Yo market so ugly… (Evaluating markets from a b2b sales perspective)

May 19, 2011 at 7:55 pm Leave a comment

yeah, yeah I know that sounds like the beginning of some bad joke but evaluating a market is no joking matter for startups.

Evaluating a market from the Sales perspective is the most important because it is Sales turns the hypothesis that startups call “the market” into the reality of cold, hard cash.  This discussion is about products for businesses, not for individual consumers.

What makes a market attractive from a b2b sales perspective?  Here is my list of factors:

  1. Number of customers and Deal size
  2. Problem ownership
  3. Buyer addressability
  4. Demand driver
  5. Competition

Number of customers and Deal size

The typical Billion dollar market that VCs expect you to show in your business plan can be made up of any combination of number of customers (N) and price points (P) as long as (N x P) = $1,000,000,000.  My favorite combination is 10,000 potential customers each able to spend $100,000.  Consider the alternatives – if the entire market was comprised of 100 customers each willing to spend $10 million on your solution, not only would you have a really hard time getting those sales as a startup, but you would have terrible concentration risk.  On the other hand, if you had 10 million customers each willing to spend on average only $100, you would have a difficult time breaking even on sales.  The cost of direct sales, the sales model that most b2b startups have to initially adopt,  far exceeds $100 per customer-transaction.  If you want to know why, read my post “Did you make money on this sale“.  A good deal size for b2b direct sales is $100,000 — at this price point, you can afford to hire excellent sales people, pay them well and still make a handsome margin.

Having a lot of customers means you can qualify thoughtfully and spend your precious time on those that acknowledge they have the pain you alleviate, the money to buy your “medicine” and are empowered, indeed eager to take action.  The loss or disqualification of a single prospect does not feel catastrophic to your fledgling startup, which allows you to preserve your margins, and your sanity!  It also means you have the ability to support multiple sales people as you start to scale up.

Problem ownership

When the problem a startup solves is owned by a single department at a company sales are faster and less complex.  Whether it is Manufacturing (yes, they still do that in America), Sales, Marketing, R&D, Finance, HR or Legal, if they don’t have to consult and get buy-in from other departments,  it is much easier to understand the buying process and the decisions are usually made faster.

Faster decisions and easier-to-understand buying processes lead to quicker sales and lower sales cost, both of which can make a life-or-death difference to a startup.

Buyer addressability

When a startup can say that their target buyers are CFOs at all US public companies over 500 million in sales, its music to investor ears.  Why?  It’s because they can make a list of all these companies and even better, they can get the names of the current CFOs from each company’s most-recent 10-Q filings with the Securities and Exchange Commission.  That’s what I mean by addressable buyers — tell me the market definition and I can have a list with names and addresses ready in a few hours.

Next best is having a specific and common title at a list of companies.  If we have to hunt for “who is responsible for asbestos contamination, should you have any…” we are in deep doo-doo.  Even worse is if we cannot even make a list of specific companies to call.

Demand driver

If your target companies have to take action by a particular deadline, in response to an external demand that makes the market more attractive for a startup.  In 2002 when the Sarbanes-Oxley act was passed, all US public companies had specific timetables by which they had to comply with section 302 and then 404.  This created opportunities for the audit and accounting firms and also for numerous IT startups.  New regulations create disruptions that are perfect for swift entrepreneurial responses.   When the media started talking about the devastating effect Amazon.com would have on traditional retailers, many moved with unusual speed and made large investments in unproven technology from startups in an attempt to compete.  More recently news of security and privacy breaches on transactional websites have created a window of opportunity for startups to get their first sale.

Internal demand drivers such as cost reduction or revenue enhancement are good but external drivers like regulation, disruptive competition and news of catastrophes, that companies believe could happen to them, are priceless.

Competition

Most VCs will tell you that if you don’t have competitors, you don’t have a market.  That’s probably true but from a sales perspective if you don’t have any well-known competitors its hard to explain what you do.  The ideal situation is to be able to say “We are just like General Arrogance, except better, faster, cheaper and more friendly!”.  It really helps if your buyers know but dislike a vendor (your competitor) in your market.  It also helps if a competitor is well-known but not well entrenched with the buyers, since the cost of switching to a new solution vendor, particularly if they are a startup, are considerable.

Conversely, a market with a lot of entrenched competitors who are well liked by their customers is not a good choice for a startup.

What do you look for when you are evaluating markets for startup companies?

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Entry filed under: new venture, Sales Skills, startup.

Did you make money on this sale? The Annual Sales Meeting

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