October 1, 2006
I haven’t posted in a while. Unfortunately there has been little time, as I have been working around the clock with my team to launch a new Venture Capital firm, OpenView Venture Partners, located in Boston, Massachusetts. Today, we officially launched the firm with the closing of our inaugural fund on Friday night. Given my excitement about this new venture, I thought that I would take the time to share our concept and some of the details. (Also, take a look at the new website, www.openviewpartners.com.)
The overarching thrust for the firm is Operational Value Add (in addition to capital) for InfoTech companies, who have reached the expansion-stage of company development (as in “I have a product and some customers, Now What?”), and are located anywhere in the world.
We set the goal of operational value add because, in our experience, this involvement helps improve products, sales and marketing, and customer service. The improvement leads to enthusiastic customers and increased growth rates, profitability, and long term competitive advantage. Net net, the more value we provide, the greater and faster the enterprise builds value.
We developed and refined the approach at our prior firm, Insight Venture Partners (we had been working as its Boston Office). As we evolved the approach, we have found the results to be both significant and significantly different than the approaches used by other firms.
The goal of operational value add is a principle that we have spent a great deal of time operationalizing through a combination of focus, value add resources, and a small fund size. We believe that staying focused, having the best resources, both internally and in our network, and then “putting all the wood behind the arrow” is a great approach for delivering the most value (I gave similar advice to emerging growth companies last year and, again earlier this year). Finally, and perhaps most importantly, we work extremely well and in partnership with our portfolio company senior management (an earlier post on the topic is here). The feedback to date from our approach has been outstanding.
Some details on each of the points:
Our value add starts with the focus that we have on market and stage. With this focus, we have developed a much deeper understanding of the issues and opportunities facing our portfolio companies and have geared our firm to help address those issues and opportunities. Our focal point includes the following:
- Our Market Focus is InfoTech, particularly around companies that configure software, data, and/or hardware into packages that provide meaningful value to their users. At this point our list includes software (all flavors from installed to on-demand), internet, information services, and technology enabled business models.
- Our Stage Focus is Expansion Stage. Expansion stage to us starts when a company has worked out the major kinks in its core product, has begun to address its first market, has a viable approach to reaching the market, and has some customers that use, like, and reference the product. (Generally, a good proxy for this is company revenue in the $500k to $1MM per quarter at a minimum with good historic growth).
- Our Geographic Coverage is Global. Our belief is that expansion stage InfoTech companies all need to develop a global presence, so the starting location is not as important as the company’s desire to expand globally, particularly in North America (given our North American presence).
We strongly believe that the issues and opportunities that emerging growth InfoTech companies face at the expansion stage are very different than the issues faced by companies in other sectors or in other stages of development. By choosing a sector and a stage, we could then more deeply gear our firm to deliver the most value against that more specific set of issues and opportunities. Separately, we have found that the major issues facing expansion stage information technology companies are independent of their geographic location, enabling us to have a wide geographic coverage (that is, we invest globally) without diluting our value add.
Operational Value Add
Our operational value add programs are described on our website. Our general approach is to determine the key issues facing each portfolio company at the senior management level, compare notes with the management team, help determine the top goals of the company, and then offer each company a “menu” of ways that we might help. The menu includes items such as offering our portfolio companies people on our team for small or large projects, introductions to our network, and/or helping our portfolio companies recruit senior staff and add to the “DNA” of their team.
Our efforts also include a number of functionally specific (sales, marketing, development) “best practice” forums for our portfolio companies. The forums are designed to help our portfolio companies network among themselves and also help to spread “best practices” in each functional area between and among our companies. These forums take the form of one-day events in Boston, each devoted to a particular topic.
My blog is also meant to be an extension of this work. By reading some of the posts in the blog, you can get a pretty good feel for the issues that we work on with the companies and some of the principles that we use to address the issues.
Optimal Fund Size
As OpenView took shape, we thought a lot about the optimal fund size. We believe that a smaller fund is better for both our investors and our portfolio companies, which ultimately makes it better for us. Yet, it was important that the fund was large enough to create a level of diversification and to give us enough time for the portfolio to develop before raising our next fund. Net net, we set the fund size at $100 million, which we believe is the optimal amount to meet our goals.
