Happily Building a Software Business in a "Post-Sale" World
Those of us building software businesses today (especially B2B software businesses) live in a much different world than the one that existed just a generation before us - even just 10-15 years ago (maybe even just 5 years ago).
And I’m not talking about the world as it relates to building a software productÂ (which is very different as well) - I’m talking about the world of building a business around that product. I’m talking about the ‘machine’ that converts a bunch of lines of code into a successful commercial enterprise.
Old Software vs New Software - it’s all about the ‘Value Capture’
The most significant, fundamental shift from the ‘old software’ world to the ‘new software’ world lies in the difference between the dominant business models. It lies in the way in which for the value of a software product is captured.
In the ‘old world’, the buyers of software had to commit to a long-term license - 1 year, 3 year, 5 year, even perpetual licenses in some cases. Under this model, the buyer committed and the seller captured the value of the contract/deal at the time of the sale. The ‘value capture’ graph for this model looked like this:
Occasionally, vendors would include small annual service/support fees in the contract, which wold make the graph look a little more like this:
Long term commitments. Multi-million dollar deals. High switching costs. Very little support required. Not a bad model (well…for the vendors, that is). Ahhh…the good ‘ol days.
Enter the web, Benioff & the SaaS model.
Software-as-a-service. Pay for what you use. Don’t want it? Turn it off and stop paying for it - just like any other utility. I mean, you didn’t pay for a lifetime worth of electricity on your 18th birthday, did you? Of course not. So, why should you pay for software any differently - especially when it could be delivered and regulated over the web?
Talk about a buyer-friendly model. As a buyer, who wouldn’t love this? It’s a pretty easy sell.
But for the software builder, this created a significant shift. And not just a shift in distribution (software delivered over the web vs a local installation), but an entirely new business model - one that requires a new way to do business.Â
The SaaS model completely changes the ‘value capture’ structure from the old world. With SaaS, instead of capturing all the value of your software at the time of sale, you capture it a little at a time (most commonly on a monthly basis), over a (hopefully, long) period of time. So in this model, you’re value capture graph for a single customer looks like this:
"Yeah, yeah"…you’re saying. "We got that. So what?"
"So what?!?!" I say. "So…f’ing everything!"
It’s this model of value capture that is the root of our new world - a world I refer to as the “Post-Sale" World. When your business captures its value—not AT THE TIME of sale—but for many months/years AFTER the time of sale, then you live in a Post-Sale world. This means that the activities that occur and the value that is delivered AFTER a ‘sale’ of software today are just as, if not more, important than the activities that happen before it.
And this changes everything. But there are still plenty of people who try to build a successful Post-Sale business using the same structure, organization & practices of a Old World software business. I think this is a flawed approach whose result is frustration and a cap on the ultimate success of the business.Â
So…What does it mean to build a business in a Post-Sale world?
There are a few essential truths that exist in a Post-Sale world that should define the way these businesses are built. They include:Â
#1: POST-SALE ACTIVITIES ARE JUST AS, IF NOT MORE, IMPORTANT THAN PRE-SALES ACTIVITIES
I mentioned this before, but I’ll elaborate here because this is, by far, the most important rule. And it’s amazing how often I see it ignored. It’s the hardest rule for most Old World veterans to understand & execute on. Here’s why:
In the Old World, the relative ‘value’ of the departments in a software company looked like this (not including Product - more on this later):
Marketing was important. Building a pipeline of prospects/leads was important. But, by far, Sales was the most important (and, as a result, best compensated) department in this world. This was an age of the big (pardon the crudeness) ‘swinging ****' in their spit-shined shoes and fancy cars driving around closing huge, multi-million dollar software deals. The value of the sale was captured the day the contract was signed and everything that happened after that really didn't matter. Service & support teams were afterthoughts - cost centers - that didn't receive much thought, respect or investment. In the Old World, you didn't have a business without a big, amazing sales team.
But in our Post-Sales world, the opposite is true. Knowing this may lead you to shift the value of the traditional departments to look like this:
That’s a good start, but the reality is that the nature of the organization and the roles need to evolve as well. The nature of marketing is different. The nature of sales is different (what is a ‘sale’ in a freemium offering anyway?! Is sign-up & sale the same thing?). There are important new roles that didn’t exist in the Old World. A more extreme, but real version of the new organization looks like this:
Did you notice? No sales team.
Huh? No sales team?! That’s impossible!
Look, I’m a believer in salespeople. I like salespeople…hell, I am a sales person. I don’t claim that you can build a HUGE software business without *eventually* having a sales team (wait - I take that back…Atlassian is $3.3B company with NO salespeople!), but it is totally possible to grow a good-sized, important business without a sales team today. Look at teams like Buffer or Intercom or even ToutApp. Millions of users, millions in revenue, millions in dollars raised, market-changing products. No sales teams (yet).
I do think there is an important role for Sales in a Post-Sale company, but the timing, structure & operation of this function is different than it was before.
