Market Size and Its Impact on Sales Ramp Up
I’m using a comment on one of my earlier posts as a theme for this post —the original post was “Can a Growing Company Grow Faster While Spending Less?” The comment from Jason Healey brings up interesting points:
“Great post! I have a question on CAC [customer acquisition cost]. What if there’s a poor sales & marketing strategy based on an assumption that the market a company is targeting is substantially larger than it really is.
“For example, ABC Company bases their salesforce hiring on the assumption there’s 80,000 companies in their target segment. Then, the marketing strategy is based on this 80,000 number which drives up costs through too many event sponsorships, added list purchases, direct mail costs, etc. After two years with the 80,000 number, they run out of lists to call, over hire possibly 20 cold callers with very little effectiveness, over hire 8 sales reps while revenue and new customer acquisition stays flat. The Senior Management, after two years, realizes the market is more around 10,000.
“My question, wouldn’t the traditional method of finding CAC be highly erroneous in this scenario because spending was increased on grossly inaccurate target market numbers from senior management?”
Getting Over the Fear that Limiting Your Scope Limits Your Potential
Aiming at a market segment is one of the most effective approaches to building a capital efficient distribution model. It is one of the fundamental tenets of scaling an early-stage enterprise SaaS business these days. Founding CEOs tend to resist a segment-driven go-to-market approach for fear that their companies will be perceived as too niche aiming at a market that is not gigantic. It’s the typical fear of crossing the chasm. This fear misses the mark by a mile. Picking a segment of the market to aim your go-to-market (GTM) efforts does not mean that you are limiting the scope of your company. What it means is that you are focusing your GTM resources and activities to a segment of the market where you can achieve the best results. You can still react to other market segment prospects that want to buy from you. And you can continue to brand your company as one that is aiming at a broader market. Just in my handful of portfolio companies, I can cite just as many examples. Here are two:
NextDocs delivers a solution aimed at Life Sciences companies. You could say that Life Sciences is NextDocs’ segment, but in fact its the company’s market. Within Life Sciences, they have chosen to focus on pharmaceutical companies as the priority segment. And within pharmaceuticals, they are primarily aiming at the largest 20 companies (Tier 1) and the next largest (Tier 2). That does not mean that NextDocs does not have a healthy portion of its business coming from medical device companies and other Life Sciences customers.
2) Central Desktop
Central Desktop delivers a cloud-based collaboration business suite to SMEs. Their main website positions them as a horizontally-focused company selling to any SME within any industry and market. But if you examine the company’s GTM operations, you would realize that the majority of its activities are aimed a specific segment. Check out SocialBridge and you’ll see why. Both these companies have taken a segment-driven approach to their GTM activities and it has become the primary driver of increasing the efficiencies of their sales and marketing efforts. This is achieved by creating unique differentiation in their solutions, their branding, and their messaging to a more homogenous set of customers. So how does this relate to Jason’s comment?
Big or Small, the Important Thing is to Focus on One Segment and Dominate It
Optimizing sales and marketing efficiencies in pursuit of the most capital efficient CAC economics is somewhat independent of the market size. At least when it comes to early-stage companies. Early-stage companies are so small, that practically any market segment of any size would be big enough to build the early incarnations of their GTM teams. And even if the company starts to hit the edges of the segment they are aiming at, there invariably are other adjacent segments that they can expand to for growth (or other products/services to sell into the original segment). The trick is to pick a segment and dive deep into it. Deep enough to figure out exactly what that segment needs, and how to fine tune the offering (product and service) to be a truly differentiated solution to that segment. And then to tune the sales and market engines to become highly focused and specialized on messaging and selling to that segment as if that is the only purpose of the company’s existence. So whether there are 80,000 prospects or 10,000 in a chosen segment, it does not matter. What matters is how effectively you sell to the first 100 prospects in that segment. And then the next 100. And the next. And the next. And the next. Until you reach the highest possible efficiency (meaning you finally have your solution and messaging tuned just right, and you’re picking off the low hanging fruit prospects). And then the efficiencies will start to drop because the low hanging fruit are gone and you’re having to work harder on acquiring as you cross the chasm of your chosen segment. At this point, you will need to make a decision — keep mining this segment despite worsening efficiencies or start fishing in a new segment. The best choice here is to start expanding the scope of the segment by aiming your guns at a very adjacent segment. And so on. Going back to the example of Central Desktop, the first segment they aimed at in 2011 was the marketing agency. They spent 18 months of exclusive focus on that segment and saw incredible growth in conversion rates and deal sizes. But at this point, they are starting to see those efficiencies level off a bit. So now they are aiming a portion of their guns on an adjacent market (marketing departments who are the clients of the agencies that they sold to last year). The situation that Jason is painting is one where managers seem to be ramping up their sales resources far ahead of their ability to scale each sales rep cohort to full productivity. Check out this post on The Renaissance Rep and the Sales Learning Curve. I hope this helps, Jason…
B2B brand and product positioning will only continue to become more important with the rise of the End User Era.