Selling information technology in the 21st century
This is the closing keynote presentation from the Software Industry Conference 2016 held in Bussum, The Netherlands on March 17th 2016.
If we believe that revenue generation is some kind of magic that we need wizards to perform then it will never scale. So how do you design your revenue generation model so that it can operated by normal people and produce more revenue at steadily decreasing customer acquisition cost? That’s the question my presentation will answer.
I was in the US a couple of months ago. On a Wednesday morning I went to a local shopping mall where there is an Apple store. Entering the shop, I was met by an Apple employee telling me that there was a 45 minute waiting time for the next available customer service agent. Did I want to hang around in the shop or would I come back later?
I went for a coffee and came back 45 minutes later and was immediately taken care of.
I bought a couple of iPads and some accessories and I was out of the shop in less than 15 minutes.
This example epitomizes what the next half hour is about.
We have this: An awesome product
But we want is this: A booming business where people beat a path to our door and line up for 45 minutes to buy our products and services.
What is in this apparently magic box that can turn an awesome product into a booming business?
Well, let me demystify something that I just said.
I said, “what’s in this magic box?”
Let me emphasize that it has nothing to do with magic or it has nothing to do with wizardry.
It is not magic or wizardry.
It is actually just the good old S-curve – market share up the Y-axis and time out the X-axis
We start a company based on a great idea. Some of us (around 10%) manage to find a product/market match, move out of the startup stage and become a real company making a profit.
So now what?
Now we want to scale along the green curve and grow our company to market leadership.
But only very few of us will find the way to market leadership.
Most will drop off to the red curve.
They will remain profitable and they will grow, but not as fast as the market and not as fast as their competitors.
After some years their competitors have taken those leadership positions and we slide along the red curve and the value of the company we created shrinks and shrinks.
Being number 3, 4, 5 or 6 in a market means that we are either coming along the green curve from below or we are on the red curve. In the long run there are no attractive middle positions available.
Because it is an intrinsic characteristic of the software industry that the winners take it all.
So the objective of a software company is not only to grow and become profitable. The objective is to make it to global market leadership as fast as possible because that is the only reasonably comfortable position in the software industry.
The example I gave with Apple is not really relevant anymore. Apple was founded on April 1st 1976 which is 40 years ago.
Today and in this industry we don’t have 40 years anymore to make it to market leadership.
My presentation today is about the companies in the “make or brake” space and how they can ensure staying on the green curve as opposed to sliding down the red one and losing all the value they worked so hard to create.
The agenda for my presentation is:
- First I’ll introduce you to a generic revenue generation model. I am not going to talk about how to make an awesome product. I assume we have that. And when we have that, then we need to design a revenue generation model that will scale faster than the market and faster than our competitors.
- Then I’ll describe the four basic challenges that we all face in the software industry and that we must learn to deal with if we want to become market leaders.
- I’ll then introduce some of the major trends affecting us today and in the foreseeable future. The trends that may either kill us if we do nothing or that may help us accelerate growth if we make them work in our favor.
- And finally I’ll give you my six steps to success.
- During my presentation you can tweet comments and questions using the #sincnl. Marianne and my associate Steen Helmer over here will monitor the stream and if we have time we can pick a few.
A revenue generation model
Why do we need a revenue generation model and why we need to master the marketing and sales engineering disciplines?
This is a generic revenue generation model. Let me take you through the model in chronological order.
Over in the north western corner we decide what we want to do and who we want do it for. SPM stands for software product management.
Our products, services and domain insight are the basis for our customer value proposition and we define the ideal customer profile for this particular value proposition – the ideal customers are those customers that get the most value out of what we have to offer AND that we are able to identify with standard demographic data.
When we have this product/market fit in place and have proven that we have something which our ideal customers really want and that is perceived as better than the competitive alternatives that they know of, then we have the launch pad for developing a systematic revenue generation process which should become repeatable, replicable and thereby scalable.
When we are out of the startup stage the revenue generation process always has 5 major parts:
- A marketing process part, where we build awareness and generate leads. People cannot buy from us if they cannot find us or if we cannot find them. Not all customers are in the market for what we offer all the time, so we will have to nurture the relationships until they move into the next stage: sales
- In the sales process we deal individually with potential customers that are now actively in the market for what we offer and where we essentially facilitate and influence their purchase process.