The biggest shift to note in the organization of the Post-Sale company is the emergence of the Customer Success function. This is a role that didn’t exist in the Pre-Sales world and it’s quickly becoming the most important role in a modern software company (although not quickly enough, IMO). The nuances of this role call for a separate post, but basically these Customer Success roles are hybrid sales/support roles (when designed correctly), focused on helping users become successful with the software in order to drive customer retention (keep them paying for your software for many, many months) - and growth - over time.
The companies that prioritize and emphasize this function over the sales function (especially early on) are more aligned with the Post-Sale model and, IMHO, more primed for success.
#2: THE POST-SALES ORG CHART JUST LOOKS DIFFERENT
Building off the last point - building the organization for a Post-Sale company is different. There are new roles, new functions and the value of the departments has shifted…as has the order in which you build each of these functions in the organization.
The new roles:
- Customer Success - mentioned above
- Lead Gen - the new title and role for the modern ‘marketer’ - can include anything from content marketing to SEM to managing SM buys
- Community - this role is as much a result of the emergence of social media as it is the emergence of SaaS, but hugely important for building long-term, recurring customers as well as word-of-mouth
- Growth - also emerging as a ‘full-stack’ marketer (best description & explanation of this role I have seen to date was written by @bbalfourÂ in thisÂ post)
- Product Manager - this role isn’t new in as much as it has had to become much more focused on & involved with driving “post-sale” growth.
Does the traditinonal “marketer” still exist? Or is it splintered into Lead Gen/Community/Content/Growth? Is there still a role for the ‘product marketer’ who understands positioning, messaging, etc? Definitely - and maybe it’s even more important in this world. Maybe it’s the key to holding all these disparate new pieces together. But maybe that should fall on one of the founders in the early days.Â
What about sales? Does the traditional sales department exist? Does it shift to Customer Success? Does it report to Customer Success (I can hear the sales people reading this now - “Oh…heeeeeeell no!”)?? Or become focused on demand gen driving sign-ups and feeding Customer Success? Or do you only focus on a sales team when you start selling into enterprises?
Engineering/product still exists, but the role of the PM is evolving as mentioned above. This is why we see more and more product managers coming from design/customer teams (vs. from the technical side).
Back of the house (finance, ops, HR) is still about the same. Of course they need to look at new metrics, but still about the same.Â
In terms of the order in which I think you should hire these roles for a new business. It looks pretty much like this (this is assuming the founders can do some initial lead gen & sales if need be):
- Front load Product - heavily (more on this later).Â
- Then bring on Customer SuccessÂ
- Then Lead Gen/ContentÂ
- Then Community
- Then Growth
- Then Sales
Of course this totally depends on what you’re selling, to whom, etc, but I like this general order.
#3: IN SAAS, REVENUE COMPOUNDS - BUT IT DOES TAKE TIME
In the Old World, your sales number essential started at $0 every month. You may sell $1mm for the month of January, but when February starts, your monthly sales number is $0. In this model, ‘revenue growth’ month-over-month is very difficult to sustain.
SaaS is different. The real power of this model is in the way revenue compounds. So, you may ‘close’ the same amount of new revenue every month - making your ‘new revenue’ numbers flat, but in SaaS, under that scenario, your total monthly revenue numbers will grow nicely. Each new ‘sale’ in SaaS adds to your total recurring revenue base. If you were to bring in the same amount of new revenue every month in SaaS (assuming 0 churn), your growth curve would look like this.
And with time, this produces powerful compounding effect. But it does take time. In SaaS, patience is a major virtue (for executives, employees, and investors).
Jason Lemkin talks about this better than anyone. See his post on the SaaS compounding factor. It’s great.Â
#4: NEW WORLD, NEW METRICS
This new model also brings with it new, important metrics.
In the old world, the metric that everyone really cared about was New RevenueÂ (per week, per month, per quarter, etc). This was really all that mattered. Sure there were some funnel metrics (prospects, leads, closed deals), but really New Revenue (or New Bookings) were all you needed to determine the success of the business.
But, in this Post-Sales world, the key metrics are different. I only highlight the ones that really define this new world at a high-level here. If you want to dig deeper into SaaS metrics, you must read David Skok and Jason Cohen. They’re the best.
- CAC (Customer Acquisition Costs) - Web-based distribution of software has changed everything about how customers are acquired. The SaaS business model has made the cost of acquiring a customer a much bigger concern for a business. In the old world, you could spend a lot more on Customer Acquisition because you would realize the full value of a deal at the time of sale - not to mention that the deal sizes were a lot bigger. CAC was much less of an issue. But with SaaS, it takes time to earn back your CAC - not because the costs of acquiring customers have gone up, but because of the value capture for your software comes in drips over months. Ideally, you recover your CAC within 10-12 months, but we all continue to fight to shorten that number even more.
- LTV (Lifetime Value of a customer) - Maybe the most important metric for SaaS, if I had to pick one. This is a measure (or an estimate) of how much a single customer is worth to your business over the lifetime of his/her usage of your product. Basically - what they pay you per month to use your product TIMES the number of months will they continue to do this. Very difficult number to acquire because it isn’t lagging - it requires future assumptions - but it’s super, super important.
