First, let’s identify what actually determines forecast reliability. Reliability here means a very high likelihood that the forecast numbers for bookings or revenues are met. Or in other words, deviation from the forecasted number shall be small.

Forecast reliability (or likelihood) is determined by the following two aspects:

1. The average closing probability (or hitrate)
2. The number of opportunities in the funnel

The fact that closing probability is a crucial factor is easy to see. But also the number of opportunities in the funnel is important because closing probability is applied to all opportunities. It therefore determines the achievable revenue. If, for example the forecast for the quarter is 100.000 USD/EUR and your average hitrate is 25%, you will need at least 4 opportunities with 100.000 USD/EUR deal-size each in the respective sales process stage so you have a chance to close them in time. You can imagine that closing 100.000 USD/EUR out of a total potential of 100.000 USD/EUR (given your historical closing rate) is quite edgy and requires that all goes as planned (which it never does in Sales). However, if you have 10 opportunities in the funnel with 100.000 USD/EUR deal-size each, you have a probability of closing 250.000 in bookings based on your 25% average closing probability, which obviously makes achieving the 100.000 USD/EUR revenue much more likely.

Now, let’s have a look how the two determining factors compare in both the “High-growth” and “Reliable-forecast” scenario:

“High-growth” scenario:

In the “High-growth” scenario sales people naturally act more short-term oriented. They focus strongly on closing and on very few opportunities. The main goal in this approach is to win new customers as fast as possible with as much revenue as possible. However, this scenario implies various risks:

1. Slim backup: Funnel backup is very thin as there are only a few opportunities, all meant to be closed in the time forecasted. Therefore, slipping of a closed sale by one or two quarters cannot be compensated very well.
2. Aggressive customer management: The customer approach is clearly more aggressive. Many ways into the customer organization are pursued in parallel in order to identify the most promising buying center as fast as possible. That often leads to collisions. Also, the account managers push more aggressively for meetings and for progress in the sales process. All that increases the likelihood of a setback or internal turmoil in the customer organization.
3. Price discounts: Fast closing often requires quicker and larger compromises on the price and scope of the deal and therefore leads to a smaller deal-size.

All these risks decrease the probability of closing the opportunity in the targeted time-frame and the envisioned bookings/revenues. Another aspect is that sales people in this scenario focus on the most promising prospects that are easier and faster to close (“low hanging fruits”), which per se limits the overall potential of this approach.

“Reliable-forecast” scenario:

A robust forecast requires large backup in order to achieve the necessary probabilities. This approach is therefore mainly driven by a strict funnel management based on historical closing and funnel transition probabilities. Most efforts in this much more conservative scenario go into creating backup opportunities and long-term funnel development as well as carefully monitoring the average sales process with its transition probabilities and time-frames from stage to stage. The main difference beside above described risk factors to the “High-growth” scenario lies in the following aspects:

• Building up a larger funnel requires time, time that is missing when it comes to closing the short-term opportunities
• The focus on an accurate forecast also leads to a mindset in Sales to ensure that the forecast is met; other opportunities that could be closed as well are therefore rather postponed to a following quarter

So, both approaches vary in closing probabilities for opportunities as well as in the total number of opportunities in the funnel. Both aspects result in higher risk and fragility (and therefore often as well in volatility) of the sales forecast in the “High-growth” scenario compared to the “Reliable-forecast” approach. In addition the actual achievable revenue per opportunity is more fragile in the high-growth scenario as account managers rather focus on high revenue than on winning the deal by all means.

So, Sales Executives, be aware of the trade-off between the two scenarios. Make a conscious decision for one of them and don’t ask your account managers to achieve both. The “High-growth” scenario makes sense when you are still small, the market window open only for a small time and when you still can afford high revenue dynamics. The “Reliable-forecast” approach usually becomes relevant when your company has evolved beyond start-up stage and when stakeholders now require more security, stability and planning accuracy.

© Stephan Hesslich

1. Potential (size of the responsible area)
2. Synergies
3. Goals

1. The main function of Sales is to exploit a certain potential. So, the potential should be large enough in order to be attractive for the individual sales persons. And “attractive” means, it should enable them to achieve their sales goals over multiple years and to build up a large enough funnel considering the assumed hitrates. Keeping that in mind, the potential you provide in form of a region or segment should be reasonably large. Obviously, if you set the ceiling too low, they will not only be physically kept from jumping very high, they will also lose their ambition to jump higher and higher. Here are some hints for sizing the sales territory right:

• Assume 3-5 years time (usually required to gain a significant market share and to build up the experience that your sales people can use to leverage)
• Apply your historical or assumed hitrate (= the ratio of number of approached prospects and number of actually won customers)
• Calculate the resulting required number of target accounts and draw the territory accordingly

Example:

Total annual revenue target per account manager:  1 mill. EUR/USD

Average deal size per customer: 100.000 EUR/USD

Resulting customers required per year: 10

Average hitrate: 25%

Resulting prospects to be approached per year: 40

Total number of prospects required over 3 year time frame: 120

So, in this example, the total sales territory should include at least 120 target accounts with a potential deal size of 100.000 EUR/USD per account. Check if the region really provides the sufficient potential. If the territory is too small, your sales managers will have no room manage their funnel in a flexible way and to create sufficient backup.

