Sales Complexity is Destroying Your Startup’s Viability
October 21, 2010
I found an interesting article by For Entrepreneurs about how sales complexity damages a startup’s viability. There were many great takeaways from the piece that I’ll share with you, and some investigation into the causes and effects of too-complicated sales models.
First, Keep Your Costs Low
The best way to start addressing your potential problem with sales complexity is a simple mathematical equation that has to do with how much you spend on acquiring new customers: you must make more money from a customer than you spend for a customer. That means Lifetime Value (LTV) should be greater than the customer acquisition costs (CAC). LTV is measured by customer service and long-term customer satisfaction, rather than those roped in by short-term sales.
Entrepreneur has some key points about customer acquisition with these metrics:
- The Acquisition Cost Trendline: Over time, the cost of acquiring a customer ought to steadily decline. This is driven by higher sales volumes, enhanced brand reputation, a more experienced sales force, and product improvements. If costs aren’t reducing, that’s a red flag: either the market is getting tougher to penetrate, or the marketing organization hasn’t figured out how to operate more efficiently (perhaps due to your “sucky” market clarity).
- Customer LTV: If your new customers are one-shot buyers or if there aren’t follow-on products to sell, upfront acquisition costs should be kept as low as possible. However, it might be beneficial to take a loss on a first-time customer (like through product giveaways) in case there’s a high potential of future LTV.
- The Impact of Social Promotions: Non-budget marketing tactics — deeper discounts, stronger guarantees, website makeovers — can reduce customer acquisition costs dramatically. Expansion stage companies should test aggressively and creatively to see what tactics work best. Try using the boon of social networking to your advantage with this guidebook. There are many cheap and popular ways to snag new customers — you just have to look for them.
- Acquisition Cost by Channel and Segment: Looking at customer acquisition costs by how you’ve used market segmentation can be an eye-opening experience. (Keep long-term revenue potential for different segments in mind.) Reevaluate your market segmentation—you may make the decision to walk away from high-cost, low-profit customers.
Now we can address the horrors of sales complexity!
The Chain of Sales Complexity, and the Rise of CAC
Chain of Sales Complexity: From Simplest to Most Complex
- Freemium: Giving away some version of the product or service. Most of the time there’s a “purchase an upgrade” option, but it’s not a requirement to receive at least a decent user experience.
- No Touch Self-Service: Traffic is driven to your website using pay-per-click advertisements, SEO, Freemium services, and more. If your product is simple to understand and has compelling value, your visitors convert to paying customers without the need for salespeople.
- Light Touch Inside Sales: A “light touch” means an e-mail exchange to answer questions or offer customer support, or, perhaps, a brief phone call with an inside salesperson.
- High Touch Inside Sales: Your product is still sold over the phone, but closing the deal requires several calls, the involvement of sales engineers, and possibly webinars or web-based demonstrations.
- Field Sales, and Field Sales with Sales Engineers: On-site visits are required using a field sales organization. Multiple on-site visits may also be necessary, as well as selling to several decision-makers, use of sales engineers, and perhaps on-site installations.
It makes sense that as you foray into the last two bullet points, your CAC increases significantly, thus modeling the most compelling downside of sales complexity.
As an example, Skok also provides some rougrough estimates of CAC depending on complexity — the latter two range from $25,000 to $200,000.
What Causes Sales Complexity?
It’s been determined that sales complexity is a bad thing—not only financially, but also because of the amount of man hours that go into a project that could reasonably be executed and delivered in a streamlined fashion. So what causes sales complexity? Here are a few, but keep in mind this isn’t a complete list; you may have additional setbacks that unleash sales complexity in your organization.
- Complex to understand, evaluate, install, or configure. If your product has many moving parts, it may sometimes be difficult to avoid this one—but that doesn’t mean you shouldn’t try. Remember the importance of a simplistic and accessible user interface. Your customers are going to want the same simplicity in the back-end processes.