- The next stage is the delivery/implementation process where we deliver the value we promised.
- The fourth is customer retention (keeping the customer).
- and the fifth part is the growth process (where we up and cross sell) with the objective of bringing more value to our clients and adding them to our growing list of references and testimonials.
Let me give you a couple of examples:
In Denmark we are in the middle of implementing a new Electronic Medical Record system, or IT healthcare platform as we call it, to serve 40,000 IT users at 17 hospitals and 54 other healthcare institutions serving 2,5 million citizens. This €135M project went to US-vendor Epic. The official procurement phase started with pre-qualification in September 2012. Five vendors were long-listed in November the same year. Three vendors were shortlisted in April 2013 and the final vendor selection was made in January 2014, training and preparation was done in 2014 and 2015 and the first units will go live in May this year and the project roll-out will be completed by the end of 2017. Epic started establishing communication lines to the Danish authorities years before the tender process started. My research indicates growing interactions with Epic and Epic customers from 2007. Let’s just say that the marketing phase took 5 years, the sales phase 2 years and the implementation phase 4 years which is a total of 11 years.
Talking to the vendors participating in this tender I have estimated that the direct cost of sales was €1-2M. That means losing this project had a direct cost of €1-2M. But the real cost is the opportunity cost. It is the business that these resources could have generated for the company.
The fundamental design criteria for a scalable revenue generation model in this situation is:
- The ability to say “no thank you” very early in the process. Prospect qualification becomes a critical competence.
- An implementation approach ensuring delivery according to specifications, time and budget.
And this is exactly the Epic approach
At the opposite end of the spectrum we have Classloom, which is a web based collaboration platform for teachers, students and parents using a freemium based business model. New users may find the platform, read the content on the web site and sign up for the service within 15 minutes. There still is a marketing phase enabling enough potential users to find the platform. Although the average signup time is only 15 minutes there still is a sale development phase making enough information available on the web site for visitors to stay and understand the value proposition so they will sign up for the service and later there is a sales phase of converting users to paying customers and a retention phase keeping them on the platform.
So this process may take several years for some value propositions, and days or even just minutes for other value propositions, but it is always a step-by-step process with well defined sub-processes.
Each company has its own specific revenue generation model, and they all serve the purpose of:
Finding -> Winning -> Making -> Keeping and -> Growing
a steadily increasing number of happy customers with steadily decreasing Customer Acquisition Cost.
To be successful in the software industry we need to master what I call marketing and sales process engineering.
We must recognize that revenue generation is a series of regular business processes that must be designed, tested and optimized.
If we believe that revenue generation is some kind of magic that we need wizards to perform then it will never scale. So how do you design your revenue generation model so that it can operated by normal people and produce more revenue at steadily decreasing customer acquisition cost? That’s the question my presentation will answer, but first I need to introduce you to some generic challenges that we face in the software industry.
The four basic challenges
Why these four fundamental software industry characteristics are important to know and deal with.
In the software industry we are faced with four basic challenges:
Challenge 1: Invisibility
This is my watch. It is an Omega Seamaster. I’ve got one and James Bond also has one.
Visit Omega’s homepage and see what it takes to explain what a Seamaster is and does. It doesn’t take much. One page is enough. What you see is what you get.
This is an Apple Watch. Visit the Apple web site and see for yourself what it takes to communicate what the Apple Watch is. Certainly not an easy task.
It’s competing for the same “real estate” on our body, namely the wrist. But it is 1% watch and 99% something else. It is highly customisable and people buy it for many different reasons.
Takeaway: Software products are practically invisible and that makes it very difficult for customers to relate their problems and needs to our products. Especially if we are an unknown brand. Especially when we are not among the market leaders.
Challenge 2: The product is not the solution
In the software industry there is often a huge difference between the product and the solution.
Example: We have CAD software and the customer wants to build a bridge.
Takeaway: In the software industry the product is seldom the solution and that makes it very difficult for customers to relate their problems and needs to our products.
Especially if we are an unknown brand. Especially when we are not among the market leaders.