2. Another important point is regional or segment synergies. Such synergies can be:

• Concentrated travels to visit multiple customers and prospects
• Leveraging customer references or experiences that are region- or segment-specific (culture, purchasing behavior, cooperation, etc.)

Splitting up a region, country or segment across several account managers and assign overlapping territories therefore doesn’t make much sense because you will destroy these synergies and in addition tremendously increase internal account coordination efforts.

3. An entrepreneurial approach also means giving your sales managers generic, not account-specific goals. And this not only short-term but also long-term. Such a goal can be, for example, to win a certain number out of the Top 10 accounts or to achieve a certain market share for a specific segment, country or region or simply to achieve a certain revenue and leave it completely to the responsible sales manager how she achieves it.

So, if you give your sales guys a large potential to tap, combined with stretched goals, it will make them think “big” and long-term oriented. They will also become creative and very motivated to jump over the bar (to stay with above analogy) even if it is raised every year. By setting rather general goals, they will have to manage the dynamics of the sales process by themselves and have to make sure to create a sales funnel, keep it sufficiently filled and to balance their closing and prospecting activities accordingly. In the end, they will become little sales entrepreneurs.

The contrary approach is, what I call a static approach. This is still seen quite often in sales organizations. It means to assign a fixed number of actual accounts to sales persons with hardly any room for backup or for optimizing the account selection and prioritization (sometimes it just makes sense to win some accounts first and then tackle the related accounts, which is not possible when your responsibility is limited to certain accounts). Also, you as a sales person are under large pressure to move forward on these specific accounts, which often results in a very aggressive account approach. This however, can lower your chances to win this customer quite substantially. Sometimes, it is simply not the right time to approach a prospect. Not respecting this can be harmful for your account manager’s reputation, motivation and your company’s overall sales performance. Therefore, leave the account selection up to your sales people as much as possible.

So, by setting the sales potential, synergies, and goals right, you will unleash your sales people’s entrepreneurial capabilities. The results you will see in your top line.

© Stephan Hesslich

All that keeps the myth that trade shows are a place where business is made. While they are still a great place to meet and communicate face-to-face, you cannot rely on trade shows to be a strong lead generator. Why? Because, in order to be that, trade shows would have to provide you an effective platform of introducing yourself to the right contacts of your targeted customer groups. Now, let’s see why that is not possible:

1. Audience

We know that your audience should be selected and targeted carefully in order to make sure, your offering fits to them. The audience at trade shows however is not targeted. You cannot control who visits your booth and who not. All you can do is to try to lure the right crowd to you but that rarely works.

Another thing is that the decision makers or main influencers rarely visit trade shows to scout new solutions, if they even go. Usually mainly junior product managers or technical people go to trade shows. Many important members of your prospect’s buying center don’t go to trade shows at all. This is especially true for large organizations. And, the people who go are usually very busy with meeting existing partners or with people they already know.

2. Frequency

Exhibiting at trade shows is usually linked to substantial costs and efforts within your marketing organization. Therefore, you can only afford a certain number of such events per year. Too few to be enough to build a sustainable sales funnel for the year, even if you manage to win a few prospects at the shows.

3. Transparency

The sheer size of today’s large trade shows and the number of exhibitors is overwhelming for most visitors. Even the focused ones of them can find you only by accident. You can optimize your booth location and appearance as much as you want, you will still have to rely on luck to be discovered by your target prospects. The number of booths and vendors in relation to the available time and overview of the visitor is just too large. For smaller shows the – let’s call it “discovery rate” – might be much better. However, there you also have a smaller number of visitors, which might result in a similar total number of prospects.

As a consequence of all that, you leave your lead generation at trade shows to chance. I have been to quite many shows as an exhibitor in my life and I can tell you by my own experience that it is very hard and very rare to meet the right people there (unless, of course, you made previous appointments).

Trade shows are an excellent branding opportunity though. It’s a great chance to introduce yourself to the world and to get noticed, at least unconsciously. To be present there is also important to establish your brand and to reconfirm that you are a major player in the industry. But in order to generate new sales leads you need to rely on other marketing activities and on a more proactive sales approach.

© Stephan Hesslich

That new focus provides two kinds of challenges:

1. To manage the transition from presales to postsales
2. To manage treating your customers differently than in the past

Regarding  1.: Postsales customer management is very different from presales customer activities. It’s a little bit like in a personal relationship: In the phase of winning the partner, you only show your best side, you try to avoid any conflicts and you are still very flexible and generous in your behavior. After both sides made a commitment of staying together (e.g. got married), the relationship now requires the ability to constantly resolve conflicts and to work together in a way that both parties feel happy and satisfied. We all know this from our own relationships and it is very similar in customer management.

In the presales phase mainly negotiation and convincing skills are required, the conflict potential is usually very limited to disagreements on the terms and conditions. In that phase, the customer relationship is still lose and unbinding. In the postsales phase however, conflict resolution skills are required as well as the capabilities to constantly coach, motivate, and consult your customer to become an attractive sales partner for you. Each sales person must be able to manage that transition smoothly and to change their roles during this process.

