The story of a lawyer turned entrepreneur.
I had coffee with an entrepreneur this week. Actually, he’s a lawyer turned entrepreneur.
This attorney has developed a SaaS product for other attorneys. It improves document workflow in a law office. He’s worked in this arena for his entire career, so he knows the pains and needs of attorneys.
In fact, in a previous job he developed an early version of the product simply to make it easier to get his work done.
This entrepreneur has some early customers who are using his software. They give him positive feedback and useful ideas for improvement.
He’s gotten this far without any financing. He and his technology partner have bootstrapped the product development costs.
So he’s on his way, right?
Wrong. He has lots of questions about how to acquire more customers.
- Sell directly and hire a salesperson?
- Find resellers who work with attorneys and sell his software through them?
- Sell the software only through his website?
Which of these methods would enable him to keep his Customer Acquisition Cost lower than their Lifetime Value?
Caught in a sand trap
The entrepreneur described his situation as a “sand trap.” He must spend the time to get more customers in order to increase the subscriptions which will in turn let him hire more people who will help acquire more customers.
He faces not only the question of which method is the best one to use. He must also ask, how much will each method cost?
David Skok: It’s a common problem.
David Skok (a venture capital investor who writes a blog For Entrepreneurs) says in an article on sales complexity that my friend the lawyer turned software entrepreneur is experiencing a common problem.
But the truth is that defining the product is just the beginning. Entrepreneurs must spend significant time thinking about the complexity of their sales process and the cost of customer acquisition, as these factors will strongly impact a company’s ability to make money and attract investors.
Skok also says that when he started looking more closely at the problem, he was surprised to find that the cost of customer acquisition increases exponentially as the sales methods become more complex.
Skok’s graphics show that a startup could significantly reduce its cost of customer acquisition if it could find a way to shift:
- Inside sales –> No touch
- Direct sales –> Inside sales
Now we have to recognize that some products really do require a direct sales force. The value and the price are high, so their margins can pay the cost of direct sales. In some markets customers are experiencing high pain and urgency to solve complex problems that demand direct sales teams.
But everyone else will benefit when they do everything they can to reduce the complexity of their sales.
Skok says the green zones are attractive places to make money. He focuses his attention on finding investments in these zones.
Green Zone 1 (Freemium): This can work if large numbers of people use the software and a significant number of them convert to paying customers. The arrow indicates that additional selling is often needed to convert people into buying customers.
Zone 2 (No Touch Self Service): Skok calls this “One of the most powerful B2B business models. The companies in this zone have found a way to create very clear value propositions for their products/services that can be easily understood just by visiting their web sites.” Your attention should all be focused on maximizing the conversion of visitors to your website into paying customers.
Zone 3 (Inside Sales): This model can work as long as your prices can support the value your inside sales people deliver to customers. You may also be able to move some of your sales into Zone 2 and further reduce your sales complexity.