From a portfolio company perspective, the smaller fund size relative to some of the other VCs means that we will do fewer investments, allowing us more time for each portfolio company. From both a portfolio company and investor perspective, it means that a larger portion of our income comes from creating value in our investments, which results in highly aligned incentives between our portfolio companies, our investors, and us.
Working In Partnership
Finally, and perhaps most importantly, our belief is that we can’t add value without building strong relationships and working in close partnership with our portfolio company management teams. Every member of our team has outstanding professional credentials, great values, and a strong desire to build meaningful relationships with senior management teams. These characteristics, as well as an intense desire to add value, help to create great partnerships between our team and the portfolio companies.
You can Help!
To the extent you are interested and willing to help, there are a few things that you could do that would thrill us:
- The team would be very appreciative if you would be willing to mention OpenView Venture Partners and our URL (www.openviewpartners.com) so that the search engines have an easier time picking us up. Version 1.0 of the site just went live, so it will probably take some time for the spiders and indexers to register its presence. Your mention of the site would greatly help this effort,
- We are constantly looking for people to add to our network globally. To the extent you are interested in helping our portfolio companies, let us know via e-mail, and
- We are always on the lookout for the next expansion stage InfoTech company to meet with (our focus is above). If you know of one, send us an e-mail!
OpenView Venture Partners is all about Operational Value Add aimed at Expansion Stage InfoTech companies located anywhere in the world. Our approach has been in place and constantly refined for several years now and we take great pride in the references that our current and former portfolio companies offer about us.
If you want to participate in some way or have an interesting company that we should know about, let me know. My new e-mail address is email@example.com. I do my best to keep up with the e-mail, so drop me a line. This post marks the end of the beginning of what we hope will be great for everyone that participates!
A Special Thanks
It is hard to talk about the launch of a new fund without reflecting on and acknowledging some of the people that enabled the success. We had a significant amount of help from our portfolio company senior managers, enthusiastic and extremely high quality investors, and our tremendous network of individuals and companies who have helped us be successful over time. In addition, the team at Sparring Partners Capital did a fantastic job as the fund’s placement agent and the team at Goodwin Procter have done an equally outstanding job as council to the fund.
The group that I would like to single out here are my (now technically former) partners from Insight Venture Partners. The partners have been very supportive over the years as I pushed on different initiatives, and since the idea of OpenView started gaining traction they have been extremely supportive, helpful, and generous with their time. In addition, we have been able to work out an approach whereby we will continue to work directly with our Insight investments until each of the investments has grown and exited, something that is extremely important to us given our value add focus. Thanks guys!
EndNote: I have apologized many times to my network that has had difficulty reaching me over the last several months and appreciate the enthusiastic support and encouragement that has come from everyone. I expect that now that the firm is formed and the fund is closed I will be returning to a more normal schedule of focusing on my portfolio work and network and even updating my blog more frequently đź™‚
January 30, 2006
About 10 days ago I interviewed a VP Sales candidate for one of my portfolio companies. The more I think about our conversation, the more I like him. I walked out of our conversation thinking that he would be perfect for any B2B software or SAAS company. Why?
This particular candidate pulled out his personal operating report and explained to me how he knows what is going on every day (even when he is on the road with customers) and what he does when particular metrics drop below a certain level. He showed me the different levels of his report so that he could see his deals moving through the sales pipeline and how each salesperson and sales group was doing vs. their benchmarks. He also explained how predictable his system is in forecasting sales as well as determining when he needed to add resources at various stages of the sales process. Finally, he was able to explain how his system allows him to accurately predict the results of adding new resources and, just as importantly, how he is able to relatively easily recruit and train people to follow his system. Separately, he has relevant experience and success managing several models of distribution (including telesales, field sales, and channel sales), each of which has its own unique best practices. Also, we were able to get a reliable reference that echoed what the candidate had said.
