A colleague recently told me of his plans to dominate his particular niche. The competitors in his space have deep pockets, massive ad budgets, and are well-connected in the space. These competitors have a clearly inferior product, though it can be argued that nobody exactly smells like roses in this niche. So “Paul”, we’ll call him, felt that having a better product that was priced competitively, could win in the market. I’m not revealing who “Paul” is, since it’s the concept that’s important, not the particular individual. Here is why that strategy alone doesn’t work. May it serve as a lesson to any other budding entrepreneur who wants to go after Fortune 500 clients.
The graveyard of failed startups is littered with the bodies of companies that have gone after the Microsofts, Cokes, and Proctor and Gambles of the world. Why not? The reasoning is that just one Coke as a client can be worth 1,000 little clients, and is perhaps even enough to sustain your venture all by itself. Unfortunately, when you have one big customer that accounts for most of your earnings, they can also jerk you around; more on the “Wal-Mart” problem later.
Some people call this the problem of the elephants, deer, and rabbits. It’s sexy to go elephant hunting, but the trouble is that it takes a team to kill the elephant. That team may have to wait for months on-end before getting anything; often starving in the process. It takes sophisticated tools and plenty of unpaid labor to get an initial meeting, much less deal with all the various levels of decision makers needed to get your first dollar.
Rabbits are small, plentiful, and easy to catch. These are the small businesses that have $10 a month for your software, but can be such a pain to service that you get a case of “rabbit starvation”. Yes, it’s true; if you live in the woods and subside only on rabbit meat you will starve, since wild rabbit meat is so lean that it takes more energy to process than it’s worth.
So in true Goldilocks fashion, the rabbits are too small and the elephants are too big. And thus, startup advisors say, you should chase deer—medium sized, not too hard to catch, and enough meat to make it worthwhile. Trying to serve the middle, however, is like trying to be everything to everyone. With no focus in the marketplace, you are unable to differentiate and unable to dominate a niche.
Back to “Paul” again; he has had minor success selling to elephants. He is personally well networked, and one of the best salespeople I’ve ever met. But he is just one guy and there is only so many of him that can perform magic. It’s not scalable. Further, the $10,000 proof-of-concept deals don’t seem to materialize into $100,000 deals, despite what the Excel spreadsheets to the board might represent.
He may have spent (gambled) $50,000 in energy to get the $10,000 deal. And the big brands that he’s dealing with know this full-well, and are happy to take advantage of the discounts their name can leverage. It’s like the prom queen that can be mean to the adolescent boys; teasing each of them into an endless stream of favors. And it is here that startups die.
In engineering projects, we know that you have to multiply the estimates by a factor of 3. If they say it will take 5 weeks, then you can assume 15 weeks is a more realistic estimate. Same is true of sales. That deal that is 60% likely to close is actually 20% likely to close. And instead of 2 weeks, it will be 2 months. You might be ready to go, but the main client contact may be slow to respond to email, the accounting people have some arduous PO process, or some new person wants to evaluate your software—starting the clock over.
Meanwhile, you’re burning cash. It’s not like you can put payroll or your rent on hold. What you’ve expended so far is a sunken cost, so you just keep going like the gambler who bets double or nothing. Even if you get the deal, you might not be paid until you complete the work, plus net 60. So if the project takes 90 days to complete and you’re paid 60 days after completion, you have to float 150 days of cash. If the pre-sales process took 90 days, you’re now looking at 240 days; not an uncommon cycle to close a big deal.
In those 240 days, anything can happen. Facebook or Google comes out with a product or feature set that eliminates the need for your product. The company you’re dealing with has a re-organization, so your internal champion isn’t the decision maker anymore. Maybe you lost a key engineer—hey; lots of places are notorious for folks who are disloyal, jumping to whatever the sexy thing of the moment is. Your board or investor begins to pressure you, forcing you to spend more time on convincing them that you’re “so close” to hitting it big, while actually taking your focus away from execution.
Napoleon had his Waterloo because he overextended his supply chain. In other words; the clock ran out on him. If you’re going after the big boys, it’s easy to underestimate what it takes to win. Mind you, self-service software is a different matter—we’re talking about selling deals to household brands that are used to dealing with big agencies who will roll out the red carpet with not a penny of cost on their side for months.