Challenge 3: Value is situational
Even when we have the most super cool disc jockey in town and he plays the same kind of music every night the party is never the same two nights in a row. It’s the interaction between the DJ and the crowd that makes the party.
It is exactly the same in the software industry. Without the customer’s active participation, the solution will not work and deliver the expected value.
A good example is CRM systems. For some companies the CRM system is a major contributor to their journey towards global market leadership. For other companies it has no impact or maybe even a negative impact. The software is exactly the same, but the customers’ ability to organize around the software is very different.
Takeaway: The value of software products is very situational and that makes it very difficult for customers to relate their problems and needs to our products.
Especially if we are an unknown brand. Especially when we are not among the market leaders.
Challenge 4: Crossing the Chasm
Who is familiar with the law of diffusion of innovation?
How many are familiar with the principles behind this illustration?
What is the name for this percentage? The tipping point!
If we are a software company we must be familiar with the law of diffusion of innovation that was introduced by Professor Rodgers in 1962, but made widely known by Geoffrey Moore in his book Crossing the Chasm, which came out first in 1991 and in a new edition two years ago.
Have you ever noticed that there are basically two types of reactions you get if you tell other people that you have someting new?
If you introduce something new and exciting to another person you will get one of two reactions:
A: That sounds interesting, please tell me more!
B: Really? Who is using that?
According to Rodgers and Moore the market is divided into two main segments:
The Early Market consisting of people genuinely interested in anything new.
The Mainstream Market consisting of people genuinely UNinterested in anything new.
The challenges are:
If we are a new player with a new product, then only the early market types are prepared to actively engage with us. They will not all buy from us, but some of them may.
The majority will not engage with us. They are deliberately staying away from anything new and from any company that is not well established and not among the market leaders.
What’s the problem?
#1 Early market types are hard to find
#2 and winning Early market customers is not enough to take us to the tipping point
The tipping point is around 20% market share. This is where market dynamics change, demand becomes pull driven and our biggest challenge is not revenue generation, but scaling our delivery capacity. Passing the tipping point gets us to the tornado where the ratio between CLV and CAC becomes 3 or higher.
When products are invisible and the value situational then mainstream customers prefer tested solutions from the recognised market leaders.
If we want to stay on the green curve we must find ways to sell to mainstream customers.
These are the four fundamental challenges that we have to manage if we are a software company.
But the challenges do not end here. There is more to come.
The 6 trends that can help us or kill us
The business model environment trends that we need to have working in our favor.
How many are familiar with this illustration?
Any company can be described using this framework consisting of 9 building blocks.
The business model is under our full control.
- We define and design our own value propositions;
- we can choose those target market segments that are the best match for this value proposition,
- we choose our channels and
- we choose which relationships we want to build and maintain with our customers.
- Eventually this part of the business model, which is called the front office is supposed to produce revenue.
To operate the front office, we need a back office.
- We need certain types of resources
- exercising certain types of activities to make the front office work.
- We may need to engage some external key partners, as we may not do everything ourselves.
- The back office will produce cost.
All the elements of our business model are within our full control and if we need to improve our business then the business model framework is an excellent platform for such discussions.
The business model environment
What we do not control is all the white space around the business model.
We call this space the business model environment.
Changes in the business model environment may obsolete our business, but they will also present us with exciting new opportunities.
Alexander Osterwalder has divided the business model environment into four areas.
- Regulatory and Politics
- Socioeconomic issues
The Market (The demand side of the market)
- Market Issues
- Market Segments
- Needs and Demands
- Switching cost and
- Revenue Attractiveness
The Industry (The supply side of the market)
- New Entrants
- Substitute Products & Services
- Suppliers and other supply chain actors
- Global Market Conditions
- Capital Market Conditions
- Commodities and other natural resources
- Employment, Inflation, Balance of payments
In the following I will give you the most important issues – as I see them – across trends, industry and markets.
I don’t find the economic trends have any major impact on companies in the Make or Break phase, so I will leave this area out.
It may look overwhelming, but don’t worry I am sure you are familiar with most of these trends and I will only focus on what I see as the key issues.
Let’s start with the generic trends.
Technology penetration will continue to increase opening new business opportunities for all of us in all walks of life.