He did not quite “have me at hello,” but he did have me about 10 minutes into our discussion. I knew going in that he had relevant experience and was known for making his numbers, but it was his approach of managing to metrics that got me. Why?
When you can accurately predict your results in each operating unit, it means less risk and a greater opportunity to scale your company without blowing your capital (missed quarters get more and more expensive as you grow!). Being able to make accurate predictions also means that:
- You have an operating model (not just a collection of people), which allows you to scale better,
- You understand the key drivers of output in your operating model,
- You are consistently managing the unit to your operating model,
- You have a set of early warning signs (your key drivers) that you can focus more attention on when they get below certain thresholds (i.e., it helps you to know where to spend your time),
- You have a set of measures that you can benchmark against other companies to understand where you have opportunities to move to best practices, and
- You know when you need to add staff or other resources well before you get caught short.
Finally, the understanding of the above gives you a solid platform for experimenting with new approaches and accurately evaluating the effectiveness of the new approaches (thereby allowing you to kill the approaches that don’t work and expanding the approaches that do work).
Over time, the nature of emerging growth companies is that they move from simpler approaches to more sophisticated approaches (more specialists, more channels of distribution, more products, more marketing channels, more approaches to customer service) and you want to make sure that you continue to evolve in the right direction (note: this is not an argument to get more sophisticated as an end to itself, just that getting more sophisticated leads to better operating results as you growl…you clearly need to keep your operation as simple as possible).
Metric driven management can and should be applied in every functional unit in an expansion stage company, from product development activities (e.g., project management, bug fix reports, usability testing) to marketing (lead generation ROI, website path analysis, shopping cart abandonment, number of daily quality leads) to sales (e.g., movement through the sales funnel, salesperson activity analysis) to customer service (response time, close rates, close times, etc.) to overall customer satisfaction measured both qualitatively (surveys, interviews, etc.) and quantitatively (usage reports, retention rates, etc.).
The key to getting the right metrics program in place is to eventually understand the minimum number of measure that give you an accurate understanding of the state of your company.
- Many (most?) very early stage companies can get by without metrics-based management, as there are very few people in the organization, the processes you have are quite simple, and you can manage staff a lot easier. But as soon as you start getting any measurable number of users/customers, metrics-based management starts becoming useful, and as you grow more metrics become difficult to live without.
- There is no sense building systematic operating models and a set of metrics if you are not going to manage to them. I have met many intuitive managers who don’t get (or don’t want to get) this approach. If you don’t believe in the approach, shoot me a note or comment to this post. If you don’t completely get the approach, hire someone to work for you who does (I have done this multiple times at my portfolio companies).
- Once you lock into a set of metrics (it will take some time to determine the best most simple metrics), you should try to use the same metrics over time. I am amazed when I go into certain board meetings and see a different set of metrics each quarter…sometimes managers feel the need to present the metrics that show off the accomplishments of the company…I would rather see the metrics that show the improvement opportunities for the company…this is where the real upside is!
If you want to tell me about your results from or projections for your operations, my preference is that you show me the metrics!
January 13, 2006
We are approximately 2-weeks into the new year. How are you going to make sure that your emerging growth business gets off to a great start this month and this year? If you are like most companies, your team probably has the mindset that this is a slow quarter for sales, so why not save your energy for when the fish are biting? Well… mostly because you still need to figure out how to eat even when the fish aren’t biting!
I just finished a board meeting where this was the exact situation. The Sales head does not have the conviction that he will be able to have a reasonable first quarter due to seasonality. The CEO came up with a solution that is an old sales trick:
Offer up a Rolex watch to the top salesperson for the quarter (as measured by sales relative to quota to normalize for larger territories). The incentive should help get the sales force focussed on winning a prize AND put some fun in the day-to-day grind. The fact is that the sales group does not need to believe they can hit large numbers…they only need to believe that they might be able to do it and they need to undertake all the activities necessary to do the best that they can. Like the little engine that could, all they need is the incentive to try.
