understanding sales models

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*this chart is an oversimplification of how to go about seeking revenue, picking a go-to-market (sales model), and finding customers

this happens during the research and business model aspect of your business. dictate to the scale you want to grow this too , figure out what customers will find it most helpful, and start testing in sample sizes. more on this below 👇

Guide to Understanding the Chart

Your Prey

Flea/Mice/ Rabbits - Marketing

Deer - Inside Sales

Elephant - Field/Outbound Sales

How to figure out who to chase?

Where do you get the most of your leads from?

How much revenue exists from them?

How many people are included in the Decision to use what you offer?

Will they promote you?

So what?

you might very much be thinking, “okay”? the animals are metaphors for your business model/type. if you’re consumer - you’re probably going to be hunting for flies. lots of people who would find this helpful. if you’re

Hunting flies

In order to get to 10 million active users you need roughly 100 million people who download your app or use your website. This is of course a gross simplification, and the precise number depends on various factors like your conversion rate, how active your users are, churn, etc. But it doesn't change the take-away: To get to $100 million in ad revenues, you need dozens of millions of users. I know of only two ways to achieve that (plus one mega-outlier which breaks all rules, Google). The first one is to have a product that is inherently social and has a high viral coefficient (Instagram, Snapchat, WhatsApp). The second one is a ton of UGC (user-generated content), which leads to large amounts of SEO traffic and some level of virality. Good examples of this second option include Yelp or our portfolio company Brainly.

Hunting mice

To acquire one million consumers or prosumers who pay you roughly $100 per year, you need to get at least 10-20 million people to try your application. This is – again – a gross simplification, but I believe it's order-of-magnitude correct. To get to 10-20 million users you almost certainly need some level of virality, too – maybe not Snapchat-like virality, but some social sharing or "powered by"-virality. Great examples of this category include Evernote and MailChimp. If you're an eCommerce business you might be able to acquire one million customers using paid marketing, but it requires huge amounts of funding.

Hunting rabbits

Most SaaS companies that target small businesses charge something around $50-100 per month, so their ARPA per year is around $1k. To acquire 100,000 of these businesses you need something in the order of 0.5-2 million trial signups, depending on your conversion rate. Let's assume that your CLTV (customer lifetime value) is $2,700 (assuming an average customer lifetime of three years and a gross margin of 90%) and that you want your CLTV to be 4x your CACs (customer acquisition costs). In that case you can spend $675 to acquire a customer. If your signup-to-paying conversion rate is 10% that means you can spend $67.50 per signup (assuming a no-touch sales model where your CACs can go entirely into lead generation).

So how can you get one million signups for less than $70 each? Most SaaS products aren't inherently viral, there usually isn't enough inventory to make paid advertising work at scale, and cold calling usually doesn't work at this ARPA level. There's no silver bullet, but the closest thing to a silver bullet is inbound marketing – besides having a fantastic product with a very high NPS (net promoter score) and being obsessively focused on funnel optimization. I've written about this in more detail in my "DOs for SaaS startups" series: Create an awesome product, Make your website your best marketing person, Fill the funnel, Build a repeatable sales process. Another option is a an OEM strategy (i.e. getting your product distributed by big partners), which can work but comes with its own challenges.

Interestingly, hunting rabbits looks much less straightforward than hunting flies or hunting elephants. Why we have a strong focus on rabbit hunting SaaS companies nonetheless is something for another post.

Hunting deers

If you're a deer hunter and want to acquire 10,000 customers paying you $10k per year each, most of the rabbit hunting tactics still apply. An ARPA of $10k per year usually isn't enough to make traditional enterprise field sales work, and you likely still have to get 100,000 or more leads. The main difference is that when you're hunting deers you can use an inside sales force to close leads, potentially also to generate leads. It also means that you can pay VARs and channel partners an attractive commission, although I've rarely seen this work in SaaS.

SaaS companies sometimes start as rabbit hunters and expand into deer hunting over time. This can work very well and we're very excited about these types of businesses, but to successfully execute this strategy, SaaS founders with a product/tech/marketing DNA usually have to bring in an experienced VP of Sales who has built an inside sales organization before.

Hunting elephants

Like it or not, most of the biggest SaaS companies derive most of their revenues from selling expensive subscriptions to large enterprises. Workday, Veeva, SuccessFactors, Salesforce.com, you name it. Jason M. Lemkin, another friend and co-investor, once said (I'm quoting from memory) that if you have a good solution for a significant problem experienced by large enterprises, building a $100 million business is relatively straightforward. After all, you only need 1,000 customers, and the $100k you need from each of them is less than they spend on the salary of one executive. I think there's a lot of truth in that.

The other part of the truth, though, is that it may take you several years and millions of dollars to find out if you really are solving a problem (a.k.a. product/market fit), and once you're at that point, you still need tens of millions of dollars or more to finance the enterprise sales cycle. This does not at all mean that elephant hunting isn't attractive. It just requires very different skills, which usually means a founder team with enterprise sales DNA.

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