Re 2. The latter part becomes additionally challenging since you now need to be demanding and to manage your customer in a performance-oriented way. You need to be strict and to able to address issues immediately and in a direct way, and sometimes you have to be even willing to apply sanctions. Otherwise you will lose a main chunk of your planned and forecasted revenues.

It is a difficult balance to be both the service-oriented supplier you still need to be, trying to make the customer happy, and to be a demanding business partner.  To treat your customer like that, creates two other challenges:

A. Social Skills

It requires special communication skills in your sales persons. They also have to be senior enough, so they are respected by the customer in conflict situations. And they need to have the confidence, and sometimes even the courage, to address the issues with the customer when they arise.

This communication and personality requirement is often underestimated, I have seen very senior sales managers that sometimes got scared of treating the customer that way and who tried to slow down their account managers.

B. Accommodation

The customer also needs to adapt to be treated like that by their suppliers. Especially large customers are well aware of their bargaining power and they are used to get pampered by the vendor. The “new behavior” of their account manager can be very irritating for them if they do not prepare from the beginning for the new form of their cooperation with the vendor. Sometimes they seem to forget that it is also in their interest to get the most business out of the supplied solution and to be successful with it.

So, Sales executives should be aware of these challenges. They should support their sales people even when it gets a bit difficult with the customer. And they should make a special effort in developing the required skills in their staff and to establish the necessary culture within the organization.

© Stephan Hesslich

1. If you have non-profitable customers it has an impact on your bottom line; in order to address this you have to know which customers these are
2. Especially in start-ups, customer profitability relates to opportunity costs, which matters much since resources are scarce and growth goals aggressive

The key in realizing the importance of customer profitability in start-up companies lies in understanding opportunity costs. Opportunity costs are profits you could generate if you spent the resources on alternatives. Thus, sales resources spent on a customer that requires quite a lot of efforts should better be spent on another customer bringing in the same revenue but requiring less efforts.

Example:

Account manager A has three customers with 100.000 USD/EUR revenues p.a. each. They require all of her time, equally spread across the three of them. Each customer has the following profitability:

Customer Profitability A = 100.000 USD/EUR p.a. – 33% of the account manager’s annual costs

Account manager B has three customers with 100.000 USD/EUR revenues p.a. each that only take up 75% of his time. Therefore, each customer has a profitability as follows:

Customer Profitability B = 100.000 USD/EUR p.a. – 25% of the account manager’s annual costs

The remaining 25% of his time the account manager can spend on managing another customer with the same profitability, also bringing in 100.000 USD/EUR p.a. revenues. Therefore, account manager B generates 400.000 USD/EUR revenues (33% more than account manager B) with the same effort just by managing more profitable customers.

As this example points out, it is not only the fixed personnel costs of your sales force that matters for total company profitability but also individual customer profitability. Therefore, each customer’s profitability should be calculated based on their contributing revenues and the company resources these customers require.

Now, there are two practical difficulties with calculating customer-associated costs:

1. While measuring customer-specific costs is fairly easy in consumer direct marketing settings, it is rather difficult in high-tech sales. Time that people spent on customers is usually not recorded.
2. Sales people’s productivity varies largely. That makes it difficult to compare associated costs. One not so productive account manager might create more costs on a customer than a more productive account manager, therefore making this customer less profitable then he could be if managed by another sales person.

To address point 1. you can start with high-level estimates. You can guess, survey or even for a limited time record the resources spent by company functions like administration, finance, presales, and top management on e.g. customer visits, customer calls, and contract reviews. Count the number of customers per customer segment managed by one account manager and then compare. Measure the helpdesk support load per customer. Then put a cost value to all customer-related activities like resolving a support issue, having top management involved, developing a non-paid feature or communicating with the customer.

To get a feeling on productivity in point 2., you can compare the profitability of account managers that serve similar customers. However, customer management also varies by region and even within one rather homogeneous customer segment, customer profitability can be different. That’s why it can be helpful to compare how customers are actually managed in detail and how account managers spend resources. For example, do some account managers have the tendency to frequently set up an on-site meeting or pull in top management? Or do others rather meet every customer request even though that might not always be necessary?

Now, once you have a good estimate on your customer’s profitability the big question is:  What do you do with the results? Abandon all less profitable customers? Generally reducing the total sales efforts by assigning more customers to each account manager?

Well, the answer is not so simple. Reducing costs might result in losing the customer and in fact is often not so easy to do in practice. And letting a customer go is a very tough decision and requires quite solid data to justify it. Therefore, a better way is to educate your sales force that not only revenue but also customer profitability matters. Try to identify best practice examples. Create a consciousness for being careful with using company resources. Encourage your sales people to consider costs for customer requirements before fulfilling them.

Focusing more on customer profitability certainly requires a paradigm shift for usually strictly revenue-oriented sales organizations. But if you don’t do it, your company will not grow as much as it could. Plus, you will end up with less profitable customers, which will hurt your bottom line.

