Adopt the ABA Revenue Model

Are you in the process of establishing or growing an early stage web business?  If so, I thoroughly recommend the ABA revenue model.

What is it, I hear you asking?  It’s the “Anything But Advertising” approach.

Over the last twenty-four months we have detected a shift in the type of technology start-up being established in London.  For whatever reason (and I suspect a $100bn initial public offering may have something to do with it), the proportion of B2B versus B2C businesses seems to have changed markedly.  A number of commentators have already noted the number of “Global Vice Presidents of Sales” floating around the Old Street roundabout – usually residing in start-ups with two other employees (one a President and the other an Executive Vice President).

I read a nice set of statistics recently on LinkedIn’s blog that demonstrates the dangers of assuming eyes plus hours equals cash – an assumption that I fear underpins a lot of these start up businesses:

  • LinkedIn users spend an average of 18 minutes a month on the site. Facebook users spend 6.4 hours a month.
  • LinkedIn gets $1.30 in revenue for every hour those users spend on site. Facebook: 6.2 cents.

Surprising, aren’t they?

How to monetize website based business is something we’ve debating at Rapid Innovation Group recently – and I was pleased to find earlier that we are not alone in this debate, with this Wharton professor expressing a similar ABA preference.  However, other than Professor Clemons no one seems to be addressing this issue.

So why wouldn’t you depend on advertising revenue as your main source of funds, other than on the basis that Facebook cannot make substantial amounts of money from it?  Firstly (and sadly), when things go bad in the economy advertising revenues tend to get hammered – and secondly, how many other businesses (starting with Google) are trying to make money from the same source?  Yes, the answer is lots.

I do not have a definitive answer for you, but what I will say is this: if you are creating or seeking to grow a business, you need to be looking for sustainable revenue streams.  If you are providing a product or service that is to be used day in, day out, you do not want to be dependent on the vagaries of wider economic performance for your end of quarter sales figures.  Identify another way of extracting value from your customers early on, have a rational reason for setting your pricing point, and then stick to your guns.

Examples you should be considering:

  • Do people go to your service on a regular basis?  Then use a subscription model
  • Do your customers want different amounts of something each time they visit?  Then use a transactional model
  • Do your customers need to understand your service before they can see value?  Then use a no-charge-but-I-need-your-credit-card-details-in-advance trial model

Whatever value your service or product provides, please do not kick off into the market on the basis that your customers might be interested in a General Motors Chevy Cruze or a package holiday to Spain as a result (unless you are selling cars or Spanish package holidays)!

Pricing models and points are difficult issues for early stage businesses to address – but they set the tone for the business over the coming decade, and demark your limits of growth to an extent – so make sure you get them right!

Insights from a complex negotiation

Most readers of this blog will be interested in getting to the point that a current client finds themselves in, so I thought I’d record the process we are working through to resolve it.

Picture this: you’ve found an enthusiastic sponsor, got them to buy into your proposition ….. you then find they have opened an opportunity bigger than you could have dreamed of (or given them credit for!).  The opportunity is business changing …. it smashes that sales target ….. the world is about to take a serious change for the better!

You’ve dealt with the sponsor and business user all the way through the sales process, everything makes sense …. then you hit (corporate) reality – an unhappy procurement function.  Why are they unhappy?  Your sponsor decided (almost certainly correctly) that if they were involved early on they’d kill the whole thing stone dead – and the business needs your software so they didn’t want it killed off early.

The call is set up, the agenda point is ominous – “commercial discussion”.  That’s where we find ourselves today.  Time for some scenario planning.

Position-based negotiation – a brief segue 

Just like in position-based warfare, you either win or die in your trench.   Positioned-based negotiation is the same – and thus to be avoided unless you have nowhere to run!

Back to the point

What will come up?  In reality there are actually very few things that procurement can say / do.  They either need to tick a due diligence box to say they checked it all out and understand it – or they are going to try and beat you down on price.

As I see it, there are only really three start points you should prepare for:

  1. The price is too much
  2. They don’t like the pricing structure
  3. Justify the whole piece

The price is too much

So let’s start with the first point – the price is too much.  The price is too much?  How is that possible, we spent all that time with the business users who hold the budget working through it and making it the right fit.  How can it suddenly be too much?

In my experience it can be too much because: a) procurement has a corporate target for reducing initially quoted prices e.g. everything down by 10%; b) the budget that the sponsor and business users identified got spent and they weren’t aware of it; or c) procurement isn’t particularly evolved in this corporate and is spectacularly unimaginative when it comes to negotiation!