The salesperson perception of getting a Rolex for being the best sales person has much more perceived value than actual cost, and the net cost of $5k for the Rolex is far less than the motivational gain for the salesforce (even if you only have 2-3 salespeople). Also, the salesperson who wins will wear it as a badge of honor.
Other approaches, such as giving a stack of one dollar bills or a dinner out, have similar motivational effects for the salespeople, but the Rolex incentive is my favorite (the other ideas do, however, allow you to scale the idea to your budget). If you don’t have a salesforce, consider doing the same for your head of e-commerce or whoever needs that extra spark to get the year off right!
Think about it. What would you do for a Rolex?
January 3, 2006
In my last post, I described how the CEO, like the drummer, sets the overall beat of the organization. This post is meant to show how the sales group taps with the CEOs beat.
The chart below shows how a VP Sales manages within the context of the overall beat. Again, the horizonal axis is the day of the year (the full chart is one year) and the vertical axis is time horizon of the VP Sales focus (i.e., a 10 day time horizon means the VP of sales is focused up to 10 days out on that day of the year).
- As with the CEO beat, the VP Sales graph has the distinguishing characteristics of the strategic review in the August timeframe, the annual planning session in mid-November, and the quarterly meetings that review progress from the prior quarter and make adjustments for the remainder of the year.
- Somewhat smaller on the chart above (see the close-up of the first two weeks of each quarter on the chart below for this point), the VP sales starts every week looking out over the remainder of the quarter (roughtly 90 days the first day of the quarter and 83 days one week out) and then focuses in on the executing near-term for the rest of the week (note that the time horizon of focus is 4-days on Tuesday, 3-days on Wednesday, 2-days on Thursday, and 1-day on Friday).
Finally, I superimposed the CEO chart from my prior post so that you can see how the CEO focal points fits well with the VP Sales focal points (the two are in rhythm!). There are two key differences with the graphs. First, the VP Sales focuses on very tactical accomplishments each week (gets the work done) and only steps back to examine the rest of the quarter once a week. Second, the VP Sales spends some extra time before and after the CEOs quarterly, annual, and strategic sessions to both prepare and to incorporate feedback into the plans.
The point here is not to debate exactly what the focus is at any point of the year (every company will be different), but to point out that there is a regular rhythm set by the CEO that the rest of the organization fits into, in this case sales. Also, it is meant to show that most of the time the VP of sales should be extremely tactical, but also step back at different points to take a longer term view and make adjustments to the plan (similar to the way I swim…I swim for a while and then need to poke my head out of the water and make corrections to my path).
As with the CEO, the two mistakes that VP Sales seem to make is either tactically executing all the time (thereby missing the larger context and opportunities for adjustment) OR spend too much time on the longer-term plans and waste time that they could be executing. It is difficult to get it exactly right, but perhaps thinking in terms of a rhythm helps.
My next post is on the marketing rhythm…
December 22, 2005
This post is an overall summary of the David vs. Goliath Series and meant to act as a pointer to all of the posts in the series. There are three overarching points for the series:
- Emerging growth companies have several natural advantages over larger companies that they can amplify,
- Large companies have several advantages that emerging growth companies can minimize, and
- Emerging growth companies can (and should) take a series of specific short-term actions that over time will accumulate into a long-term defensible competitive advantage (by amplifying their advantages and minimizing the large company advantages)
I canâ€™t emphasize enough how important it is for emerging growth companies to think through these issues and develop a clear point of view on what they are trying to achieve. Regardless of the long-term goal (a sale of the company or remaining independent), building a defensible advantage will make life much better for you (easier time in the product markets, better growth, better bottom line, higher valuation, etc.). Of course, once you know what you want to achieve, you need to execute against it!
The Nine Major Themes:
- Create an Information Advantage. The emerging growth company has the natural advantage of being closer to the customer that the large company. You can truly capitalize on this advantage by taking steps to increase the information flow into your company even more.
- Create the Time Advantage. The large company has a disadvantage as it grows, as solid communication between employees gets much much more difficult as companies grow. This communication difficulty turns into a time advantage for emerging growth companies, as larger companies have difficulty doing anything quickly, while emerging growth companies, with their smaller staffs, can turn on a dime. The emerging growth company can take several steps to capitalize on this natural advantage.