- Requires multiple people to make a purchasing decision. If your product is too expensive, potential buyers will often have to ask their boss, who’ll ask their boss, who’ll ask their boss — just to make a purchasing decision. This holds up the sales cycle and could damage your chances of nailing it down.
- Your product is “mission critical.” If the entirety of your business’s self-prescribed mission relies on the sale of your product, you have troubles. This kind of pressure puts stressful obligation on you and your team, especially your sales force. Combine a mission critical product with a high price or a complex set-up and sales will tank.
- Failure is packaged with high costs. Data loss and/or a significant negative financial impact on your business could clog the sales process. Like the step above, it will stress your team out, especially if the risk of failure is high. (You can reduce the risk of failure by implementing a low-cost strategy.)
- Affects many other IT systems, people or departments. This point has to do with your product being mission critical; it may also have to do with management styles. ZDNet has a great post about how many management styles ignore the human element, which may hinder productivity, give rise to a toxic work environment, or other such downfalls.
- Requires significant change to the way people work. Face it: change can be tough, especially changes in the corporate culture. Like the point above, a potentially toxic work environment has many negative impacts.
- Requires the purchase of other elements, or integration/development work to make a complete solution. Products that cannot stand alone make for a difficult purchasing decision, and can lead to your product being passed up and down the ladder of command just to reach a consensus.
- No customer references that have the same usage needs as the buyer. Looks like you’re not engaging with your primary target audience and eliciting helpful feedback. Beta-testing with your target audience is one of many helpful steps in an influencer marketing campaign – read up on influence marketing to avoid this pitfall.
- Pricing complexity, where the buyer can’t easily figure out the right configuration, etc. I can’t help but think of the confusing labyrinth Microsoft puts its customers through whenever it releases a new OS. Ask yourself, is it immediately clear which product is right for your customer?
- Custom contracts need to be negotiated. Creating a custom contract may be necessary to sell your product, but if at all possible, it should be avoided. When custom contracts then need to be negotiated, you’ve created a situation wherein sales complexity gets worse and worse, and could lead to everybody walking away from the table.
How Can I Reduce Sales Complexity?
For starters, you can take every bullet above and flip them on their heads. That’s one way to do it. Another way that Skok suggests is an overhaul of your product or service’s design. Here are some suggested ways to transform your product or service to lower CAC and reduce sales complexity.
- SaaS: Moving from an on-premise, enterprise software product to a SaaS model offers many benefits, including eliminating IT from the decision-making process; giving easy access to test product; and risk reduction for buyers.
- Freemium: Like switching to SaaS, delving into freemium territory gives customers easy trial access with zero risk. Skok uses the example of Dropbox to illustrate his point, and couldn’t be more on-target. Falling under this category is offering free trials and switching to open source technology.
- Leverage the Web for Sales and Marketing: Once again, check out the bountiful options social networks provide for sales and marketing opportunities. OpenView’s guide to using social networks is above.
- Leverage Engineering: Have your engineering team focus on designing and building your product for ease of use and evaluation. Skok references CloudSwitch — a program that puts businesses in the cloud — which produced a free Express version of its product that has a greatly simplified user interface from the Enterprise edition.
- Leverage Influencers: If you implemented an influencer marketing strategy, you should have many influencers on your side. Don’t be afraid to ask for their assistance.
Skok’s article is thoughtful, thorough and well-researched, but it’s not the be-all end-all to reducing sales complexity. There are many other methods of approaching this problem. Here are some pointers on how to simplify your operational structure and reconfigure product strategies. Perspectives on Enterprise Planning uses the example of one business that utilized the restructuring of its sales and operations departments to help itself out of an economic slump. Bain & Company discusses cutting SKUs to reduce complexity – the lessons learned can apply to many different business sectors.
Realize that reducing sales complexity is an achievable goal, and should be an ongoing process meriting significant investment. By now you should understand the serious consequences of sales complexity so now’s the time to simplify!