Mikita Mikado is a software engineer and entrepreneur from Belarus, now based in San Francisco. He is the co-founder and CEO of Quote Roller and PandaDoc. His passions are business process automation, surfing, and his new baby girl Maya. ￼
Sales are the bloodstream for most businesses, and tech startups are no exception. It’s always better to earn money, not just raise it, as money you earn doesn’t dilute your ownership and reassures your investors.
A new era of tech events has begun
We’re back in New York this November for the 4th edition of our growth-focused technology event.
However, figuring out the way your startup should make money could be challenging, especially for us left-brained founders.
This post is about choosing the right sales strategy and channels for your startup from the start. It may sound overwhelming, but, don’t worry, it’s written for dummies, just like I was a couple of years ago…
I’m a geek and software engineer from the former Soviet state of Belarus. This mix is not a good start when it comes to sales and marketing. There were no sales people in the USSR – the government just decided what to produce and in which quantities, – so I pretty much have an anti-sales-and-marketing background.
It just so happened that I became the CEO of a B2B tech startup. In order for my startup to be successful, I had to learn from scratch the way sales and marketing work.
Being an engineer, I built myself a kind of algorithm that helps determine an early-stage startup’s sales channels, and that’s what I’m sharing with you today.
Step 1: Figure out the LTV (customer lifetime value)
In order to choose sales channels, you need to know your startup’s lifetime value. LTV is how much money you can make from an average customer during his or her purchasing lifetime with you. LTV is calculated once you start having paying customers, but, during the early days when you don’t have any sales, you need to guess your LTV based on industry standards, competitor earnings, and just similar companies.
Once you know or have guessed your LTV, you can guess what you can afford to spend on acquiring each paying customer. Customer Acquisition Cost or CAC is how much money you can spend to get someone to become a customer. Simply put, the return on investment on your product or service is LTV minus CAC.
LTV - CAC = ROI
CAC is tricky. It depends on what you do and can usually fall anywhere between 25 and 80 percent of your LTV. There is logic behind your thinking of how to determine which CAC is right for your business model.
If your CAC is 80 percent of your LTV, that means you’re going to be investing a lot of money upfront to acquire customers. After that, you’ll get just 20 percent of profit over a course of the customer lifetime, which could be a few years. For some businesses that makes sense; for example, most social gaming products have CAC 70 to 85 percent of their LTV.
If your CAC is more than 50 percent of your LTV, get ready to start fundraising. You need money to acquire customers, so you’ll need a pretty special product or service to convince investors. For example, I’ve got friends in online poker business spending $100 to acquire one paying user making about $120 in LTV. They usually invest five figures to get a critical mass before the business starts making sense.
If your CAC is ten percent of your LTV, your business is less risky, but at the same time you may not be moving as fast as you could, by not spending enough to get more customers. My startup’s CAC at $150 is around 30 percent of each customer’s LTV. It’s important to find the right balance for your company.
Step 2: Choose your sales channels
Once you know your CAC, you can outline the sales channels you can afford.
- Direct sales: Selling one-to-one
Direct sales are common with B2B startups. It is the easiest sales channel to start with because all you need is you. You can be the sales guy or gal with all the tools you need at your fingertips email, phone, social networks, etc. If this channel works, you can later hire other folks to join you.
Direct sales is also great because it brings you customer feedback right away, leads come faster you just manually find them and sales can be closed faster, too.
However, direct sales is the most expensive way to sell. Your CAC minimum needs to be in the $500 to $3,000 ballpark, depending on where you plan to hire your sales team and what kind of traction you get through the channel. Good salespeople are expensive. Direct sales take a lot of their time, which will cost your budding business.
Direct sales are also very slow and expensive to scale since you’re dealing with hiring people and those new people fostering new relationships.
I had some friends selling an eCommerce site builder to small businesses approaching with the direct sales model only. They were charging $10 $20 per month. They ultimately failed because their product was at too low of a cost to be driving around, spending hours with potential customers.
- Resellers: Selling one-to-one-to-many
You can enlist a team of resellers to sell your product for you. Usually there is a handful of companies reselling other folks’ products for a cut. This is pretty much how all the value added resellers (VAR) programs work.
In most cases, selling via resellers works with a lower CAC compared with direct sales. For example, if an average direct sale costs you a grand, a similar sale with a reseller might be two to five times cheaper. However, you’ll still need to support your resellers and you’ll be losing 20 to 60 percent of your LTV in commission. But, that’s not such a big deal. You’re a startup and you need to scale fast.
You can get in touch with an ereseller with just a cold email, and you can be your first resellers’ program manager. After chatting with a few dozen resellers, you’ll get an idea if the channel is applicable for your startup.
The resellers channel is cheaper and quicker to scale compared to direct sales, although it is still pretty expensive and slow overall.
- Partnerships and marketplaces: Selling one-through-one-to-many
There is also a special group of resellers that I’d like to cover separately. Apple’s App Store, Google Play marketplace, Salesforce App Exchange, and your mobile carrier belong to this group. They are “one-to-many” resellers you can be selling through.
“One-to-many” resellers already hold a significant audience. They will unlikely to be selling your product individually. They may even be selling your competitors. They are not looking to benefit by partnering with your company. They’re looking to benefit by partnering with companies like yours.
Power resellers may be interested in selling your product for a commission or just to make their own products better.
Some partnerships cost you nearly $0 in CAC. Our product greatly benefits from being listed on the Google Apps Marketplace and all we needed to do was implement a single sign-on, which had to be done anyway.