- Create the Scope Advantage. The emerging growth company has the ability to focus on one product market. The larger companies naturally need to increase their scope in order to sustain growth. The emerging growth company can exploit this natural advantage by staying focused and continuously improving â€śownershipâ€? of its product market.
- Create the Scale Advantage. Large companies have difficulty seeing and/or addressing small markets, even if they are very high growth. This gives the emerging growth company time to establish a foothold in the market as well as create some level of defensibility before the large company enters the market.
- Create the Innovation Advantage. Large companies have difficulty executing against certain types of innovation (for example, innovations that cross department boundaries, such as new products with new channels of distribution and new customer service approaches). If emerging growth companies innovate against these natural advantages, they can create an edge against the large companies.
- Set Your Operating Point Closer to the Funnel Singularity. This is the strategy of allocating your resources against nailing the customer experience at low price points to the customer instead of allocating significant resources against sales and marketing activities. If you do this well in the right markets, you can create a large, profitable business that is very difficult for the large companies to compete against. This is a classic strategy, but the internet-based sales and marketing approaches now allows the strategy to be executed more aggressively.
- Attenuate Goliathâ€™s Strengths. The large company does have some natural advantages itself. The posts below address each of the large company advantages as well as what the emerging growth company can do to minimize the large company strengths (and in many of the cases, create an edge):
- Great senior managers and employees
- A technology platform in place with customers
- A Patent portfolio and ongoing new patents
- User comfort with the user interface â€ślook and feelâ€?
- Many customer relationships
- Well developed channels of distribution
- A huge set of great technical talent
- A brand name and reputation
- Significant financial resources
- Economies of Scale and Scope
- Ability to bundle multiple products
- Defend Against Goliathâ€™s Attack. No matter what you do, if you are successful then Goliath will eventually attack. These posts address the nature of Goliathâ€™s attacks as well as how the emerging growth company can set up in advance to defend against the attack. I point out that the results of the attack will be determined well in advance of the attack! The two posts are:
I am going to take a breather from this series for now, but I do intend to put together the implications for each department so that some of the more esoteric points will be made more tangible for each functional group. When I post each of the functional implications, I will place a link on this post below so that this post will act as the index of the major strategies in addition to the specific implications for each function.
November 28, 2005
This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:
As a large company, Goliath has a well-developed set of channels of distribution, both direct and indirect in many cases. Channels of distribution come in several flavors, including:
Direct distribution approaches
- Field sales into large enterprise
- Telesales into small and midsized businesses, departments of large enterprises, and municipalities
- E-commerce sales to consumers and individuals at businesses (of all sizes)
Indirect distribution approaches
- Through systems integrators to large enterprise and large government
- Through VARS/Resellers with or without distributors
- Through big box retailers to SOHO and consumers
- Through e-commerce affiliates
- Through OEM approaches to all customer categories
The large company has spent years perfecting its channels of distribution and generally has well thought out approaches that function very well.
Attenuating the large company channel of distribution strength…
While the large company starts with a significant advantage, there are a several approaches that the emerging growth company can use to help minimize the large company strength and, perhaps, gain an edge:
- Align yourself with the large company channels of distribution if you have complimentary products to the large company. This is a straightforward approach that works if you are truly complimentary. (It works best if the large company agrees that you are complimentary and agrees to help!) This could result in you getting introductions to prospects as well as gaining valuable indirect channel partners.
- Align yourself with your large competitor’s large competitor. Two companies competing with the same large company might be natural allies.
- Focus on the Channels of distribution where the large company isn’t involved or where the large company has some issues. This would generally be indirect channel partners who have great relationships with your target customers that for one reason or another are not working with the large company (for example, different geographies, bad relationship, channel conflict with the large company’s direct sales force).
