Getting to Yes, Repeatedly: XaaS Go-To-Market (GTM)

XaaS Success Key #3:  Go-To-Market

Part 1: The XaaS Sales Funnel:  Deeper Than You Think

In XaaS go-to-market, there is one truth and only one truth:

The money is in renewals.

In my next three articles covering Keys to Winning at XaaS (Right Go-To-Market (GTM), Right Capabilities, Right Goals), renewals will continually come up.  In this article, I will cover the XaaS sales funnel, channel considerations, and a bunch of other interesting stuff.  But at the end of it all, I want you to remember one thing:

The money is in renewals.

First let’s start with one of the key concepts in any sales funnel conversation:  the sales funnel.

A Sale Is Only A Beginning

Most sales funnels include some combination of awareness, discovery, intent…ending at purchase (Figure 1).

Figure 1:  A Typical Sales Funnel

But for the XaaS sales funnel, purchase isn’t the end, but the beginning of the relationship.  Why is this?  Because XaaS is indeed a relationship, not a transaction, as discussed in my first article, “From Transaction To Relationship: 6 Keys To Winning In XaaS”.

There’s also a practical reason:  it’s cheaper to keep a customer than to buy a new one.  Even for poorly-performing XaaS companies, it costs about ? as much to renew a customer, as to acquire a completely new one.  Clearly, earning more from an existing customer will deliver you more profit than finding an entirely new one, barring any substantial differences in revenue per user.  I’ll discuss this more in later articles on Right Capabilities and Right Goals.  

In Figure 2, I’ve laid out my view on the key steps in the sales funnel for XaaS. 

Figure 2: The XaaS Sales Funnel 

Let’s review these to uncover some critical GTM best practices:

Get to know me:  Discovery  

Sometimes called awareness in typical sales funnels, this is the process whereby potential customers discover your solution and offers.  Any number of different marketing channels can work for this.

Best practice:  Referrals.  Nothing works better for marketing than word of mouth; nothing will incentivize your existing customers to help you find new customers than a referral bounty.  Offer your existing customers a bounty if they recommend your product or service to a new customer that then successfully signs up.  The beauty of referrals lies in not having to spend anything on customers that don’t convert; the bounty is not paid unless the new customer signs up.

Example:  One accounting SaaS provider I analyzed cut their customer acquisition costs (CAC - more on CAC below) by over 30%, with just as many net new customer additions, by shifting spend from digital marketing to referrals.  

Give it a try:  Trial  

Normally this sales funnel step is called Evaluation; I’m jumping straight to best practice and calling this step Trial.

Best practice:  Offer your products and services on a trial basis to customers.  This has these key benefits:

• Awareness.  Nothing builds awareness of your value better than someone actually using your product.  For this reason, trial is correctly considered a marketing expense captured in CAC.
• Stickiness.  The minute a customer begins developing specific knowledge or skills related to your product/service, or begins storing any data with you, it is much more difficult for them to switch away.  This greatly raises the probability of conversion to a paid customer.

To make the economics of trial work, it’s critical to place some sort of threshold limitation before a customer must convert to paid; it’s really difficult to make money at a price point of $0.  These thresholds could be time-, usage-, or success-based, but they are all set at the right level that people can get basic functionality for free, but the value-added functionality they really need require a paid subscription.  This becomes a conversion trigger for you – and a cost-effective one.

Example:  Too many to count – even for product!  One lighting distributor I worked with experimented, offering LED lighting products to customers on a trial basis, correctly evaluating that customers would be unwilling to pull all the product out and send it back.  Sales increased – as did customer satisfaction.

Let’s get this party started:  Purchase

This is only step 2 out of 5 – not the final step!  This is the actual contract-signing stage, the point at which a lead becomes a customer.  By the way, everything up to now has been focused on removing all friction to your customer subscribing to your XaaS offering – your tiered offering, your pricing, your trial offer, all have the effect of making things as easy as possible for them to decide to subscribe to you.

Best practice:  Communicate frequently with the potential customer during the trial process.  Just because they’re in the trial – and they’re not yet paying you – doesn’t mean you can just leave them alone.  You want to make them fell wanted, answer their questions, and reiterate your value proposition every opportunity you get.

Example:  Several years ago, as a test, I signed up for a free trial with Salesforce.com.  I must have received at least 10 emails, and one phone call, during the trial, to make sure I was using the product, could get any questions answered and any roadblocks removed, and to make sure I knew the great features of their CRM solution.  Simply put, they were not willing to just leave me to my own devices – they were going to do everything they could to make me want to convert to a paid customer.

All set up:  Provisioning.  