Others may require a lot of time and significant development efforts, which raises the CAC. For example, integration with Salesforce and the process of being listed on their App Exchange turned out to be a 10 months long bureaucratic nightmare. Similarly, designing an iOS-friendly app cost us a lot of developers’ hours, but hasn’t gotten traction so far.
A general tip would be to try to partner with as many “one-to-many” resellers as you feel make sense for your product.
- Inbound marketing: Selling one-to-many
Thanks to the power of the Internet, you can build channels that are selling to many people without the need to communicate with them individually. Building those channels is more of a marketing activity; however, if your startup provides a product or service that could be purchased online, that opens up another inbound sales channel.
In today’s world, you can sell through blogs, podcasts, video, eBooks, newsletters, whitepapers, SEO, social media marketing, and other forms of content marketing. All those activities are part of “Inbound Marketing,” which you can learn more about in this awesome post by HubSpot.
The formula is simple: inbound marketing drives traffic to your website, and those visitors convert into subscribers or buyers.
With inbound marketing, you build evergreen assets that work for you regardless of your further investments in them (blog, content, videos, etc.) If the channel works, your CAC could be as low as a few bucks. Meaningful content helps a startup establish itself as an expert in its field.
Inbound marketing has some downsides. Inbound marketing is not easy, and it’s hard to forecast without trying it for a few months first. The payback time might be three to eight months significant for a startup with not enough money in the bank but inbound marketing is probably the cheapest channel to test out.
- Ads: Selling one-to-many
Buying online ads drives interest toward your product and traffic to your website. Those visitors may then convert into customers. This channel works for startups with both low and high CAC (from a few cents to a few thousand dollars.)
Selling your product through online ads is an awesome channel if done right, which entails taking the time to research which networks and kinds of ads are most successful for your company. This channel is also quite fast because it’s easy to test just make sure you have someone who has experience dealing with online advertising platforms. You’ll have to go through a series of A/B tests both for your website and ads and do a whole bunch of other tricks. Once tuned to a decent level, it can be scaled really fast by pumping more money into it.
You can also merge this channel with inbound marketing as it is not that necessary to advertise your product you can advertise the content that leads to using your product.
Got a startup where an average customer or user barely brings any money? Well, then you’ve got to go viral. If you can’t afford to spend money to acquire users, you have to make your existing users acquire new users for you.
Dropbox is a perfect example of a company that relied heavily on product virality, which was built into the product. Users invite new users by sharing folders and files. Then, those users are able to get additional storage space by telling their friends and bringing them into the platform. Without spending extra money, Dropbox has been able to entice and reward its users for telling their friends.
Based on the channels you use, your startup is usually placed in a certain category. Consumer companies usually have a low CAC, low LTV and make money in volume; therefore, they need to utilize ads, virality, and inbound marketing. Enterprise startups, on the other hand, have high LTV and high CAC and can afford to hire salespeople, allowing them to rely on direct sales and resellers.
You may have to reconsider your business model if it turns out none of the channels you’ve tried seem to be working.
Step 3: Test your channels
Testing the channels isn’t that hard. You don’t need to hire an army as you can do the most of the work yourself. Getting an adviser – a fellow entrepreneur who was successful at the sales and marketing side of a similar business is a huge asset. In the meantime, we’ve got some bits of advice on how to see which channel(s) is right for you and your company.
Testing the resellers channel and direct sales is the manual work that should be undertaken by at least one of the founders. As Paul Graham suggested, sometimes founders need to do things that don’t scale.
Try to ask around which marketplaces and partnerships work best for your kind of startup. I had a few friends, who had built a sales automation SaaS, who were priceless in helping me choose the right marketplaces for our sales proposal SaaS Quote Roller. In the startup community, it’s all about the network you’ve built.
In order to maximize the outcome of inbound marketing, try to start it before you even start your company. No one would stop you from having an audience around your blog prior to the launch of the actual product. Rand Fishkin built a huge community around SEOmoz before launching the first product. Drew Houston made a funny video that got over 75,000 views featuring a nonexistant product prior to the launch.
Ad campaigns can be run with a little help from the outside in case you don’t have a marketing person as a part of the team. Hire a consultant or an agency, preferably one that you’ve heard good things about in your network. Try to meet with them face-to-face when possible and be open to their ideas.
Product virality is an art. It’s usually built into the product, so it’s something to keep in mind when you’re designing your product. Some of the things to consider are the product gamification, perks and incentives to share your product with others. Normally really good products that solve a real problem are viral by nature.
Founders must be involved in testing the sales channels because it pushes them to interact with customers and receive feedback, which is extremely important in your early days and across the life of your brand.
Step 4: Focus and grow
With a rare exception, successful startups have a few if not all channels working for them at the same time. However, when you’re early on, it’s important to start with only a few. Building and ramping up the channels takes time, money and effort. To be able to stay afloat, raise money, and pay salaries you need financial or numerical results to come as fast as possible.
Find out which channels are the best by testing the ones making sense from a CAC and LTV standpoint. Then, invest heavily to build them up. The aforementioned Dropbox started as a consumer company and, once successful with consumers, built other channels, including direct to sell to the enterprises.
Once you’ve found and verified the channels, hire the best sales and marketing people out there to ramp them up. You may find that the results the channels bring can be multiplied tenfold, if not more.
In the end, sales isn’t about numbers as much as it’s about people. Great people make the biggest difference in sales and a company’s overall success.
Image credit: Thinkstock