from self-sufficient to “I need help” it creates tension. Hand-holding costs more and the sales model is different.
As we talked about it, I realized that I’ve seen this same thing many times and it would helpful to have a better way to frame the strategic options. Here’s what I wrote up:
First you need to think in terms of three deployment options and sales approaches:
1) Self-serve (DIY) / direct marketing
2) Configured / insides sales
3) Customized / enterprise sales
You can think about the pricing/deployment options and demand curve like this:
1) Self-serve (aka do-it-yourself). This is very common for web sites. It’s the most scalable of any of the models. This needs to be 100% hands-off without any sales people involved. The total number of customers needs to be high and the price needs to be reasonably low. The price per month typically ranges from $10 to $100 so the annual contract value, or ACV, ranges from $120 to $1200. The key to making this approach work is finding an efficient way to attract new customers through direct and word-of-mouth marketing. It’s also important to optimize conversions at the highest price. An example of a company that does well with this model is 37Signals with their popular Basecamp project management software. Below is a screenshot that shows how they present their pricing options. The really nice thing about the self-serve model is your business operates 24×7. Although I don’t know anyone who’s actually done this, you can literally have the cash register ringing while you sit on the beach. When it works well, the self-serve model is a beautiful thing.
2) Configured. This option helps address the common requirements of all clients but acknowledges that most will need some additional help. It provides them with tools that they need to revise some of the high-level settings. For example, an admin or sales engineer could edit color schemes, change layout, and assign editorial of roles and responsibilities. The more configuration options you can provide, the closer you’ll be to self-serve. In fact, I’m sure some readers will point out that Basecamp has many of the options noted above which is one of the reasons it’s so successful. The other key distinction between self-serve and configuration is the sales model and customer expectation you set. Most companies that pick the configuration path can sell at price points between $500 and $1500 per month or $6k to $18K ACV. When we started KnowledgeVision this is the primary approach that we chose although we kept open an “Enterprise” option where could provide more customization at a higher price. Which brings us to the third option…
3) Customized. Larger clients paying higher prices expect personal attention. They typically want you to visit in person, make several presentations to several people. You may even have to fill out an RFP to get in the door. This work requires an Enterprise sales force and the corresponding overhead. It’s expensive to manage a sales force, pay for travel and wait through the longer sales cycles. So, the price points need to be higher. In my experience, I’ve seen the ACV of enterprise deals that range from $30K to $180K. There are some companies where this can reach into the millions depending on the type of service being offered.
The key thing to avoid is backsliding. In other words, if you take on work that requires configuration and inside sales but only charge self-serve rates, your cost of sales will be too high. Similarly if you charge prices commensurate with configuration, but offer special customization options, extended programming spec’d projects and integration, you’re not going to cover your costs. A simpler way to say this is make sure you charge for what it costs to sell, deploy and support. This is a common mistake that many companies make. You need to set the right expectation from the start even if you’re hungry for your first sale. Small companies cannot afford to take on high maintenance clients without revenue to cover the costs.
With enough resources you can developed offerings to fit into each of these categories. For example, Brightcove has three options called Express, Professional and Enterprise. Each of these has a different deployment model, price range, and sales model.
One other related point about language: as a SaaS company you need to be careful how the terms you use are interpreted. When you use the term “custom development” you want to be sure you avoid implying that the code you’re creating is a work-for-hire for that client. In a SaaS company, that would be a major problem if you wrote a contract that conveyed rights to a subset of your code. You need to emphasize that you’re fulfilling a client’s requirements, but that development is taking place on top of your proprietary base of code and for that reason isn’t owned by your client. As a sales rep you can also emphasize that price you charge to cover the cost of custom development is also the premium for prioritizing that feature higher than other requests. A technique that’s worked well for me is to create a separate schedule that includes rates for a variety of professional services including Training, Support, Design and Custom Development. By grouping these hands-on services together it’s easier to avoid the conversation about who owns the code.
– pick your primary deployment and sales model.
– optimize for conversion and price
– avoid backsliding; don’t offer more services, support or features than your price point justifies
– over time create create several options and guide customers into these different packages based on their budget and needs.
For related information, read this article by Kissmetrics: “How to transition from a self-service to enterprise sales model.”
Addendum: Check out David Skok’s article covering the same subject: “Are You Using the Right SaaS Customer Acquisition Model?” in the Open View Blog.