They’re not really your customer until they’re actually using your product or service.  To make that happen, sometimes customization is required, sometimes delivery is required, sometimes on-site installation is required.

Best practice:  standardized offers.  One of the easiest ways to ensure no provisioning nightmares – such as customizations that don’t work, supply delays, etc. - is to offer standardized product or service, or even product + service, packages/offers.  In fact, standardized offers ease the progress of customers throughout each stage in the funnel by easing decision making for the customer, which as noted in my first article is one of the key benefits of XaaS.

Example:  Adobe’s Creative Cloud is available in basically 3 different plans – All Apps (all of Adobe’s applications), Photography (Lightrooom and Photoshop), and individual applications (a la carte selection).  There are three additional offers based on customer type, but even then, this means there are only 6 different plans on offer, making the decision-making process simple.  And simple makes it easier for the customer to decide, deploy, and use.

Winning!:  (Customer) Success 

Now that your customer is paying you – you want to make them as successful as possible, so they renew without costing you a fortune. 

Best Practice:  This skill is critical, evolving, and therefore worthy of deeper treatment, so I’ll cover it in a future article, XaaS Key #4:  Right Capabilities.

Let’s do it again:  Renew 

Like I said, the money is in renewals.  And renewal may seem simple – after all, most customers are on auto-renew, right?  Out of a typical XaaS cohort of 100 customers on auto-renewal subscriptions, 70 – a majority, but not all – do auto-renew.  However, that means 30 don’t automatically renew – which means you need to spend money to keep them.  And that 30 includes 10 that will cancel their subscription and 20 that are seriously thinking of cancelling unless you intervene (spend). 

Best practice:  Getting renewals right is critical, so I’ll also review this in XaaS Key #4:  Right Capabilities.  

Would you like another?:  Upsell

Upsell is basically having a new or premium offer, with greater functionality and benefits.  Upsell is absolutely critical to XaaS growth:  for more mature XaaS offers, upsell becomes 25-50% of the lifetime value of your customer (LTV).  Upsell is your long-term growth vehicle. There are two key issues at play here:

• Growth through pricing:  Unless you have an upsell offering, if you have penetrated all of your customers with your XaaS offers, you have no growth path unless you raise your prices.  And as everyone knows, raising prices on a constant product can really annoy your customers.  
• Aspiration:  Remember the good-better-best hierarchy of offers discussed in my previous article on XaaS Key #2, Right Product and Service Design, “Dude, Where’s My Predictable, Growing Revenue?”.   We all want to aspire to better things:  losing weight, running farther, making more money, driving a better car….This is true of XaaS customers, too.  

Best practice:  a hierarchy of offers, including one super-premium offer.  You always want to have an aspirational offer at a premium price so your customers have something they can look at and say, “one day, I’ll be big/rich/important/whatever enough to need that, but maybe not right now”.  That way, you can always pitch a new offer to them to drive greater revenue per customer.  

Example:  Salesforce.com’s hierarchy of offers (Figure 3) is brilliant on many levels, including the “Unlimited” package at the far right, promising a clearly aspirational offer of “unlimited CRM power and support”.  Who doesn’t want to be powerful?  And it’s premium priced, a full doubling of the price of the next offer down, ensuring high margins.  

Figure 3: Salesforce.com Hierarchy of CRM Offers

Best practice:  Frequently I get asked by startups how to raise prices, since they plan to differentiate at launch with lower pricing.  I answer with three words:  “new and improved”.  New and improved becomes much easier if you have a completely new offering, at a higher price point – in other words, an upsell offer.  (Note:  I also use three other words, “don’t do that”, when startups suggest making lower prices a major component of their value proposition, but that’s best saved for another discussion!).

Example:  Adobe Systems ran into this growth-through-pricing threat when launching Creative Cloud.  At launch, Creative Cloud was “all-you-can eat”; one price gave the user access to the entire Adobe software suite.  There was a real possibility that once all customers transitioned to Creative Cloud, revenue growth would stop unless prices were raised.  Adobe has since launched multiple add-on packages to Creative Cloud, ensuring LTV growth. 

Example:  Netflix has raised prices on a constant product, without severe consequences, but we need to consider that they are the exception, not the rule, due to their unique offering, existing low price point, and high market share.  And it should be noted that Netflix has also recently introduced an upsell:  for an additional fee, customers can enjoy Netflix simultaneously on unlimited devices.

Changing Lanes

So we've reviewed funnel best practices - but what about sales channels, the different lanes you can use to reach customers? I'll cover that in the second article in this series on XaaS GTM.

What is your take?  What challenges have you faced in GTM transitions for XaaS?  What's your funnel, and what challenges and best practices do you see?  Contact me; I’d love to hear from you!