- Develop your channels of distribution that have more efficiency than the large company’s channels (note, this really needs to be part of an overall strategy that includes simpler and more targeted product, lower price, more efficient customer service, which I describe in “Aiming Toward the Economic Singularity“). The basic concept can be a significant advantage over the large company, as they will have difficulty building their more efficient channels (even more difficulty than you will, as they already have a distribution approach in place that will have conflicts, both internal and external). For example, use telesales into departments of large enterprise (and the SMB market) if they have field sales into large enterprise, use the indirect channel if they have only direct telesales, use e-commerce approaches, etc.
No matter what distribution approach you choose (excluding the OEM approaches, which are highly varied), the following approach seems to be the best practice:
- Start with direct distribution. You need to have direct access and relationship with the end users so that you can perfect your product, services, and marketing messages. You also need some reference customers!
- Once you have perfected your value proposition to your customers directly, you can work on expanding your reach through building up your indirect channel. Some thoughts:
- You should do your homework and truly understand the segment of channel partners that are best for you. This is the exact same process as choosing the right customer segment and will take real work. Just so I am clear, it may turn out that there are not appropriate indirect channel opportunities for your product. If there aren’t, don’t push it, as it won’t work!
- You need to perfect the value proposition for the end customer before you approach the channel. While there are some exceptions, this rule is important, as there is no reason a channel partner should work with you if you do not have a solid “package” to offer their customers.
- The best indirect channel relationships seem to start with the emerging growth company offering value to the channel partner rather than the reverse. You need to develop your value proposition to your channel targets (this is very similar in concept to the approach to developing your value proposition to your target customers)! Note that this will take some effort and resource to do right! The key question that you need to ask is “what is in it for them?” (Btw, the best way to find out is to ask them who they currently do business with and why, what there ideal scenario is, and how can you craft a package that will add the most value for them).
- Put in place a training program and website specifically to address the channel partner’s needs. You need to treat them like your most valuable customers, as they truly are customers!
- Once you have your value-proposition right for the channel partners, you need to “prime the pump.” If you have ever siphoned gas from a gas tank, you know that just putting the hose into the tank and into the bucket doesn’t do anything (which is the same thing that will happen when you sign up most channel partners if you don’t “prime the pump”). Just like you need to suck on the hose to get the gas flowing into the bucket, you will need to offer up leads and help close some deals with each salesperson/group at your channel partner so that they can learn how it is done and also see how easy it is to make money relative to selling other products and services that are in their catalog.
- Start with a very small number of target partners. Remember my magnifying glass analogy? If not, take a look.
- Indirect channels take a very long time relative to direct channels to build. They also require you giving up some of the economics, which is hard for many companies to swallow (especially if they have a direct sales culture). My view is that if you are building a large company OR if you have a product or service that is naturally an indirect channel sale, then you will want to pursue this strategy. If you need or want short-term results, however, then you will need to pursue a direct strategy.
- As with every other specialty in your business, there are a lot of complexities with respect to the indirect channel. I highly recommend that you hire an advisor or full time person that has this type of expertise to help you both build your channel strategy and execute it.
Large companies do have the advantage that they have great channels of distribution. However, developing a targeted approach to building your own channels can help attenuated the large company advantage. If you adopt the strategy of going after a different channel, particularly if it is part of a strategy of “aiming toward the economic singularity” or a strategy of focusing and delivering superior value to your niche then you can gain an edge, possibly a large edge in the longer term!
November 8, 2005
As I have been working on trying to frame out some of the strategies related to Funnel Economics over the last few years, my favorite is the strategy of companies putting much more energy into building better, simpler products (from the user perspective), charging less for them, and using very efficient sales and marketing approaches (rather than building an acceptable product and trying to have as high a price as possible through a value-based sale and aggressive sales and marketing efforts).
The Strategy Has Help Shape Many Success Stories…
Some notable example companies deploying the strategy are Microsoft and Intuit, which have been successful for a long time, and Google, Skype, Salesforce.com (and many others) more recently (the internet has been an important recent enabler).
