Getting to Yes, Repeatedly: XaaS Go-To-Market (GTM)
XaaS Success Key #3: Go-To-Market
In XaaS go-to-market, there is one truth and only one truth:
The money is in renewals.
In my next three articles covering Keys to Winning at XaaS (Right Go-To-Market (GTM), Right Capabilities, Right Goals), renewals will continually come up. In this article, I will cover the XaaS sales funnel, channel considerations, and a bunch of other interesting stuff. But at the end of it all, I want you to remember one thing:
The money is in renewals.
First let’s start with one of the key concepts in any sales funnel conversation: the sales funnel.
1. The XaaS Sales Funnel: Deeper Than You Think
Most sales funnels include some combination of awareness, discovery, intent…ending at purchase (Figure 1).
Figure 1: A Typical Sales Funnel
But for the XaaS sales funnel, purchase isn’t the end, but the beginning of the relationship. Why is this? Because XaaS is indeed a relationship, not a transaction, as discussed in my first article, “From Transaction To Relationship: 6 Keys To Winning In XaaS”.
There’s also a practical reason: it’s cheaper to keep a customer than to buy a new one. Even for poorly-performing XaaS companies, it costs about ¼ as much to renew a customer, as to acquire a completely new one. Clearly, earning more from an existing customer will deliver you more profit than finding an entirely new one, barring any substantial differences in revenue per user. I’ll discuss this more in later articles on Right Capabilities and Right Goals.
In Figure 2, I’ve laid out my view on the key steps in the sales funnel for XaaS.
Figure 2: The XaaS Sales Funnel
Let’s review these to uncover some critical GTM best practices:
• Get to know me: Discovery. Sometimes called awareness in typical sales funnels, this is the process whereby potential customers discover your solution and offers. Any number of different marketing channels can work for this.
Best practice: Referrals. Nothing works better for marketing than word of mouth; nothing will incentivize your existing customers to help you find new customers than a referral bounty. Offer your existing customers a bounty if they recommend your product or service to a new customer that then successfully signs up. The beauty of referrals lies in not having to spend anything on customers that don’t convert; the bounty is not paid unless the new customer signs up.
Example: One accounting SaaS provider I analyzed cut their customer acquisition costs (CAC - more on CAC below) by over 30%, with just as many net new customer additions, by shifting spend from digital marketing to referrals.
• Give it a try: Trial. Normally this sales funnel step is called Evaluation; I’m jumping straight to best practice and calling this step Trial.
Best practice: Offer your products and services on a trial basis to customers. This has these key benefits:
Awareness. Nothing builds awareness of your value better than someone actually using your product. For this reason, trial is correctly considered a marketing expense captured in CAC.
Stickiness. The minute a customer begins developing specific knowledge or skills related to your product/service, or begins storing any data with you, it is much more difficult for them to switch away. This greatly raises the probability of conversion to a paid customer.
To make the economics of trial work, it’s critical to place some sort of threshold limitation before a customer must convert to paid; it’s really difficult to make money at a price point of $0. These thresholds could be time-, usage-, or success-based, but they are all set at the right level that people can get basic functionality for free, but the value-added functionality they really need require a paid subscription. This becomes a conversion trigger for you – and a cost-effective one.
Example: Too many to count – even for product! One lighting distributor I worked with experimented, offering LED lighting products to customers on a trial basis, correctly evaluating that customers would be unwilling to pull all the product out and send it back. Sales increased – as did customer satisfaction.
• Let’s get this party started: Purchase. This is only step 2 out of 5 – not the final step! This is the actual contract-signing stage, the point at which a lead becomes a customer. By the way, everything up to now has been focused on removing all friction to your customer subscribing to your XaaS offering – your tiered offering, your pricing, your trial offer, all have the effect of making things as easy as possible for them to decide to subscribe to you.
Best practice: Communicate frequently with the potential customer during the trial process. Just because they’re in the trial – and they’re not yet paying you – doesn’t mean you can just leave them alone. You want to make them feel wanted, answer their questions, and reiterate your value proposition every opportunity you get.