Software is truly eating the world a Marc Andreassen wrote some years ago in the Wall Street Journal.
The forces behind this trend are:
- The proliferation of the internet in terms of penetration and speed
- The falling prices of technology and
- The conversion from on-premise to as-a-service formats
- that makes payments related to consumption rather than acquisition. We move CAPEX to OPEX.
Our windows of opportunity will continue to shrink.
The barriers of entry will continue to drop opening the market to new entrants.
We need to move faster and go for pole positions to improve our chances for survival.
Let’s look at the industry trends on the supply side of the market.
Prices on software will continue to fall.
When the first edition of Navision (financial administration software) for MS-DOS came on the market in 1984 the price was €4.300 for a single user product running on a PC that had a price tag of €10.000.
Today the going rate for such software is around €300 or 7% of what it was 30 years ago.
If you buy a Mac, the Apple office software package is included in the price.
With Microsoft Office that cost of $99/year for 5 devices comes with 1TB of file space in the cloud.
Yes, we will all work like crazy to add more value to our products, but we can only hope to minimize the decrease in prices. We cannot change the trend.
Customer Acquisition Cost will increase. It is a consequence of the increased competitive pressure and the saturation of marketing channels, but it is also a consequence of some issues on the market side that I will introduce next.
Let’s look at the market trends – the demand side of the market
Customers become more educated, experienced and demanding. They will be more difficult to sell to.
Propaganda is dead.
Customers have a hard time relating their needs to our products and they have stopped believing what we have to say about ourselves and our products.
We will have to redesign our communication strategies completely to get our messages to the market and get the attention of our potential customers.
These are the six most important trends that I see facing the software industry today and in the near future.
So what are we to do about it?
What are the routes we can choose to take advantage of these trends and use them to our benefit rather than letting them kill us?
The six steps to success
The six steps that I find most critical in building market leadership.
Let me give you my six step recipe for success.
Ambition, Purpose & Leadership
I meet with software companies around the world and I must conclude that a minority have the burning ambition to become market leaders.
They would all love if it happened to them, but this it not how it works.
Because of the law of diffusion of innovation the market leaders will run over every one else. In the software industry the winner takes all.
We must have the ambition of becoming the market leader to enjoy the tornado acceleration advantages.
People will not work hard and be dedicated just to make you and me rich. People are not motivated by growing revenue and profit.
Our business needs a purpose that people, and especially millennials, will rally behind.
If you need some inspiration and ammunition for your leadership role I can recommend Simon Sinek’s book: Start with why.
Without burning ambitions for global market leadership we will not achieve global market leadership.
Ambition is the fuel that keeps us moving ahead despite all the unforeseen obstacles and setbacks.
And purpose is what makes people come to work dedicated and enthusiastically for our cause every day.
Leadership is what makes the meaningful for the people we need to help us make the journey.
Step #2: Use the business model framework
We need to get those posters up on the wall.
If we have no better method for engineering our business model this should be our framework.
Let’s get all our stakeholders on the same page and speaking the same language.
We have no time for misalignment and misunderstandings.
Disagreement is fine, but misalignment due to misunderstanding and differences in vocabulary is a drain on our execution capacity.
There is plenty of literature available and plenty of consultants available that can help you get started.
- Business Model Generation
- Value Proposition Design
- and free whitepapers from our own publishing division
Step #3: Choose your channels carefully.
Most software companies at least in the B2B domain will continue to favor the indirect go-to-market approach through independent resellers.
The indirect channel can accelerate our growth and consolidate our leadership position, but it takes away control and can also slow us down and add no value whatsoever.
If we choose to work with independent channel partners then keep in mind that we introduce a 3rd party business model into our own business model.
We add a potential lever and multiplication opportunity, but we also give away control and we introduce complexity.
Promotion: If you are working with or consider working with an indirect channel I can recommend my own book: Building Successful Partner Channels. Promotion ended.
Step #4: Marketing and sales are genuine business processes
When it comes to scale revenue generation this may be the most important step of them all.
Accept that marketing and sales are genuine business processes that need to be defined, described, monitored and optimized.
Customers just don’t jump right down to the bottom of our funnel and especially mainstream customers are hard to move from top to bottom.