- Net Churn - The greatest risk factor of the SaaS model and very much a factor and a driver of LTV. Churn is the amount (or %) of revenue (or # of customers) that you lose on a monthly basis. Net Churn nets this Churn against any Growth revenue (upgrades) you receive from existing customers during the same period. Net churn is a major indicator of the future viability & sustainability of any SaaS business. This wasn’t a real problem in the Old World b/c they sold longer-term contracts and captured (most) of the LTV at the time of sale - meaning revenue/bookings was essentially equal to LTV.
- Total MRR (Monthly Recurring Revenue) - This is SaaS’s answer to “Total New Revenue” from the Old Ways. In SaaS, Total MRR is essentially the measure of the size of your business. As mentioned before, MRR in a SaaS business compounds, builds on itself. [*Note - this is different from Bookings. Don’t make that mistake - Buffer talks about how they made this mistake in this post]
In short, the metrics used to assess a SaaS business are different and are more consistent with the SaaS business model. They don’t answer the question, "How much money did I make in a previous period?", but instead answer the question, "How much money am I going to make in the future?"
#5: CUSTOMER ACQUISITION COSTS NEED TO BE AS CLOSE TO ZERO AS POSSIBLE
I mentioned CAC in the metrics section above, but it’s important to look at this in more detail.
Distributing products over the web has obviously changed the way marketing works, in general. But, more importantly, the structure of the SaaS value capture has demanded that the structure of customer acquisition change.
Because with a SaaS model, you are capturing small chunks of revenue from each customer over a long period of time, you simply can’t afford to spend a lot on customer acquisition (or if you do, you need to realize that you are going to have to raise a TON of money to cover the cash gap - which works for some - see Box). But for most of us…the need to drive down the cost of customer acquisition is paramount.
And the best way to do that? As it turns out, the best way to drive down your cost of acquisition isn’t to be more efficient with your marketing - it’s to make your current customers so happy that they refer you to everyone they know. A customer that signs up for your software from a referral has a CAC of $0. Can’t get much lower than than.
So…arguably the most important role in the company (outside product) for driving down customer acquisition cost? You guessed it, Customer Success.Â
The second most important role? Community.Â
Invest in both.
#6: YOUR PRODUCT IS YOUR LEAD SINGER
The final, and most important, shift in the Post-Sales world is the ultimate role of your Product in your success. I know this sounds obvious and stupid, but it’s a significant shift. In the Old World, Product was important, but not nearly as important as it is today. In the Old World, switching costs were very high because:
- Long-term contracts made it ‘legally’ impossible to switch except for certain times
- Customers paid much higher price tags, literally making the costs to switch very high.
- And there were far fewer options on the market, making switching to an alternative solution often impossible.
Bottom-line - Product didn’t have to be great. I recently had a ‘discussion’ with an old Oracle exec about the importance of product. His argument - "most Oracle products sucked - they didn’t do 1/2 of the things they were supposed to do!"
My answer - "Different time. Different world."
Today, products are MUCH cheaper to build and distribute. Which means two things:
- There are many more products attacking the same problems - making finding an alternative easy;
- AND, given the SaaS business model, the financial costs of switching are super low.
Combine this with the transparency of a social web where anyone can talk about your product - positively or negatively - and you are forced to think differently about Product.
In this Post-Sale world, your Product is the lead singer in your band.
Your Product is your Bono. When you mention U2 to anyone on the planet, the first thing that comes to mind is Bono. Everything else, the rest of the band, specific songs, albums, videos…while important, pale in comparison to Bono’s importance to the success of U2. If a person doesn’t like Bono, he/she isn’t going to like U2. Period.
You need to know that in a Post-Sale world, your product is your lead singer. It doesn’t matter how good the band is, if your lead singer sucks, you’re not going very far.
The point is this - it’s very important for all modern software business builders to realize & understand that they are living in a Post-Sale world. And that in this Post-Sale world, the ones that will succeed are the ones that organize and operate in a way that is consistent with how value is captured in this world. It looks something like this:
- Build a great, sticky product
- Help customers/users become super, super happy & successful
- Tell the world about it
- Sell the hell out of it
And the good news is that we are seeing the emergence of tools & technologies that are being built to support life in this world. While the last 10 years focused on technologies that supported Pre-Sale activities (CRM, Digital Ads, SEO Automation, Marketing Automation, etc), we are seeing a whole new host of tools focused on supporting Post-Sale activities - customer engagement, retention, growth, etc (like Intercom, Totango, Gainsight, Frontapp….andÂ KnowtifyÂ among many others). I think this is from where the next wave of investments/big software companies will come.
All of this is what I love about living in a Post-Sale world. I think building a software business today is as pure as it gets. The most important activities are focused on the right things - building a great product & making customers successful. These are the battlefields upon which we should all be fighting. It’s just pure.
That’s why I’m happy to live in a Post-Sale world.