How it Relates to the Funnel…
Funnel Economics is essentially the (inflowing) cash flow generated by “sales and marketing” activity divided by the “sales and marketing” expenses. If you shrink the denominator faster than the numerator, the limit is a singularity (the singularity is actually zero in the denominator, but try dividing a really small number by a really really small number on your calculator and you will see that you get a large number). From a business standpoint, if you aim for this economic singularity in a very large market, it could be a formula for a very successful company and huge wealth creation (i.e., take the previous number on your calculator and multiply it by a very large number and you get an even larger very large number).
The strategy has some really basic, but powerful elements…
- Make something useful and make it really, really, really easy to install, configure, use, and update. This approach increases the value to the user base, increases use, and reduces product abandonment. (The idea works with all technology products including, but not limited to, appliances, server applications and both browser applications and rich client applications so long as they follow the “really easy” principle)
- Constantly make the product better with rapid development cycles. Economically, this continues to increase the value to the user base (by better meeting their needs), gives the users something to “sing” about, and reduces the cost of customer service (the customers don’t need service, as the product works and is easy to figure out!).
- Design into the package one or more “features” that will compel users to tell people about it and influential people to write and talk about it. The most prevalent approaches either build in the network effect or have unbelievable usability or other characteristics that make people want to talk about them (see Jeremy Levine’s posting for a pretty amusing extreme example of this). If you can’t come up with any ideas here for your product, focus on points 1 and 2 (above) even harder. Economically, this leads to very low sales and marketing expenses, as others are doing the selling for you!
- Give it away free for beta and trial purposes, and price it competitively once the free period ends. No one wants to be oversold these days. Give it to the users and let them see if it is worth using, and make sure that they feel they are getting a great deal when you actually charge them for it (note that looking at advertising counts as payment here)! This approach increases conversion rates of prospects to customers (assuming the product works!).
- Make the “purchase” transaction as simple and easy as possible. For consumers, the extreme version of this seems to be the “micropayment” vehicle called “advertising” (at this point in time), although SkypeOut allows you to make a single credit card purchase that will last for a very long time and Amazon.com has one-click purchases, both of which are very simple and easy. For business customers, the credit card model or simple contract/billing model seems to be acceptable, although it would be great if something better came along. (Perhaps my friends at IPCommerce will create something to address this issue better for both consumers and businesses!). Economically, this approach increases value to the user and conversion rates of prospects to customers.
- Keep the sales and marketing expenses (the denominator) as low as possible, and put your resources toward the first five elements of the strategy, which should drive customer adoption. Economically, bringing this cost to zero creates the singularity! (Note: I expect that most B2B and many B2C companies will still need sales and marketing, at least in the current environment. The key is to keep pushing for the efficiency and to keep this cost as low as possible relative to the gross profit generated by the activity).
Don’t confuse this approach with just eliminating sales and marketing and calling it a day. If a company sets the right operating point in the right market situation, the company should still be growing, possibly explosively, just growing for reasons other than a purely aggressive sales and marketing effort.
To perfect the execution, you need to determine the optimal operating point…
I am a strong believer in the six themes outlined above, but there are four major issues that every company needs to address:
- The larger the market, the better the strategy works. Companies that sell to consumers and the universe of small/midsized businesses will have a better outcome than companies that only have a few hundred (or fewer) possible customers.
- Each company needs to find its optimal “operating point.” The best way to think about this is that each of the six elements above have knobs controlling them that company management can rotate to set the “level” for each element. The optimal set point for each element has to do with how sensitive user response is to that element (this gets more complex when you build in the issue of path dependent outcomes, which I won’t cover here). The ultimate goal is to have the right set points for each of the knobs. The core assumption that needs to be tested is that you can improve your results by decrease sales and marketing resources, increase resources spent on the product, and reducing the price (or eliminating it for a period of time).
- Once you set your initial operating point, it is easier to move away from the singularity than toward it. That is, it is easier to move from a simple product to a complex product than a complex product to a simple product and it is easier to add sales and marketing activities and expenses than it is to subtract them! As an example of an extreme starting point, the concepts around Web 2.0 are essentially the extreme version of the strategy aimed at consumers. (I particularly liked Charles O’Donnell’s posting “10 Steps to a Hugely Successful Web 2.0 Company” as an example of the web 2.0 themes). In my view this is a great starting point for these types of companies, as it is the extreme from which to start turning the dials to tune in the optimal operating point.