Accept that we are facilitating customer (people – not companies) buying journeys and that we may even have different personas with different needs to deal with. We need to support the buyers with different deliverables depending on where they are in their journey and we need to have very different conversations in the individual touch points, too.
The biggest mistake you can make is to assign sales people to run the entire funnel. This is what we do in startup mode, and many companies continue this approach, but that will never scale to market leadership.
We need to introduce “division of labor” and specialisation in the revenue generation process. The division of labor was introduced by Adam Smith is his book “The Wealth of Nations” and it is now time to introduce this proven principle in marketing and sales also.
Marketing is responsible for generic brand building activities and for nurturing and generating what we can call suspects. They are responsible for making potential customers find us!
Inbound sales development is responsible for managing and qualifying inbound leads. Inbound leads are mostly unqualified. There are only very few genuine fish in the net.
There is a huge inbound movement arising around the world, and while I agree that we must find ways to be found and make the right customers come to us I still believe that many software companies need an -> outbound sales development functions also.
Outbound sales development reach out to our ideal customers with the objective of identifying opportunties for the future. Over time they will build a goldmine of insight into our core market.
Inbound and outbound are both sales development functions, and they should not be mixed. They both pass the qualified leads to our quota carrying sales people for closing.
New customer acquisition sales is the most expensive resource we have and they should be reserved for only the best qualified projects.
Existing customers should be managed by farmers.
Expecting that single individuals can manage all these roles is naive.
Only very, very few people can do so and relying on only very few people doesn’t scale well.
Takeaway: Introduce division of labor and specialisation in your marketing and sales processes.
Step #5: Content Marketing
I have mentioned several times that propaganda is dead. All research confirms that customers have a hard time relating their needs directly to our products and that they do not believe what we say about ourselves and our products.
Then what are the most powerful marketing vehicles?
On the very top we have -> Recommendations.
Most powerful is recommendations from people we know and the least powerful is recommendations from people that we know are paid to make the recommendation, such as celebrities.
What comes 2nd?
Permission based email marketing! Yes, good old e-mail marketing is still a very effective marketing channel.
What comes 3rd?
Social media. People reading our posts and our comments to discussions related to their needs, issues and challenges.
#4 is search!!
Let me emphasize that the power of the various marketing and sales channels differs quite substantially from industry to industry, but one thing is crystal clear for all companies in the make & break phase:
We cannot afford to pay our way to leads, prospects and customers with advertising!
Therefore we must map how the communication takes place in our market and design our marketing and sales strategies around the channels that our ideal customers prefer and the language that they use.
And the communication strategy that we must apply is what I call Responsive Content Marketing.
We must discuss the issues that are of interest to our potential customers and we must do it so well that people recommend our content to their networks and we must engage as soon at our audience respond to our messages.
The recommendation here is to get our Responsive Content Marketing strategy in place and executed.
Step #6: We must use analytics in optimising our revenue generating activities.
And that leads me to my final recommendation.
Marketing and sales processes are increasingly digital or at least digitally documented. Mastering statistics and analytics becomes a critical skill in the continuous optimisation effort of the marketing and sales processes.
We cannot scale our business without the use of marketing and sales automation software.
We cannot measure and optimise our revenue generation activities without applying software to the processes.
We cannot optimise our revenue generation activities without taking our own medicine.
There are numerous tried and tested platforms available. We must find the platforms that match our needs and requirements and invest the time and effort in making them work and keep them going.
When it comes to marketing and sales software there is a big difference between the products and the solution and success requires our 100% commitment and engagement from top management.
I recommend you read the book Inbound Marketing for additional inspiration in this area.
-> These are my six recommendations for how to accelerate growth and become market leader in the software industry.
- You must really want to achieve market leadership.
- And you need a purpose that’s worth working for.
- Use the Osterwalder Business Model Generation – it will help you save time and stay on the green curve.
- If you want to work with independent resellers then read my book.
- Apply division of labor and specialisation in your marketing and sales processes.
- Communicate using the language of your customers on the channels where your customers are.
- Take you own medicine – use sales and marketing software.
Following my recommendations will keep you on the green curve all the way to market leadership.
Thank you very much.