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Segmentation & Qualification for B2B
SaaS companiesApril 2015
Most founders believe their product has the potential to change the world - or at least the lives of their users - for the better. This belief is often reflected in the fact that when asked about their target customer, their answer is going to be “everyone”. This is a terrible mistake.The goal of this presentation is to provide insight into the why and how of the sales segmentation and qualification process for B2B SaaS companies. This initial decision will determine a lot of the choices you have to make down the road.
Note: I strongly encourage you to go and read the original articles I’m referring to in full, they’re definitely worth it!
Introduction
Selecting a target segment
Your first reaction about my claim that you need to select a target segment might well be: “I’ve looked at Dropbox, Microsoft and Salesforce and they sell to all types of business, so why shouldn’t I do the same?”. The answer is very simple: you most likely can’t afford it. Those companies got there after investing years of work (and billions of dollars) in building their products and their sales & marketing teams.Unless you have access to the same type of resources, trying to go after every type of client at once will be a fool’s errand. To help you avoid this fate, the following slides will run you through the process of selecting the right type of target for your company.
Does segmentation matter so much?
Jason Lemkin:There’s one thing I can tell you in SaaS, at least: everything (except the product itself) is sort of the same at a given ACV (Annual Contract Value) level.
I mean, yes, pricing is important. But the thing is, unless you only sell one seat at a time, and always only ever will — then pricing is just one variable in deal size. Deal size = Price per seat x Number of seats.
It’s not that this is rocket science. It isn’t. But if you haven’t lived it, understand that Deal Size is the single most important factor in your SaaS business model. Because it will completely define how you do sales and marketing, and to a just somewhat lesser extent, prioritize feature development and engineering.
Your ACV is who you are
Tom Tunguz:Developing a sales strategy is critical for software-as-a-service (SaaS) startups. The first step in developing a sales strategy is to build a robust market segmentation. I’ve used data from the US Census to develop a segmentation that reveals some surprising facts about the SMB market and may help inform your startup’s sales strategy.
Accounting for number of firms and total employment, I have divided the market into 4 segments, each demarcated by a different color, below. While the 20 to 500 person company and the 5000+ employee company segments represent the two largest segments by revenue opportunity, each of the four segments is roughly equal in size, about one quarter of the 121M US workers.
Which segment should you go after?
Mark Suster:I know that this advice won’t apply to every possible startup – but I think it applies to many. When you start your company the very first question you need to ask yourself is which kind of customers do you want to serve. Many start-ups (and even growth firms) lack this discipline and they therefore serve customers off all sizes. This leads to suboptimal results for all.
Make sure you know what the size of customer you want to serve is, what the people in a company of that size do, the problems they have, the features that will resonate and the channels you’ll need to sell into and service that customer. Because it will vary dramatically by different segments I believe you need to pick an animal size and go for it.
Advice about selecting a segment
Tom Tunguz:For some time, I’ve been wondering whether companies selling enteprise software contracts with long sales cycles are less attractive to investors than newer SaaS companies with high-velocity, low friction sales models.
After all, this newer, high-velocity model provides much more predictability in sales processes.
But the data indicates this isn’t the case. There is no optimal ACV to maximize for market cap or revenues, according to this data. Multi-billion dollar SaaS companies can be built serving customers large or small.
One segment to rule them all?
Jason Lemkin:If you can build a $100m self-service SaaS business without the need for a sales team, a client success team, webinars, getting on planes, and all that — go for it. [...] Why invest in sales, demand gen, and all that if you don’t have to? Why not just build a wonderful product and let them all sign up on their own?
Let me just share one semi-obvious piece of math and learning. No matter how hard I tried at EchoSign to drive up self-service as a % of our revenue, the laws of this math and gravity held it back to a minority of our revenue.
Here’s the thing. If your product is 100% individual-focused, and you add just enough features to sell to a Team, to tilt just slightly upmarket — you can grow your revenue, at least a segment of your revenue, by 20-30x.
