Choosing the Right (Metaphorical) Weapon
When identifying companies to pursue as potential customers, an age-old decision persists: the use of a shotgun or a rifle as the metaphorical weapon of choice. The argument for the shotgun is obvious — every company in my geographic or vertical market is a potential prospective customer.
For horizontal solutions, this may be theoretically true, but can we effectively indiscriminately call on all companies? Just because all companies might be able to benefit from our solution, should we prioritize some companies over others? Do all companies benefit equally from our solution, or do we have features that apply more significantly to some, but not all?
Alternatively, we could use the rifle to identify the companies — where our unique features are driving a strong and differentiated business case for identified potential customers. Certainly, our win rate would be dramatically higher when we deliver a unique and differentiated solution reinforced by a business case that leverages this differentiation. Winning nine out of every ten opportunities (90%) is a much more efficient model than winning fifteen out of every fifty opportunities (30%). This predictability has wide ranging positive by-product benefits, particularly as it relates to the exit multiple your SaaS company can expect. Converting from a shotgun approach to rifle approach takes a little time, but let's do the math.
Let's suppose for a second that a successful enterprise sales effort requires 21 steps. Let's call successful execution of each those steps a "bullet hitting the target." A sales person, whose base pay is $150k selling an average deal size of $175k, needs 28 bullets to hit the target (per quarter) to make the business financially attractive. Many times we observe shotgun approaches hitting targets at approximate 30% rate. This means approximately nine bullets are hitting the target per quarter (and 19 +/- are missing the target). Converting from a shotgun to rifle approach substantially impacts scalability and value. The graph below shows the impact of that conversion based on a three year investment holding period. We assumed here that we are able to recover, in effect, 13 of those 19 misfires (i.e., 65%). The impact on value is HUGE and the liquidity prospects for the business just went up materially.
The above analysis does not even consider another key advantage of the rifle approach — pricing. Higher pricing is more defensible when it is supported by a differentiated business case. Commodity products (one size fits all) are driven by commodity (lowest) pricing. Again, having pricing power gets rewarded in the exit multiple.
Ultimately, your company needs to choose its “Go To Market” strategy — generic, commodity products with an unnecessarily low price and a modest win rate, or a differentiated product set with unique capability priced in accordance with that differentiation and a very high win rate (90%) sales forecast probability and premium pricing. For your SaaS company, the choice is yours.
If you want help differentiating your SaaS product and its associated pricing, as well as sales forecast predictability, please reach out to me at dave@moicpartners.com.