© Stephan Hesslich

While it is certainly important to keep paying customers that contribute revenues to your company, this post focuses on the profitability that long-term customers generate compared to not so loyal customers. We also look at this mainly for settings where a service provider has many, comparably small customers. Obviously, customer loyalty has a different importance in high-tech companies where you have only a few but large customers that provide substantial revenue contribution. But even there it is important to look at customer profitability and not only revenue.

Loyal customers are supposed to be less expensive to serve and to have a lower price sensitivity, which means that prices can be raised on them more easily without compromising on demand. As I outlined in one of my previous posts, customer retention costs are usually higher than initial acquisition costs. Retention costs therefore need to be compensated by high, regular revenue and sufficient gross margins per sales in order to ensure overall customer profitability.

There has been some excellent marketing research on the topic. For example, Werner Reinartz and V. Kumar (“The Mismanagement of Customer Loyalty”, Harvard Business Review, July 2002) investigated the link between customer loyalty and profitability in four example companies. The result of their study was that the link between customer loyalty and profitability is very weak. The picture below shows the relations between profitability and loyalty, clearly showing that long-term customers can have both high and low profitability, the same as short-term customers.

The study also showed that the assumed smaller price sensitivity does not exist with long-lasting customers. These customers often use their bargaining power to pay even lower prices than short-term customers, also resulting in lower margins per transaction.

I assume why companies still focus on keeping their customers as long as possible is the following:

1. It is more comfortable for the sales force. Dealing with customers that you already know is easier than hunting for new customers, which involves a lot of uncertainty and risk.
2. Especially service providers invest a lot of upfront money in acquiring new customers, e.g. free hardware, free months of service (used to be very popular for DSL), however have comparably small marginal costs for delivering their service. Therefore, a certain revenue contribution over time is required in order to compensate for the initial costs. What service providers often neglect is, that these high acquisition costs are not really a prerequisite to win new customers and that overall margin counts, not only margin on service delivery.
3. Especially the telecommunications industry is fixated on churn rate as a key performance indicator and not profits per customer or for the company. That seems to justify overly investing in customer retention and loyalty initiatives.

With this knowledge in mind, take a look at your loyalty programs and their real impact on profitability. Try to monitor profitability per customer, invest in your customers more carefully based on their duration/profit ratio, and get rid of customer retention as the key metric to measure your company performance.

References: 

The Mismanagement of Customer Loyalty, Werner Reinartz and V. Kumar, Harvard Business Review, July 2002

Getting the Most out of All Your Customers, Jacquelyn S. Thomas, Werner Reinartz, and V. Kumar, Harvard Business Review, July-Aug. 2004

© Stephan Hesslich

A common assumption is that satisfied customers are more loyal in the sense that they stay in a longer relationship with the supplier. However, marketing research has proven that this linkage is not always so strong and that it largely varies by customer segment and industry. Therefore, vendors and service providers should not rely on such effect, also because the stand-alone value of customer loyalty is not very clear as I will outline in one of my future posts.

A much clearer benefit of customer satisfaction seems to be a positive effect on willingness to pay and price sensitivity (per item but also in terms of overall spending).

So, if customer satisfaction has a price-related value, the question then is: What influences customer satisfaction?

Product quality

Well, one important driver in both consumer and business settings is product or service quality. In addition, for business customers the following attributes related to vendor performance have an impact on customer satisfaction:

Sales representative performance

This includes the ability of sales representatives and account managers to address customer issues, to understand key strategic issues of the customer, to know the customer business processes, to be easily reached, and to provide information on current market conditions. Interesting here is, that a longer relationship between the account manager and the customer has an additional positive effect and can compensate for weaker performance in the other areas.

Product line

This relates to the breadth of the product line portfolio and the ability to deliver a comprehensive solution.

Responsiveness

This means the time between an addressed inquiry or issue and the response by the sales representative, the time to resolve issues, and the ability to provide quote responses in time.

Delivery

This relates to the vendor’s ability to deliver the solution in the agreed time and quality. It also includes the degree of matching committed and delivered functionality and features as well as the ability to provide flexible delivery options.

Revenue and margin

For cloud product vendors additionally important, but not crucial, criteria for customer satisfaction are the revenue and margin that your product generate for the customer (who in this case acts more as a channel partner).

Another two key findings are:

1. Negative performance has a greater impact on overall satisfaction than does positive performance
2. The link between customer satisfaction and willingness to pay is non-linear, so that from a certain point on increasing satisfaction does not translate into higher willingness to pay

The combination of these two suggest to focus more on avoiding customer dissatisfaction than on investing too much in customer satisfaction. To maximize overall satisfaction, attribute performance should be optimized, not maximized. For any given factor, negative performance should be eliminated first before focusing on positive performance. Also, it is important to always monitor customer satisfaction, so you can react early enough and balance your measures.

Since you want exploit higher willingness to pay also for higher prices, you need to create customer satisfaction already in the pre-sales phase as well. For that it is very important to both enable the customer to trial your product or service before the actual purchase and to have an excellent product presentation highlighting all the benefits without setting false expectations.