If you can aim a bit higher, do it!
How can I find leads that match my target segment?
Once you’ve decided what kind of company you wanted to be and the matching customer segment you’d like to serve, the next step is to find a way to generate leads that match your expectations. This is by no means an easy task.Traditionally, there has been 2 ways to achieve this. The first one is simply to go about trying to find people who might be interested in what you have to offer and talking to them. This is usually called “outbound marketing”. The other way is to make sure that people who could be a good fit will find out about you if and when they experience the pain that your solution solves. That’s inbound marketing. You’re probably going to need a mix of both to get things going.
Generating the right set of leads
Tom Tunguz:Marketing is one of those words without meaning. Or at least a consistent meaning for most people. Recently, I met a very bright marketer who broke down a few of the different marketing disciplines and matched them to a freemium sales funnel. His framework is a stroke of genius.
First customers become aware of the product, then they use the free version of the product, then they convert to paid either by themselves or with the aid of an inside sales team, and finally they are retained as customers.
The rectangle on the right contains the marketing disciplines used to grow and optimize customer acquisition metrics on the left. The list isn’t meant to be comprehensive but does get the gist across.
Aligning marketing & sales
Tom Tunguz:In traditional Outbound Sales, leads are first screened for whether they are a good potential fit for a product, a task typically completed by the marketing team. The account executives must then determine whether the customer experiences enough pain in the status quo to buy a product.
In Inbound Sales, the model Hubspot perfected, the lead qualification steps are reversed. Through content marketing and education, the marketing team creates a funnel of people who suffer from pain, and it’s the AEs who must test for product fit.
This seemingly small difference is an important one, a wave whose ripples cascade through the organization.
The benefits of inbound marketing
Jason Lemkin:There’s a meme, a CommonThink, among certain segments that Outbound Sales is bad, or at least, a little unseemly. And maybe a lot bit old school. That we’re in a new world of sales, a new consultative world, where leads come in, prospects can try and learn before they even talk to a human, and then, a sales rep thoughtfully answers questions, models business process change, and helps them decide how and why, and if, to buy. And that’s true. We are in that world. Inside sales is terrific. Warm leads are great. Live trials of easy-to-use-and-deploy web services really have changed the game.
And yet... The reality is, by revenue, this isn’t the way the majority of the world buys enterprise software.
Inbound or outbound sales? Both!
Tom Tunguz:A startup’s sales evolution contains three phases: beta, reference customer, ROI calculator.
Beta: a founder of the startup develops relationships with a handful of customers who will work in tandem with the company to design, tune and improve the product.
Reference Customers: the goal of the beta is to cultivate a handful of reference customers, product champions passionate enough about the startup’s product to take calls from potential clients and sing praises about the product.
The ROI Calculator: reference customers' testimonials and case studies should be leveraged to build a larger sales pipeline of potential customers.
Understand which phase you’re at
Mark Suster:In short, innovators and early adopters have faith that there will be benefits to using products that are unproven and even if they don’t they enjoy the process of using new stuff. This applies to business users as much as to consumers. Sometimes these markets never appeal to “normals” (Chris Dixon’s definition) and other times it needs to be more effectively marketed to normals. So the early part of a technology company is about finding your hard core group of early adopters and making them passionate about your products.
This is where heroes come in. Heroes are those every day users of your product who are not overly senior in ranks but are in charge of implementing your solution within their company.
Find your heroes and talk to them
Running your lead qualification process
Now that you’re generating leads that (hopefully) match your target segment, the next step is to make sure that you can successfully turn them into opportunities. In order to achieve this, you need to make sure that there is a fit between what you have to offer and the potential clients you’re speaking with. This process is called lead qualification.
During this phase, your goal is very simple: you need to determine as fast and efficiently as possible whether the person you’re speaking with has a chance to convert into a paid customer and, if so, you need to get them in touch with someone who can close the deal.