Example: Several years ago, as a test, I signed up for a free trial with Salesforce.com. I must have received at least 10 emails, and one phone call, during the trial, to make sure I was using the product, could get any questions answered and any roadblocks removed, and to make sure I knew the great features of their CRM solution. Simply put, they were not willing to just leave me to my own devices – they were going to do everything they could to make me want to convert to a paid customer.
• All set up: Provisioning. They’re not really your customer until they’re actually using your product or service. To make that happen, sometimes customization is required, sometimes delivery is required, sometimes on-site installation is required.
Best practice: standardized offers. One of the easiest ways to ensure no provisioning nightmares – such as customizations that don’t work, supply delays, etc. - is to offer standardized product or service, or even product + service, packages/offers. In fact, standardized offers ease the progress of customers throughout each stage in the funnel by easing decision making for the customer, which as noted in my first article is one of the key benefits of XaaS.
Example: Adobe’s Creative Cloud is available in basically 3 different plans – All Apps (all of Adobe’s applications), Photography (Lightrooom and Photoshop), and individual applications (a la carte selection). There are three additional offers based on customer type, but even then, this means there are only 6 different plans on offer, making the decision-making process simple. And simple makes it easier for the customer to decide, deploy, and use.
• Winning!: (Customer) Success. Now that your customer is paying you – you want to make them as successful as possible, so they renew without costing you a fortune.
Best Practice: This skill is critical, evolving, and therefore worthy of deeper treatment, so I’ll cover it in a future article, XaaS Key #4: Right Capabilities.
• Let’s do it again: Renew. Like I said, the money is in renewals. And renewal may seem simple – after all, most customers are on auto-renew, right? Out of a typical XaaS cohort of 100 customers on auto-renewal subscriptions, 70 – a majority, but not all – do auto-renew. However, that means 30 don’t automatically renew – which means you need to spend money to keep them. And that 30 includes 10 that will cancel their subscription and 20 that are seriously thinking of cancelling unless you intervene (spend).
Best practice: Getting renewals right is critical, so I’ll also review this in XaaS Key #4: Right Capabilities.
• Would you like another?: Upsell. Upsell is basically having a new or premium offer, with greater functionality and benefits. Upsell is absolutely critical to XaaS growth: for more mature XaaS offers, upsell becomes 25-50% of the lifetime value of your customer (LTV). There are two key issues at play here:
Growth through pricing: Unless you have an upsell offering, if you have penetrated all of your customers with your XaaS offers, you have no growth path unless you raise your prices. And as everyone knows, raising prices on a constant product can really annoy your customers.
Aspiration: Remember the good-better-best hierarchy of offers discussed in my previous article on XaaS Key #2, Right Product and Service Design, “Dude, Where’s My Predictable, Growing Revenue?”. We all want to aspire to better things: losing weight, running farther, making more money, driving a better car….This is true of XaaS customers, too.
Best practice: a hierarchy of offers, including one super-premium offer. You always want to have an aspirational offer at a premium price so your customers have something they can look at and say, “one day, I’ll be big/rich/important/whatever enough to need that, but maybe not right now”. That way, you can always pitch a new offer to them to drive greater revenue per customer.
Example: Salesforce.com’s hierarchy of offers (Figure 3) is brilliant on many levels, including the “Unlimited” package at the far right, promising a clearly aspirational offer of “unlimited CRM power and support”. Who doesn’t want to be powerful? And it’s premium priced, a full doubling of the price of the next offer down, ensuring high margins.
Figure 3: Salesforce.com Hierarchy Of CRM Offers
Best practice: Frequently I get asked by startups how to raise prices, since they plan to differentiate at launch with lower pricing. I answer with three words: “new and improved”. New and improved becomes much easier if you have a completely new offering, at a higher price point – in other words, an upsell offer. (Note: I also use three other words, “don’t do that”, when startups suggest making lower prices a major component of their value proposition, but that’s best saved for another discussion!).
