B2B Sales Models for Startups
In a past post, I’ve referenced the 13 B2C internet models using Steven Carpenter’s Tech Crunch article, which provides benchmark data for Internet B2C Companies, specifically the benchmark assumptions to get to $10M in revenue for the top 13 consumer internet models.
Last week I did the Revenue, Cost and Profit Sessions for the Founder Institute (PowerPoint presentation here on Scribd as provided to the San Diego Session). It’s clear that there isn’t much benchmark data for the B2B models, nor have I created it (yet) either.
Let’s start with the B2B Models. We’ll get to the B2B marketing models next, so just sales for now. Again, this is about Start-ups where you have a hypothesis about your numbers but no real data.
There are only three B2B sales models that I know of (feel free to add a comment if you know a fourth). Sales is the process and action of asking for and hopefully taking the order – remember they are a prospect until they sign the PO or put in their credit card numbers. Not Marketing.
- Direct Sales– either Inside sales or Outside sales. The good news, you keep all of the profit. The bad news, you need to hire the staff to do the work.
- Inside sales are phone based sales people, it doesn’t matter if it’s contract sales people or staff sales people
- Outside sales people travel, knock on doors, cold call and meet with customers in person to close the sale
One of the characteristics of Direct Sales is that you need to have either a high price point – or a high lifetime value – in order to pay the salary and commissions of a direct sales force. Inside sales is less expensive and outside sales is the more expensive model. What do I mean by a high price point? One way to do it is to work backward from the type of sales rep you would need to sell your product. Are you calling on medical, executive, IT? Will it cost $150K a year to get a world-class sales person who wears a suit and tie? Or are you selling to businesses where an entry level, inside sales person can fill the bill at $24K base salary, and another $16K in commission? Let’s start with the simple approach, a straight % of revenue.
$150,000 assuming 10% Sales Cost (not Cost of Goods) = $1,500,000 in product/service sales- how many sales would be required at your expected per unit cost or for the first year revenue if you have a subscription? For example, if your average sale is $3,000, they would have to sell 500 units or ~42 per month.
$40,000 assuming 10% Sales Costs (not Cost of Goods) = $400,000 in product/service sales – how many sales would be required at your expected per unit cost or for the first year revenue if you have a subscription? For example, if your average sale is $300, they would have to sell 1,333 units or ~111 per month.
Can you give a more significant percent of sales as part of the sale? The answer is yes and no depending on your type of business and the lifetime value calculation. In the life insurance business, the insurance company pays 100% of the first year premium to the selling agent. Now, they have Actuaries in their business and know the value, but you likely don’t for your start-up. Could you give the first year’s subscription? It depends on your churn rate.
If you’re selling a product to businesses with a low price point you cannot sustain a direct sales team – you may use a direct team to start – but you can’t scale a sales team from a low price point. The good news about direct sales is that you keep the margin with no middle man. The bad news is that you have the overhead of hiring the team.
Please – do not hire a “Strategic Sales Person” or a “hired gun” VP of sales. Get a sales person that is hungry to go sell, not to “think big thoughts” about why they can’t sell your product.
- Indirect or Channel Sales– where a third party sells your product for you.
- Agent Sales – there are “Rep” organizations out in the market that will rep your product to their customers.
- Indirect Sales or Channel Sales – an example is the Microsoft System Integrator sale – for every $1 in MS product sales there are $3-4 in services required to do setup, support, training, etc. These groups typically sell your product as part of selling their services.
Remember, Channels and Reps do not create demand, they fulfill the demand you create for your product. For a Service Channel to sell your product it has to not take away from their sales process. If they have a choice to lead their sales process by selling your product or selling their service, you loose. If they can shorten their sales process by leading with your product, you’ll win.
You should expect to give your channel 35-50% of the Retail price of the product/service sales. If you do less than 25% don’t expect to get much of their mind-share over a long period of time. Even if you’re selling a $1M widget. The sales cycle on that price point is almost always long and that will cause the Channel to lose interest.
You will also need to train the channel on your product and how to sell your product. So a channel is not likely the strategy you will use to start. Unless you’re a division of MS, you don’t have an existing channel to drop your product into that market.
- Web Sales– you can take the order for your product over the web site. This model is the simplest and easiest to understand.
- Web Direct – the order comes through your website, you clear the credit card, etc.
- Affiliate Sales – where the leads are generated through a third party like a Clickbank, where the order comes through their website. You get paid after they make the sale.
Your sales costs are low – but your marketing costs are where you will spend your $$$. One assumption to consider on Web Sales is will you need customer service instead of sales? Will the customer need help with setup or are there other areas to reduce the friction of on-boarding them as new customers?
Web sales assumes that businesses are looking for the product that you’ve created. This is a situation where innovation works against you. Let’s say you have developed a site that if businesses knew about it, they would fall all over themselves to say WOW! The only problem is that they don’t know that they should be looking for you.
Next up B2B marketing and cost of advertising…who has the list that you would want to sell to and how do you make it work?
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