A primer on lead qualification
Mark Suster:If you ask any experienced sales leader, they’ll tell you there are three things to know about being effective at sales: qualify, qualify, qualify. This is simply because sales people have limited time and can’t afford to waste time with anybody who isn’t likely to buy from them in the near term. But how do you do it?
Do you have a problem I could solve? The starting point is to ask yourself whether the person you’re dealing with has a problem that is solved by the solution you offer. If they don’t – you simply won’t sell anything. That’s why many great sales starts with generating inbound marketing leads. If you create content marketing programs and drive traffic to websites where you can measure how long somebody spends reading your materials or downloading your white papers you’ve at least confirmed some level of interest.
How do you qualify?
Tom Tunguz:Challengers pitch customers in five steps. First, instead of asking, “What problems do you, the customer have?”, they warm up the prospect and build credibility by providing some relevant data or insight. Next, and this is the most important part, they reframe the conversation. They teach the customer that their current world view is flawed in some way.
This judo move changes the power dynamic in the relationship. The salesperson becomes an expert and the customer wants to continue the conversation to learn more about why their current worldview isn’t optimal, and how to fix it. The next three steps of the Challenger sales process are similar to other models of selling.
Teach your customer their problem
Mark Suster:What happened to me and what I think happens to others is that this tacit knowledge of how to sell your company’s products is not as institutionalized as you think. The people that are in the same office as the leadership team, many of whom have been there since the “early days” intuitively know how to position the company and how to sell its products.
This is where management has to step in and help with “aiming”. Ultimately as you grow this task can be shared between a VP of Sales, VP Marketing and the CEO. I define “A deals” as those that have a realistic shot of closing in the next 3 months, “B deals” as those that you forecast to close within 3-12 months and “C deals” as those that are currently unlikely to close within the next 12 months.
Three buckets for your leads
Jason Lemkin:One question I struggled with a lot in the early days was what price points supported inside sales reps. It was clear to me that our freemium offering, priced at from $0 to $19/month, couldn’t really support a traditional inside sales team. And it became clear to me that five-figure or larger ACV deals could clearly support an inside sales team, once I handed those off to sales.
But how low can you go? Can you really build a sales team around a $299/mo product? A $2000 ACV? What about a $199 or a $99/mo price point?
Different companies will have different experiences. But here’s what I learned. And if you do it right, you can go pretty low.
Can you afford inside sales?
Marketo whitepapers:Regardless of your organization or industry, marketers should always pay attention to “batons” that cross functions. That’s because whenever two or more departments share ownership and responsibility, conditions are ripest for problems. This is especially true in the handoff between Marketing and Sales. So why not add a guiding step in between?
Combined with the best practices we’ve written about (such as agreed-upon lead definitions, sophisticated lead scoring, and handoff processes), we believe the secret to a truly high-performance revenue engine is the effective use of a Sales Development team. The team is composed of Sales Development Representatives (SDRs) who have one exclusive focus: to review, contact and qualify Marketing-generated leads and deliver them to Sales Account Execs.
Setting up a sales development team
Conclusion
Pick your segment and qualify!Your company will live and die on the relevance of its segmentation and qualification processes. There are but a few mistakes that will cost you more time and money than going after the wrong type of leads for your company. Conversely, nothing will allow you to grow faster than selecting the right type of leads and pursuing them agressively.
If you haven’t done your homework yet, stop what you’re doing and give it a deep thought: it will save you a lot of hassle down the road.
Special thanks
Mark Suster (Upfront Ventures)➔ Website➔ Twitter
Jason M. Lemkin (Storm Ventures)➔ Website➔ Twitter
Tom Tunguz (Redpoint Ventures)➔ Website➔ Twitter
Marketo➔ Website➔ Twitter
Looking for help?
I am available for short consulting missions: strategy advice, questions about the enterprise sales cycle, positioning review…
Get in touch:[email protected]
