Chapter 16
Not Too Big, Not Too Small
Small deals can sink you, but so can big ones. Mark Suster envisioned customers as three kinds of animals—rabbits, deer, and elephants—and came up with the metaphor “Most startups should be deer hunters.” For early-stage companies, he said to focus on the deer (good-sized deals) and avoid the rabbits (too small) and the elephants (the largest companies and deals, which are difficult to sell to and service, very demanding, and hard to make successful).
Mark wrote, “It's tempting on many levels to be an elephant hunter. If you manage to kill an elephant, it'll have so much meat it will feed you for a long time. But elephants are hard to catch, and they take whole teams of people to bring down. They take special tools. If you're not successful you may starve. And if you do catch them, it could be even worse. Avoid elephants in your early stages.”
David tackled Goliath, but your life is not a myth. Be smart about the largest deals and companies that you can:
- Realistically close
- Realistically help succeed in a big way
- And that won't kill you with new product requirements or service level expectations that take your business off course
When You Can't Turn Small Deals into Big Ones
If you're doing lots of small deals with big companies but nothing's turning into bigger opportunities, something's off. It could be that you're not selling high enough; the product isn't a need for your customers or explained the right way to them, or perhaps you're just too impatient and the cake is still baking.
Figuring out how to improve this can be as simple as getting salespeople around a table to talk about what has and hasn't worked in turning small deals into bigger ones, then coming up with a new plan. For example, you might be rushing to pilot/trial too fast with bigger companies; it might be better to slow down and get more executives to buy in before kicking off a trial or paid pilot. Or, you might be assuming that the small deals at big companies matter. If someone at IBM buys a license or five of your products, it's unlikely their VP knows or even cares.
You can't assume that just because people are using your stuff in one part of a company that other people will automatically find out about it. Letting things bubble up on their own can take a long time—or not happen at all. Don't be afraid to take things into your own hands, systematically and explicitly asking for referrals, and when referrals don't work, outbound prospecting directly to senior executives at other divisions. There's a difference between being patient and being passive.
There's a difference between being patient and being passive.
Ignore Our Advice
If there's some problem you're seeing in going for bigger deals, then don't be afraid to ignore anything or everything we've said here, or in this whole book. Don't do something just because we said so, or an investor or some bigwig like Marc Benioff or your brother Bob said so. What Zuck does only works for Zuck. Always think for yourself, taking ideas and adapting them to your specific situation. Hey, if you're selling small deals as transactions and it's going well, keep at it! Or perhaps all you have experience in is small deals or more consumer-type customers. Use your strengths: Do more of what is already working.
It's a lot easier to triple down on something that's already working than to get it working in the first place.
If You Have Customers of All Sizes
One time, I talked to a great entrepreneur/CEO, who at the time was doing a few million in ARR and growing quickly. His make-up of customers was split roughly three ways:
- Big customers (Fortune 500/Global 2000 types)—not many, but each paying a lot
- Small and medium-sized businesses, each paying four or five figures a year
- A large group of very small businesses paying very little individually, but a material amount as a group
Figure 16.1 How much of your revenue comes from which different customer segments?
He asked me where I thought he should place his bets. On one hand, their largest customers were very important and were creating six-figure deals. On the other hand, they didn't represent the majority of revenue and were a ton of work.
He showed me his customer list, ranked by revenue. His largest customer, a Fortune 500 leader, was paying him $100,000 a year. I told him that I was pretty sure, given the importance of the problem he was solving and its impact across the enterprise, that this number-one customer could pay them at least $300,000 a year. The CEO turned to me and nodded his head. “Amazing! In fact, they told us the exact same thing the other day—that we were worth $300,000!”
Boom! That's me, Mr. Clairvoyant.
Actually, it wasn't very hard. Because what he had with his SaaS company is something you may have with yours, too: an application that can be used by businesses of every size. And if you do, you'll want to decide if you're selling a tool—or a solution.
It's not always obvious which way to go. And the 40/40/20 ratio you see in the chart above is surprisingly common. It's basically what we had at EchoSign. It's also basically what WebEx and Salesforce.com had, in the early years. It's what a lot of apps have that can be used by businesses of all sizes.