So how to respond?  Remembering to avoid a position based approach (“it’s the best we can do”), ask a question: “why is it too much?  We have spent time with X and Y, who confirmed the budget was available, so you need to explain this to us”.  It’s a killer – now the procurement person has to explain their rationale for their statement – if they aren’t coming clean, try a couple of other questions: “do you have a corporate target? Has the budget been spent elsewhere?”  This puts you in the driving seat as you are now asking the questions.

We don’t like the pricing structure

This for me is a classic.  I have a tendency to specialise in subscription-based businesses – I like the model, as it lowers the cost for users to adopt and provides the business with on-going revenue to pay its employees and further develop the software.

However, subscription-based software isn’t old hat to everyone – in fact, some people still think that all software is sold on a license / maintenance basis.  This is not good, because you might have to explain the whole rationale of subscription based software to them, and then break the news that they won’t even own it – and some procurement departments hate not having something they can take away (even though in the long term they are totally powerless to develop it in house!)

There are several ways to address this:

  1. That’s our business model – take it or leave it (bad position-based start!)
  2. The pricing structure is like this because it reflects how we deliver the software – a lot of our costs are in on-going development for your benefit, as well as server space to deliver it across all those different geographies
  3. Give them a quick calculation of the license / maintenance cost – hey, if they want to buy it like that then why not!  So your £50k per annum software is now £127k (£115k+£12k) year one and then £12k for the following two years.  Obviously that’s good for my cash flow and bad for yours, Mr Procurement, plus we won’t be able to deliver you with any of the development benefits over the three years because we are going to have to create a separate instance of the software for you on another service, and once that’s in place we won’t be able to tinker with it in case something goes wrong and affects your business
  4. Ask them why they don’t like it – then knock off all the responses with the standard SaaS arguments – it won’t make them look good, so hopefully they will stop making stupid points fairly quickly!

Justify it…..all of it

This has to be the worst one …. not because you can’t do it, but because it takes so long to do.  You have confidence in your pricing, otherwise you would not have put it in front of them, and you’ve probably already been through this with the sponsors and business users – so it’s just tedious.

Do get some practice in beforehand though – time spent in preparation is time well spent.  In all likelihood the question that keeps coming up as you go through will be “why is that like that?  And why is that like that?”   As I said before, you have confidence in your pricing …… you are just going to have to spend a long time explaining it.  And there’s always the risk that either “that’s too much” or “I don’t like that” is going to come up – if so, I reference you back up to the previous two sections.

Final Thought

Generally you don’t get to a negotiation unless the customer wants to work with you.  Keep that in mind….and you’ll have a successful outcome – and lastly, the only business worth winning is profitable business!

Choose your customers

One of the topics I like to discuss with prospective RIG-ers at interview is what the first steps are that they would undertake to plan the demand generation (i.e. marketing) strategy for one of our typical earlier stage clients. I describe this ‘typical’ client as having the following characteristics:

  • A market ready B2B SaaS offering
  • One paying customer
  • A recent angel investment with the objective of driving sales and marketing

There are numerous mechanisms, processes, and strategies in planning the initial stages of an effective marketing effort for such a company. However, I try and guide the discussion to the central tenet of any successful plan – the fact that you need to begin by choosing your customer. This becomes remarkably obvious to the candidate when I tell them, but it is non-the-less a vital step in any marketing strategy.

The key of course, is how to invest limited resources to maximise chances of market traction. In order to do this, you want to sell your solution to an organisation which has:

  • A problem / opportunity which your product solves / enables them to exploit better or cheaper than alternatives
  • An awareness that this problem / opportunity exists
  • Available budget

Now you have chosen your customer, in which markets do you find them? What is the best way to reach them? How are you able to articulate your proposition in such a way that it is most compelling? How do you make it more compelling than going with a competitor, doing nothing at all or doing something in house? How should you price the solution and what is the anticipated return on investment? How do you navigate the complex sale?

Once you have found a way to do it, how you codify this process to drive both repeatability and visibility for the purposes of revenue predictability? What are the key hires and what can be done to ensure the optimal candidate is recruited and able to perform? When is more investment required? Would growth objectives be better met if partnerships were formed in certain areas? How are the best partners found and what management processes are needed to reduce the risks of failure?

These are all the challenges we not only advise our clients on, but actively execute for them, and they are all areas that I will cover in future posts.

At this stage in the interview, the candidates are always suitably fired up about our business!