References:

Linking Customer Management Effort to Customer Profitability in Business Markets, Douglas Bowman and Das Narayandas, Journal of Marketing Research, Nov. 2004

The Effects of Customer Satisfaction, Relationship Commitment Dimensions, and Triggers on Customer Retention, Anders Gustafsson, Michael D. Johnson, and Inger Roos, Journal of Marketing, Oct. 2005

Do Satisfied Customers Really Pay More? A Study of the Relationship Between Customer Satisfaction and Willingness to Pay, Christian Homburg, Nicole Koschate, and Wayne D. Hoyer, Journal of Marketing, April 2005

Satisfaction is Nice, But Value Drives Loyalty, William D. Neal, Marketing Research, 1999

Do Satisfied Customers Buy More, Kathleen Seiders, Glenn B. Voss, Dhruv Grewal, and Andrea L. Godfrey, MSI Working Paper, 2005

© Stephan Hesslich

Costs for customer-related expenses in such a comparison can only be accounted in total, meaning for the entire customer lifecycle, or per customer transaction or purchase.

1.       Total Customer Lifecycle

Let’s first look at this from the high-tech sales perspective: Presales time in high-tech sales is usually 3 to 24 months. However, the average customer lifecycle is usually 2-3 years, often even 5 years and more. Therefore, a conservative ratio of presales to after-sales time can be assumed with 1:3.

It can be assumed that time correlates with effort here. In the presales phase there might be more sales resources involved, after-sales you usually have more technical, helpdesk and finance/administration resources involved. Presales might require a higher frequency of communication with the prospect; however, also customer retention requires constant account management and regular customer communication. So, alone from the time and effort spent it is clear that customer retention requires a lot more effort and resulting costs across the entire customer lifecycle.

This especially true for cloud products where customers have rather become sales channels. It usually takes quite some effort to enable the new partner to sell your product effectively. Such efforts naturally only begin after the deal is signed.

While this is specific to high-tech sales, it is similar in other settings. Initial costs for marketing and branding, which are assigned to customer acquisition might be quite high, but also existing customers need to be reassured of the value of the supplier’s offering and marketing and branding is still required to keep even existing customers loyal.

For some products or services, e.g. in telecommunications there might be large initial setup costs to either register the customer as such in the company with all involved process or to provide the product or service to them. However, nowadays, the internal customer setup costs are usually very slim and one-time costs related to initially providing the product or service to the customer are either charged separately or priced into the core product or service.

2.       Customer Purchase

So, let’s have a look at individual customer (repeat) purchases. An assumption for above sales myth could be that customers, once they are won, might require less efforts (and therefore costs) to be served and to conduct repeat purchases than for the initial purchase. Arguments on that include that existing customers are more familiar with the company’s transaction processes, require less helpdesk support and less presales consulting.

However, as also demonstrated by the groundbreaking research from Werner Reinartz and V. Kumar (“The Mismanagement of Customer Loyalty”, Werner Reinartz and V. Kumar, Harvard Business Review, July 2002), existing customers, especially large key accounts, often know how to exploit their bargaining power. That results for example in constant requests for specific features, demands for premium service, custom-tailored purchase and support processes, not to mention specific price discounts. That often leads to unprofitable repeat purchases, which means that retaining the customer not only costs more than acquiring them but even more than they actually return in revenues.

As we see, costs for acquiring a customer – as long and stretching it might sometimes seem for the responsible sales persons – are much lower than for retaining that customer. In more advanced customer management, acquisition and retention costs can actually be optimized and balanced in order to optimize customer profitability but that will be the topic in one of my future posts.

References:  The Mismanagement of Customer Loyalty, Werner Reinartz and V. Kumar, Harvard Business Review, July 2002

© Stephan Hesslich

There is an interesting study by the US Office of Fair Trading, conducted by the University College London. They investigated how customers react to various promotions. Even though it was an academic text design and the setup was consumer-centric, I believe it represents general customer behavior and can be applied to other settings as well.

Five different promotion types were subject of the study:

• Drip pricing, where buyers see only part of the full price up front and price increments are dripped through the buying process
• Sales pricing, in which a sale price is given and a pre-sale price is also given as a reference, e.g. “was 2,- EUR and is now 1,- EUR” (actual prices are identical to baseline pricing)
• Complex pricing, where the unit price requires some computations, e.g. “3 for the price of 2”
• Baiting, in which sellers may promote a special price but there is only a limited number of quantities actually available at that price
• Time limited offers, where the special price is only available for a pre-defined, short period of time

The result of the study was, that – unlike predicted by standard economic theory – buyers make different purchase decisions than they would with straight unit pricing (here called baseline pricing). For each price frame, the study investigates the overall revenue for sellers, advantages for the first seller offering the promotion as well as purchasing errors (buying too few or too many units than was optimal).

The quite surprising result is that Complex pricing provides the largest benefits for sellers with the least purchasing errors and welfare loss for the customer.