Example: Adobe Systems ran into this growth-through-pricing threat when launching Creative Cloud. At launch, Creative Cloud was “all-you-can eat”; one price gave the user access to the entire Adobe software suite. There was a real possibility that once all customers transitioned to Creative Cloud, revenue growth would stop unless prices were raised. Adobe has since launched multiple add-on packages to Creative Cloud, ensuring LTV growth.
Example: Netflix has raised prices on a constant product, without severe consequences, but we need to consider that they are the exception, not the rule, due to their unique offering, existing low price point, and high market share. And it should be noted that Netflix has also recently introduced an upsell: for an additional fee, customers can enjoy Netflix simultaneously on unlimited devices.
2. XaaS Channels: Changing Lanes
In my first article, “From Transaction To Relationship: 6 Keys To Winning In XaaS”, I mentioned one of the great benefits of the recurring revenue model: a direct relationship with your customer. Indeed, XaaS can eliminate the distinction between decider, payer, and user, giving you a direct relationship with the actual user of your product or service.
Just You And Me: Direct Selling
In fact, XaaS creates the opportunity – if not the need – for directly selling your product or service, bypassing indirect channels such as online retailers and online aggregators. The benefits of direct sales are many:
• Lower perceived prices: The cut earned by channel partners can vary wildly from industry to industry; one software solution I researched, for example, gave channel partners anywhere from 15% to 25% of the purchase price. If you sell directly to the end user, at least one party is removed from the distribution chain, reducing that 15% to 25% to 0%. Of course the option also exists to keep the price for the end user the same, increasing your profit, but that would preclude another key benefit, which is….
• Larger market size: With a lower price, elasticity kicks in, making your product available to more customers, at the same per unit/per customer profitability for yourself.
• Data control: Without others in the distribution chain, you directly collect, own and use customer-related data that helps optimize your price-product/service-promotion mix. For example, by selling Creative Cloud directly through Adobe.com, instead of selling Creative Suite through Amazon.com, Adobe enjoyed exclusive rights to customer data and did not rely on another party which actually possessed the data to share it with them.
• Ownership: In short, you own the customer, not somebody else, giving you the opportunity to market new products and services without adding another decision-making layer between you and customer.
However, there are some critical tradeoffs:
• Access: Indirect distribution works because retailers and distributors aggregate supply across multiple vendors, giving customers more vendor choice with the simplicity of a single purchase and a single supplier. A layperson example of this is the supermarket: instead of shopping for vegetables, meat and dairy separately, a consumer can go to a single store, fill a single cart, and make a single purchase – and have a single company to turn to in case anything with that purchase goes wrong.
• Capabilities: In XaaS Key #4, Right Capabilities, I will discuss more about the new skills you will need when moving to an XaaS world. One of these is setting up an online storefront if you want to distribute direct; the challenges of doing this properly and the associated costs are unfortunately often ignored. Another is providing provisioning services – such as customization, integration with other products/services, and customer training. These require headcount, which can be very costly compared to distributors, who can train team members on multiple products and services, thus maximizing their productivity.
The barriers to direct sales have been falling – creating more opportunity to sell XaaS solutions directly to your customers:
• Purchasing policy and process: For B2B customers, traditionally multiple levels of approval from IT and finance were required for product and service purchases; as one XaaS vendor once told me, “your customer’s IT department is your enemy”. Then the dreaded purchase order had to be cut – a costly process, both in terms of money and time. On average, a purchase order required approving a vendor before any purchase could be made, then manually creating a purchase order document. In total, it could take a month and over $100 just to create a purchase order.
With the growth in corporate cards, and the lower price point of a subscription service, now XaaS products and services can be purchased with a corporate card, and typically without any advance approval, or even a receipt for reimbursement.
• Bundling/multi-vendor purchases: Often products and services have been sold in bundles blending offerings from several vendors, delivering discounts and removing decision stress. However, both B2B buyers and B2C shoppers have become more savvy in seeking out the best providers for different solutions, removing decision stress from the equation, and the already low perceived price points of XaaS solutions created by monthly payment makes discounts less noticeable.