But once you are at even $1 million in ARR, you'll need to make a primary bet. Which segment do you put as your top priority in marketing? Which segment is the #1 orientation of your sales team?
If you have multiple segments with 10% or more revenue, you need to service them all in some fashion. Let them atrophy and you may regret it, if 12 or 24 or 30 months later, you're trying to find a layer where you can grow your business another 10%!
If you have multiple segments with 10% or more revenue, you need to service them all in some fashion. But one segment has to be number one.
But one segment has to be number one. And as you see this segmentation develop, you have to decide. Am I mainly DropBox, going for the mass market of smaller users to cover as much area as possible? Or mainly Box, going for revenue growth through bigger deals? Am I mainly like HubSpot (medium), or MailChimp (small), or am I Marketo (Big)? Maybe you could go any way at this time. At the end of the day, I think there are two main considerations:
1. Understand that you can make 3 to 20x the revenue on a given enterprise customer with a solution sale versus a tool. Having been a VP at a Fortune 500 company, I can tell you that getting me as a corporate VP to pay $100,000 for a web tool was basically impossible. It gets sent to Procurement, and by the time you are done it's hard to get anyone to pay more than $20,000 for a tool. There's never any extra budget for a six-figure tool to make the troops happier (sadly). But a solution? Solve my problem around billing? Around Customer Success Around CPQ? Well … you can get $20 million if you go the whole distance to completely solve a core enterprise business problem. Twenty million is what Salesforce gets at many large customers.
My point is that (relatively speaking) it's “easy” to get a six-figure contract in larger companies if you solve a real, painful business process problem. Those problems are very expensive to solve at BigCos. If I'm a VP in the Fortune 500, it costs me $200,000–$500,000 in people just to get anything done, and it takes forever. If you solve a true problem for me, and I have a $20 million budget, I'll spend 1–2% of that to solve my problem. Easy. Another tool? That's not on the list. The budget here has to be a rounding error if it's just a tool. $5,000 ACV is fine, and $10,000–$15,000 is maybe fine, for a tool. Above that, don't bother me, I'm a Corporate VP … I've got real problems to solve.
2. You'll need a lot more people and processes (and features and software development) to provide a true solution. You can't sell, provision, implement, and support a solution the same way as a tool, even if it's basically the same business process you are addressing. You'll probably need solution architects. You may have to fly there and go onsite. You may need account managers and a dedicated professional services team and sophisticated Customer Success managers. You may need a more sophisticated approach to techops and netops, and disaster recovery and enterprise-grade security. You may need your own CIO to talk to their CIO. And you may need more, and more expensive, sales people. DropBox didn't need anyone in sales, really, until they hit $100 million in revenue; then they decided to add solution sales. But Box doubled down early on this—and while they got to $100 million a little more slowly, they got to their first millionth customer more quickly.
An example of the difference: EchoSign was a tool that let you sign a contract on the Internet, and it's also sold as a very sophisticated solution that completely automates the process of creating, signing, routing, and managing millions of contracts made up of thousands of dynamic documents, automating hundreds of business processes for an entire enterprise. The two products share a core set of functionalities, but a very different set of edge features and support. The first is worth about $15 a month. The latter may be worth $1 million a year.
If you have a broad mix of customers, I'm not telling you which way to go. But I can tell you what the math says: It's easier to get to $100 million in ARR and an IPO on the backs of enterprise customers who can pay $100,000-plus a shot. After all, you only need 1,000 of them then to get to $100 million in ARR. To get to the six- and seven-figure price points, you need to sell a solution to a big problem, not just a tool.
It's easier to get to $100 million in ARR and an IPO on the backs of enterprise customers who can pay $100,000-plus a shot.
Don't fear the solution. Don't fear the Professional Services team, or the solution architect, or the sales engineer. Deep down, many of us would prefer to sit at our desks or in front of our iPads and watch the customers roll in with no human interaction. If you can get 1,000,000 paying customers that way, that's probably the way to go.
But whatever you do, don't do all the expensive work to provide a solution and then get stuck at a low tool price point; that's the kiss of death.