Time-limited offerings are very popular but such a promotion only provides an advantage if you are the only or the first seller offering it and if the promotional price is competitive. However, even for the first or only seller, revenues are just a little bit higher than with baseline pricing. In any case, Time-limited offerings can be used as a tactical instrument to accelerate the purchase decision. Some buyers in the study reported that this frame compelled them to buy and some others reported that the special offer enticed them to buy without searching further. But be aware that this only applies to settings where bargaining power of your customers is smaller than your selling power, meaning you as one provider have many buyers. If there are only few buyers and they are aware of their purchasing power, Time-limited offerings can become ineffective.

Baiting provides significant benefits for the first store/seller visited by the buyer, so the comparative advantage for a seller can be strong. However, this price frame is not really feasible for service providers and software vendors since they usually do not have limited quantities of their products and services. Besides, since you cannot control that customers come to you first before other providers, you would have to make sure you are the only one offering it in order to benefit from the promotion.

Not recommended at all can be Drip pricing. It provides no increase in revenues compared to baseline pricing, but creates the largest welfare loss for customers due to purchasing errors. This can be assumed to lead to lower customer satisfaction and brand value of the seller, which could lead to less repeat purchases. The study reports that surveyed customers felt annoyance, disappointment, and irritation because the additional charges were not shown with the base price. Also, in some industries and countries there are some legal issues with such a price frame.

References:  The Impact of Price Frames on Consumer Decision Making, Office of Fair Trading, May 2010 (http://www.oft.gov.uk/shared_oft/economic_research/OFT1226.pdf)

© Stephan Hesslich

In general, Net Neutrality means that carriers, network operators or in general Internet access providers (and not, as often stated, mere service providers), which provide users access to the Internet, should treat all content equally in terms of access speed and load performance. (Note: To make my point clear, I will use the term Internet access providers in this article, commonly they are called Internet Service Providers). This concept is mainly related to web content, to prioritize applications like voice (VoIP) with technologies like PVS or MPLS is already common practice.

When discussing whether or not content providers should pay to get their traffic to users, two aspects need to be considered:

1. What is the actual structure of the value chain?
2. What is the potential impact on innovation and overall economics?

Regarding 1. – value chain:

If you look at a typical service value chain then each link of the chain procures services from the preceding link, adds value to it and sells the, now value-enriched, service to the next chain link or the end customer. Therefore, each service at any stage of the value chain includes the services of all preceding chain links.

So, if a service provider pays the network operator to use its network, the service provider must be able to include network access in its own service. Just like a train ticket already includes usage of the railroads and just like energy from a utility already includes access to the energy grid through the plug.

But that’s not how it works with content providers today. Content providers are not able to include network access in their services. Access to the Internet, either through DSL, Cable, GSM, UMTS or others, is provided by Internet access providers, which usually procure it from network operators.  Therefore, the business model is not in place that allows charging content providers for network utilization. Content providers themselves don’t use the network, their customers do. And they already pay another company for network access.

As we see, end customers and Internet access providers are in one value chain. Internet access providers provide network access, the end customers pay for it. Content providers and end users are also in one value chain, where users pay for (well, maybe not always, but actively choose) services provided by the content provider. However, content providers and Internet access providers are not in the same value chain. If content providers now try to get individual deals with network operators to get their traffic prioritized over others, regulatory authorities should be alarmed. With such a dea,l the content provider would get an advantage, which the end customer does not explicitly pay for, probably isn’t even aware of and certainly not always wants (because the user might prefer other content that comes from a company without such a network prioritization agreement).

Regarding 2. – impact on innovation:

There is also the argument, mainly coming from venture capitalists, that giving up Net Neutrality would discriminate start-up companies because they would have to bear high additional costs to get their content to their customers.

Due to my profession I usually take the side of start-up companies, but in this case I find it hard to follow the argument. If network providers would charge them for their traffic, this would have to be based on the total bandwidth utilization and therefore on the number of users. However, the number of users usually correlates with the growth of the company; therefore the associated costs would increase with the company’s size just like most other operational costs such as office space and employee-related costs. Of course, for companies like YouTube with a lot of high bandwidth traffic and comparably low revenues (if any at all) this would be more difficult, but I see that as specific to the respective business model and not as a general obstacle for innovations or new start-ups. Some start-ups just have higher costs and need larger investments than others.

© Stephan Hesslich

But again, what is cloud computing? Have a look at the following video for a pretty good introduction. It is 4:52 min. long:

Cloud computing has a deep impact on the way software is offered to the customer. The main differences are:

1. You need a service delivery platform that can host your software and provide it as a service to your customers. If you don’t want to or are not able to build up this infrastructure on your own, you need partners that can provide the service for you.
2. The software needs to be specifically designed for it. As Microsoft, SAP and many others painfully learned, software designed for on-premises installation simply can’t be turned into a SaaS application. It needs to be re-developed.
3. What used to be one-time perpetual license revenue is now subscription revenue spread over many months. That has a great influence on revenue growth and cash-flow.

The challenges that arise from these differences need to be addressed by every software vendor. However, if you as an ISV can manage 2. then points 1. and 3. can also provide some advantages:

• You can offer your software to be resold by service provider partners like hosters or ISPs. Since the largest of them have millions of users, they provide a completely new dimension of sales channel. Main condition however is, that your software fits into their portfolio and they are able to market it effectively.
• You can build up a guaranteed revenue funnel for the next years. Even with a high churn rate you have revenues secured from your existing customers at the beginning of each fiscal year. Therefore, your revenue (and forecast) for the year does not completely depend on getting new customers. For details on this, please see also one of my previous posts.