So here are some key insights to help you avoid a prolonged death—to have a decent shot at success versus running out of gas.
Law #1: Enterprise software is not bought, it is sold. Companies don’t just walk up to you and say they want to order the #2 meal, supersized. Expressing interest after reading about you on TechCrunch is a long way from getting your first penny. Enterprise software is sold via a network of experienced sales reps that have inside connections at the client company. That rep may have been an agency player with a big black book or someone who was internal until recently. If you don’t have teams of folks who can navigate these landmines, you’ll be constantly scratching your head as to why you got so close, but some inferior vendor won the day. You’re column fodder, buddy—the client was happy to waste your time to get you to fly in and pitch, just so they can say they talked to 3 other people before selecting the vendor they had in mind all along. Moral of the story– don’t enter a battle that you haven’t already determined you’ve won via inside connections. In other words: never go into an RFP situation blind.
Law #2: Ask for a token payment. Sure, you might be dealing with someone from General Motors. But does that person have power to sign a check? We no longer do custom work for free or do a ton of free consulting. If they want a proof of concept, we charge a nominal fee. Even if it’s only asking for $1,000, the prospect’s reaction to this will be quite telling if they are serious. Case in point—one of the largest newspapers in the world wanted our help with Facebook marketing. They wanted every PowerPoint presentation we have ever done, some one-on-one meetings on-site, and some technical help to troubleshoot. We were flattered. But when we popped the question, they balked. I knew this person’s boss, who told me that this person was preparing a strategy to present as their own. This person was just swapping our name for his name and taking credit with no intention of engaging with us. It happens all the time. Watch for it now and you’ll see it often. A payment of a few thousand dollars is a gesture of good faith between both parties. And if you are looking at doing a partnership with a larger, more established company, be wary of “partners” that want you to take all the risk.
Law #3: Decide if you are positioning yourself as cheaper or better. You can’t be both. Even if you are, the marketplace won’t believe you. Plus, you’d be leaving money on the table if you can justify yourself as being of higher quality. Would you trust a heart surgeon that is offering surgeries this week at 50% off?
Law #4: Triple your prices. You’ll lose some customers, as you should. But the ones you lose are likely the ones that are causing you the most headaches which, in turn, prevent you from focusing on the guys that are happy to pay you more. Spend time on the customers who love you. Don’t abide by the squeaky wheel management philosophy. If you have 30 clients paying you $5k a month each on average, wouldn’t it be so much easier to have just 10 clients paying you $15k a month?
Law #5: Ignore the armchair quarterbacks. Often the most well-meaning of family and friends will insist on giving you advice. While you trust their friendship, it doesn’t mean they can weigh-in on complex business decisions. How much of your precious time are you selling to folks who aren’t going to buy your software or can’t help you refine your offering? You’re talking to the wrong people, though many enjoy the entertainment of verbal jousting at your expense.
Law #6: Sell through a partner. If you can’t afford a sales force, leverage the client base on someone who already has a Fortune 500 client base. That’s what BlitzLocal does with Webtrends, who opens doors for us that we would never get on our own. In fact, we get to work with existing clients who have Webtrends as their analytics provider, which makes deals so much easier. It’s a win-win for everyone.
So that’s what it takes to go after the big boys. If you’re not extremely lucky, you need the cash, connections, and focus to weather lengthy sales cycles. So think twice if you want to get Nike as a client. They won’t even let you publicly mention them as a client if you do, so the referral value may be less than you anticipate. But when you can find those particular clients who are partners that care about your success, too—then you’ve found a competitive advantage in the marketplace.
If you found this helpful, let me know in the comments below. If you want to argue, feel free to voice your opinion, too. I can’t promise I’ll respond, but I will certainly try to respond to folks who ask for help. You can also reach me at facebook.com/dennisyu.
About the Author:
Dennis Yu is Chief Executive Officer of BlitzLocal, a Webtrends partner that builds social media dashboards to measure brand engagement and ROI, specializing in the intersection of Facebook and local advertising. BlitzLocal is a leader in social and local advertising and analytics, creating mass micro-targeted campaigns. Mr. Yu has been featured in National Public Radio, TechCrunch, Entrepreneur Magazine, CBS Evening News, and other venues. He is an internationally sought-after speaker and author on all things Facebook. BlitzLocal serves both national brands and local service businesses.