Never Say Never
So when do you opt for direct sales versus selling through channels? Typically, indirect selling is still required in these situations:
• Lower customer awareness: If your solution is extremely new, or you are extremely new to offering the solution, your channel partner can (hopefully) be a key asset in marketing the benefits of the new offer, giving you access to customers, and providing service after sales to ensure deployment success.
• Customized products: Put simply, customization means headcount experienced at customizing. Headcount can be expensive, especially if you’re a small company and you are not sure that headcount will be fully utilized at all times – that is, if you have lumpy order flows. A channel partner well-equipped with skilled IT staff that can customize your product will still require you to spend, but probably not as much as you would on your own, as their staff will likely work on other vendors’ solutions as well.
• Customers with over 250 users: Larger customer deployments will require more indirect selling – partially because they are more likely to require customization, partially because they will require, or try to require, you to use their preferred reseller, or because they want all purchases to go through the typical approval flows. Which we’re kinda trying to get around, but you can’t always win.
Are We Still Friends? New Channels
If selling indirect, through channels, is still the right path for your product or service, you may need to consider new channels. Why? I’ll elaborate further in XaaS Key #4, Right Capabilities, but your existing channel partner may also lack the key capabilities to successfully offer XaaS products and services.
You should ask your existing channel partners about their development of these key XaaS capabilities:
• Recurring billing and recurring payment. Don’t underestimate how difficult setting up these systems will be. The good news is there’s an entire ecosystem to assist. The question is whether your channel partner is using that ecosystem, or is just hoping everything will be ok.
• Pricing. I discussed in XaaS Key #2, Right Product and Service Design, “Dude, Where’s My Predictable, Growing Revenue?”, that pricing for XaaS is an art – is your channel partner drawing cartoons, or masterpieces?
• Systems integration. While IoT-enabled product features are not required for XaaS product offers, many product companies transitioning to XaaS are doing so as IoT sensing and computing enable them to offer entirely new monitoring, maintenance, and optimization features they previously could not. Does your existing channel partner have any capabilities in doing the systems integration work to make sure your IoT solution and services actually work? If not, you and your partner may have immense headaches.
• Marketing and sales. You will be educating yourself, your employees, your shareholders and your customers on the new XaaS business model, and you need your channel partner to do this, too. And also, your sales teams’ mindset will need to change from catching big fish to gathering many recurring units. Is your channel partner retraining their sales force to do this? Are they ready to explain why this new model is the best, from an end-user standpoint?
Best practice: Educating your channel partner. In some cases, you may need to invest in retraining your channel partner, if that single partner is critical to your overall business.
Example: The lighting industry features a few large global players with many fragmented local players. Lighting vendors such as Signify and LEDVANCE received multiple inquiries from channel partners on how to transition to IoT and XaaS business models enabled by IoT. The transition isn’t trivial for you, nor is it trivial for your channel partners, and sometimes they need their suppliers to be a guide.
Best practice: Entirely new partners. In the IT world, B2B sales of IT tools typically either requires your own sales person, or selling indirectly through IT resellers such as CDW or even Amazon. Both are excellent companies; CDW has been slower to develop its own XaaS capabilities.
Example: As a result, a new class of channel partners – XaaS aggregators – has emerged. These companies specialize in the marketing, sales, and after-sales integration of XaaS tools. More specifically, for cloud-based SaaS offers, cloud marketplaces have emerged, with full capabilities for rapid services provisioning, recurring billing, managing sign-ons, and providing XaaS-specific terms and conditions.
What’s Your Take?
XaaS presents you with an entirely different sales funnel, driven by the supremacy of renewals. This creates challenges as you and existing channel partners work to build new skills. But you also have the opportunity to sell directly to the end-user, which, as we will find out in the next article, enables collecting the critical information required for successful renewals.
What is your take? What challenges have you faced in GTM transitions for XaaS? What have been your successes and mis-steps for selling directly to end users? Contact me; I’d love to hear from you!