So, with cloud computing, software sales in ISVs has shifted to both selling a service instead of a software license and to managing service provider partners, which used to be the job of specific channel managers.

From a product and strategy perspective there are two more points to keep in mind:

1. Competition will intensify as the number of sales channels will shrink. If service providers become the main sales channel it is clear that they will focus on one (usually leading) application per category. Also, for many categories there are much less service providers than application vendors. For example, there are currently more than 1,000 CRM applications in the world but only ~200 large service providers. As not all vendors will find service provider partners as channel, a large consolidation of vendors will be the consequence.
2. With SaaS you are closer to the customer and to the user. Since they now pay for a monthly service, they have different expectations to the frequency of updates. You can use this virtually stronger presence of your product to get better feedback more often from your customers in order to adapt and improve your product faster.

© Stephan Hesslich

To view the HBR article click here:

The BP Brand’s Avoidable Fall

As I outlined in my post from 28 Feb., branding activities (which are usually comparably expensive for any company) become quite ineffective if you make a brand promise that you cannot deliver on. In fact, this does more damage to your brand than not having a brand promise at all. You have to make sure that:

• Your branding campaigns leverage your competitive advantage
• Your brand promise is clear and credible
• You can fulfill your customer’s expectations that your brand raises.

To read my blog post again click here:

Effective Branding

© Stephan Hesslich

I differentiate between three main funnel development shapes: Cone, Bottle, and Tube. These idealized shapes characterize the funnel development and can be used to compare with your actual funnel development shape.

The Cone shape is considered to be the ideal shape. Such a shape means that there is a more or less linear screening out of some opportunities in each sales process stage. Therefore, the funnel contains a bit less prospects at each funnel transition point with the relative amount of lost opportunities becoming less and less (This is expected from a normal sales process, the further the prospects move along, the higher should be the probability that they reach the next milestone and eventually become won customers).

The Bottle shape means a usually high screen out of opportunities when they reach point C2 or point C1. This can indicate that you do not address the right audience with your marketing and pre-sales activities. Or that you might have product-related issues that lead to disappointing product test results for the prospect after initial interest has been created. It can also mean that the price might not be right since general pricing is usually introduced in stages pre C2.

The Tube shape means very high transition rates but a generally flat and fragile funnel. The number of closed deals pretty much relates to the number of incoming new leads. Such a funnel development can indicate a very effective sales process with almost no loss of opportunities along the process. But it can also indicate that no new leads are coming into the funnel and that only very loyal existing customers generate opportunities. The number of new opportunities should therefore be increased dramatically.

Analyzing your funnel like that can provide very valuable insights into your sales process and funnel state. While it might not in all cases be required to aim for the ideal funnel shape, the development of your opportunities across the funnel (and therefore sales process) should be well understood.

© Stephan Hesslich

Let’s first look at the typical sales process in high-tech sales in the IT and telecommunications industry. There are probably more books on the topic than actual sales people out there, but in my experience the following process has been proven to be valid:

Now, if you look at the process you can see that the prospect goes through various stages along the process. At any stage they can decide against your solution and therefore abandon the process. The further the prospect moves along the process, the higher the respective sales stage and the higher the likelihood of closing the deal. So, in each sales stage there are certain sales aspects that are more important and the tasks for the responsible sales person are different. While in early stages the focus is on understanding the buying center and the decision influences, the focus then shifts to convincing the people involved and creating a consensus on the deal. In the later stages the focus is on creating a sense of urgency and driving the process towards closure.

Now, does it make sense to refer to the prospect with different names, depending on their current sales stage? Well, certainly not (unless you are a CRM system vendor or in the consulting industry or an academic) and that is for the following reason:

1. Any prospect is an opportunity to do business, no matter what sales stage they are in. There are no “unqualified” leads unless they are not interested in your solution, in which case you should not spend any sales resources on them at all.

2. Prospects should be taken care of by the same person or team from the beginning to the end. Handing over a prospect to the next department because they are now “qualified” for it, can lead to frustration of the potential customer (many will feel at least irritated) and creates information gaps in your sales process.

So, you can call a potential customer “lead”, “opportunity” or “prospect”, whichever you prefer. But a distinction between them and applying those names to individual sales stages will not help your sales team, it might only be a funny, new way of reporting. If you want to use names to indicate the sales stage of the prospect in a simple way so your sales manager immediately knows their status, this could actually justify different names per sales stage. But if you do that, then do it consistently and also for the later sales stages 3 and 4.

(Such an exercise would surely provide some potential for your next party and/or sales team meeting, when prospects become “evaluation completer”, “prelim-decider”, finish liner” and so on…)

If you feel the prospects are not qualified enough when they first come to you or if you think your sales persons spend too much of their time explaining the basics, then you might want to try to improve the lead generation:

1. Improve your positioning in the market in order to better address the right audience.

2. Explain your offering more beforehand, market it as a complete product, and offer additional information, which is easy to access.