- You can use this strategy against your competitors (and they can use it against you). Some people say that Google is out-Microsofting Microsoft. Essentially, the point is that Google has set its operating point closer to the singularity and it will be difficult for Microsoft to respond (harder to move toward the singularity!)…It will be interesting to see what happens. It will also be interesting to see if someone eventually out-Googles Google (perhaps Microsoft?)!
I have seen these themes in place in companies selling to consumers, small businesses, and large enterprises in all areas of information technology (infrastructure, applications, software as a service, etc.) and entertainment (particularly gaming). The strategy can be deployed in different forms at different operating points by every company selling to any customer segment (so long as it is a large enough segment!)…All you need to do is focus on aiming toward the economic singularity (also, make sure that you start closer to it than your competitors do)!
October 28, 2005
Even with all my ranting in board meetings about the topic, I continue to be amazed by the lack of focus on the economic aspects of the sales and marketing funnel (A.K.A. Funnel Economics).
Funnel Economics is essentially how much money do you spend on the funnel (in the form of sales and marketing expenses) vs. how much money (in the form of Gross Profit) drops out of the funnel? In this sense, Sales and Marketing is a money machine (remember that magic trick where you put a dollar in, turned the handle, and you got $10 out?) when done right (and a money sink when done poorly). Somewhat more complex issues include:
- What are each of the components of the funnel and how do they contribute to the economic results?
- How have your Funnel Economics changed over time?
- What are the marginal Funnel Economics?
- And, most important, How can you maximize the Funnel Economics? (this is actually the most important question, but you need the answers to the other issues to accurately address this one.)
My argument for putting more energy against understanding and improving the Funnel Economics is that it is the most important (and complex) factor in determining the growth, profitability, and, indirectly, ultimate valuation of an emerging growth technology company (yes, the product, pricing and services are really important too, but they factor into the funnel economicsâ€¦more on this below. And, yes, many companies get acquired for their technology, before they get a chance to scale up their funnels, but this is the Expansion Stage view).
When to focus on Funnel Economics
In the early stages of a companyâ€™s life, the processes should be creative in nature and informal (this also involves very few high quality highly passionate people trying a huge number of things before settling in on â€śwhat worksâ€?â€¦probably where a lot of the â€śmagicâ€? takes place). Forget about funnel economics at this stage, as you should be making something and getting some people to use it! Most important at this stage is moving down the sales learning curve as far as possible (although you will need some simple form of Funnel Economs to understand how far down the curve you are.)
As a company finds its footing and is ready to scale up its sales and marketing resources (the Expansion Stage), measuring and managing the funnel economics are a extremely important activity (you are about to amplify them, possibly significantly, so you had better be able to predict the results accurately).
Itâ€™s all about Sales and Marketing Management
Many Factors Extenal to Sales and Marketing Influence Funnel Economicsâ€¦
Market and product factors are highly important in determining the order of magnitude of funnel economics. For example, a high growth market with an extreme pain point where the company has the best solution, a natural ability to have a network effect and the ability create a viral effect would probably have pretty rich funnel economics (add any Web 2.0 concepts that I am missing, as the web 2.0 crowd has done a great job of clustering important concepts and giving them a tag that generally represents many good principals).
â€¦But Sales and Marketing management AND the company CEO can have a tremendous effect!
From a sales and marketing management perspective, however, most of the market and product factors are fixed, at least in the near term. The key is to understand how the sales and marketing activities influence the ultimate economics of the company (are you getting $1 for each dollar dropped in or $10?)â€¦especially important are maintaining and improving them as the company grows!
I have seen many companies make significant progress understanding and managing their Funnel Economics (and many technology companies building products to help them with various aspects of the analysis). I have also seen many companies punt on these issues or not keep careful track of their development which has resulted in a lot of wasted capital!
Hopefully, all companies will adopt this approach and do it wellâ€¦until then I will keep rantingâ€¦