3. Provide more or better training on your offering to your resellers and channel partners.

© Stephan Hesslich

1. You as an ISV don’t start at 0 revenues at the beginning of the fiscal year anymore. You already have a revenue base from the customer contracts of the previous years. That has a great advantage for your sales forecast – it makes it a bit robust. The risk of closing new deals only applies to the new revenues on top. However, there is also a flipside to it:

Since revenues from new customer projects are no bulk revenues anymore, but usually monthly revenues stretched over the contract term, your forecast for the year is now more sensitive to deal delays. Perpetual license revenue you can usually book the same month you ship the software (which is mostly the same month the order gets in). So theoretically, you could get all your orders in December and still make your annual plan. With SaaS revenues, if you did the same thing, you would end up with less than 20% of your initial forecast (continuous revenue streams assumed).

2. Another uncertainty to your sales plan comes from the fact that your revenue now depends on the growth of your customers (meaning how well they market your product). Therefore, Sales in software companies has to focus much more on customer retention and not only on customer acquisition anymore. Strongly focusing on winning new customers used to be the most effective way to grow for start-ups, now with SaaS it is not anymore. Enabling and continuously supporting your customers with selling your product to their customers is a pre-requisite to ensure revenue growth. Therefore, mere sales skills are not sufficient anymore, also channel management know-how as well as marketing and business development capabilities are now required (which really are quite hard to find in one person).

So, what about “hunters” and “farmers” in ISV’s sales teams? Well, that distinction is probably not valid anymore. With SaaS each “hunter” also needs to be a “farmer” in order to ensure future revenues and customer retention. I used to consider myself a strong hunter but I also learned to build up and to maintain a long-term relationship with customers. Customer relationship management has become much more important, losing a customer does not mean to lose 10-20% maintenance revenue as in the old times, it now means to lose the customer’s entire license revenue and the corresponding upside potential!

3. So, in order to capture the SaaS effect, software vendors need to focus on revenues and not new bookings anymore. New bookings (=order income) are not that relevant anymore because they can either be much lower than the revenue if there is no or only a small revenue base level agreed. Or they can be much higher than the revenue if, as usual in SaaS contracts, a multi-year contract with a revenue base level is agreed.

Managing a start-up company by revenue instead of bookings is a big challenge that comes with SaaS. Finance and accounting can be quite complex, even in the early stage of a start-up. Sales incentives and commission plans should be based on annual revenues (or quarterly if you are public and/or US-based) and not new bookings or revenues from new orders. And, strong marketing support for your customers and partners is necessary from the beginning, which – due to lack of your own market experience with your new product – requires quite some anticipation.

© Stephan Hesslich

As most readers of this blog probably know, SaaS, often also referred to (in my opinion somewhat misleading) as Cloud Computing, means to provide a software application as an online service. Such services are accessed through the Internet (e.g. for groupware or email exchange) or sometimes through dedicated networks (e.g. for hosted PBX). SaaS services are usually billed on a monthly basis.

This concept of delivering software has been around for quite some time (we all remember the ASP model in the nineties) but with new sharing and virtualization technology developments in the past years, it has now reached a status, where it can be done efficiently and cost-effectively. SaaS is therefore on the way to become the dominant software business model. As the tremendous success of SaaS pioneer salesforce.com shows, this model provides some compelling advantages for end customers. It is highly flexible (you usually only pay seats that you really need) and very easy to set up (you basically sign up for the service, maybe do some configuration, and start using it). End customers do not need to worry anymore, about software installation, updates and upgrades or data backup and restoration. As any serious TCO (Total Cost of Ownership) study reveals, the highest costs for on-premises software result from operations and maintenance.

And that is where the value proposition and the business case for service providers come in. With VoIP, Hosted PBX and others, traditional carrier services and Internet services have merged (which is also why web hosting companies increasingly offer voice products). Therefore, SaaS products should be the new core products for carriers and service providers (and even utilities) unless they want to end up as mere infrastructure providers (which utilities already are). SaaS services perfectly fit to the service provider’s brands and can be well combined with “traditional network products”. By not offering SaaS products you would not only give up quite a substantial portion of market share and margin, you would also miss leveraging valuable, existing intellectual capital. I believe, SaaS is a great opportunity for all service providers to compensate for declining revenues from commodity products like DSL and VoIP (or energy), and to generate new revenues at attractive margins.

But what service provider offer to their customers, they also expect from their vendors (or at least their suppliers should offer it to them). So with SaaS, the business model for software vendors has changed as well. We all still remember the great times of large perpetual license deals and now it should be all pay-as-you-go on a monthly basis? Well, yes, but SaaS has some great advantages for ISVs too. Customer relationships become more intense (usually in a positive way), product release cycles have become shorter (which mostly means, products improve faster) and you as an ISV know much sooner how well (and if at all) your software is used by your customers. The greatest advantage however, is that you can build up a base level of already secured revenues for your budget year and that you can grow with your customers. But that has a couple of implications… (for more, please read next post)

© Stephan Hesslich