Pricing & Revenue

A Solution Sale Can Capture 3-20x the Revenues of A Tool Sale. With Almost the Exact Same Core Product.'

Jason Lemkin

Recently, I caught up with two great entrepreneurs/CEOs, both doing a few million in ARR and growing quickly.  Doing well.

Both had a roughly similar make-up of customers, split between:

  • 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; and then
  • A large group of very small businesses paying very little individually, but a material amount as a group.

More or less like this:

Screen Shot 2014-01-29 at 8.57.34 AM

Both asked me where they should place their bets.  On the one hand, their largest customers were very important and creating six-figure deals.  On the other hand, they weren’t the majority of revenue and were a ton of work.

The first showed me his customer list, ranked by revenue.   His largest customer, a Fortune 500 leader, was paying him $100,000 a year.  I told the CEO I was pretty sure, given the importance of the problem he was solving, and its impact across the enterprise, that this #1 customer could pay them at least $300,000 a year.  It’s a heckuva solution.

The CEO turned to me and nodded his head.  “Amazing!  In fact,” he said, “they told us just the exact same thing the other day.  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 too with yours.  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 above is surprisingly common.  It’s basically what we had.  It’s also basically what WebEx had, back in the day.  It’s what a lot of apps have that can be used by businesses of all sizes.

But once you are at even $1m 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?

Of course, 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 12-24-30 months later you’re trying to find a layer to grow your business another 10%! 😉  More on that here.

But one segment has to be #1.  And so as you see this segmentation develop, you have to decide.  Am I mainly DropBox, or mainly Box?  At least for now.  Am I mainly like Hubspot, or Mailchimp, or am I Marketo?   Because maybe you could go any way at this time.

At the end of the day, I think there are two main considerations:

  • Understand that you can make 3-20x the revenues on a given enterprise customer with a solution sale vs. a tool.  Having been a VP at a Fortune 500 company, I can tell you that getting me as a corporate VP to pay $100k 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 $20k for a tool.  And 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 $20,000,000  if you truly solve a core enterprise business problem.  $20 million is what Salesforce gets at many large customers.  My point is, it’s “easy” (relatively speaking) to get a six-figure contract in larger companies if you solve a real, painful business process problem.   Because those problems are very expensive to solve at BigCos.  If I’m a VP in the Fortune 500, it costs me $200k-$500k in people costs just to get anything done, and it takes forever.  If you solve a true problem for me, and I have a $20m budget … I’ll spend 1-2% of that to solve my problem.  Easy.  But again, ask me to buy another tool?  That’s not on the list.  So the budget here has to be a rounding error if it’s just a tool.  $5k ACV is fine.  $10-15k maybe.  For a tool. Above that, don’t bother me, I’m a Corporate VP … I’ve got real problems to solve.
  • But obviously, you’ll probably 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 on-site.  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 DR, 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 $100m in revenue (then, they decided to add solution sales ;).  But Box doubled down here early — and while they got to $100m a little more slowly, they got to their first $1m customer more quickly.

An example of the difference, for us:  EchoSign’s both a tool that lets 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.  Same core set of functionality, but a very different set of edge features and support.  The first is worth about $15 a month.  The latter may be worth $1,000,000 a year.

So I’m not telling you which way to go, if you have a pan-enterprise mix of customers.

But what I can tell you is the math says — it’s easier to get to $100m in ARR and an IPO on the backs of enterprise customers who can pay $100k+ a shot.  You only need 1,000 of them then to get to $100m in ARR, after all.  And to get to the six and seven figure price points, you need to sell a solution to a big problem, not just a tool.

In any event, at least … Don’t Fear the Solution.  Don’t Fear The ProServ Team, or the Solution Architect, or the Sales Engineer.  Look, deep down, most of us would prefer to sit at our desks or in front of our iPads and just watch the customers come in with no human interaction required.  And 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 work to provide a solution — and just get stuck at a tool price point.  That’s the kiss of death.

Published on January 29, 2014
  • Spot on as usual.
    Additionally the bigger customers pay their bills on time, genuinely respect/value your team and will likely be in business in 24+ months. SMB/Very Small business segments are more volatile by nature so no matter how amazing your product + customer success are, there will be a material amount of “unavoidable churn”. Not sure if you experienced this at Echosign, but it ceases to amaze me that the smallest paying or freemium customers have an inversely proportional voice taking up customer success cycles. They’ll happily pay you $0 yet be incredibly demanding. Professional customers just treat you so much better. You may even get invited to their holiday party. (ok, not that you’d actually want to go…. but it’s the thought that counts!)

    • Agreed 100%. Having said all that, I’ve learned that from a longer-term perspective the benefits of enterprise are sort of matched by the benefits of selling to VSB/SMB. For example, in enterprise, they pay upfront with big checks. That sounds great. But, if the sales cycle is 6 months … the cash effect doesn’t really matter as compared to a small business that pays monthly, but immediately (i.e., 1 week sales cycle). Yes, enterprise churn is much lower and often negative on a net basis. But if your SMB business is growing 150% a year net of churn — does it really matter if the churn is 2.5% a month?

      I guess my real learning is what really matters is putting your #1 efforts into your #1 largest market segment. For most $$ billion+ SaaS market-value companies, that will be on the backs of larger customers, because of the math of 1,000 customers x $100,000 a year is more achievable than 1,000,0000 customers x $10 a year.

  • Great topic.
    And there is no correct answer, in fact.
    If you focus on solution and big companies, you’ll need a very expensive and “inflated” company. Therefore, you’ll have lots of new problems to deal with. Big money brings big and unexpected problems. Dealing with teams and peoples is one of them, probably the hardest part. Of course, there’s no big prize with no pain.
    In the other extreme, putting all your bets on a tool that, in its best, won’t require a sales team and very specialized people, you can have an extremely profitable, flexible and agile company. And it’s also a good bet. In my first company, me and my ex-partners made this choice in the past and there was no regret.
    I believe that’s a matter of vision, of what you really want to do.
    What is certain is that you do have to choose a segment, or you won’t excel on any of them, right?

  • You mention “Same core set of functionality, but a very different set of edge features and support.”…can you clarify what the enterprise solution had that the web one didn’t? Thanks.

    • A long list. Enterprise-integrations (SAP, SFDC, Oracle, etc. etc.). 1000s of dynamic contracting workflows created on the fly. Integration with whatever document flows the enterprise is already using. Etc. etc.

  • Very interesting insights on market focus. With respect to the WebEx reference, I was there very, very early on and at the outset the focus was largely SMB software companies who saw our flagship product, Meeting Center, as a tool to demo their software over the internet. Only later did customers appreciate Meeting Center as a true solution. Second tier growth came through the telco channel. Only later did the enterprise come into play in a big way, first as departmental sales which grew into enterprise wide deployments.

    • Yeah. Growing from SMBs into the Enterprise over time is a pretty common track for services that can sell to companies of all sizes.

  • PMW

    Hi Jason- Great topic. How would you recommend escalating the conversation into a solution based one? We end up doing a bit of pro-serv in every deal and I’m not against it for now because we are growing our ecosystem of 3rd party integrations… but we are stuck at tool pricing (10-20k ARR – Lower MidMarket Customers). Any tips or ideas?

    • Well, you have to just try. Sell it as a Solution for XXXX — as Double Your Highest Price Point. The most important thing may be who you sell to. You may need to sell to someone one level up in the org, or to the CIO’s office, etc. The higher you go, the more you package it as a solution to a real problem — the more you can easily double the price to start.

  • Manoj

    Very interesting and accurate post. This is something we have experienced ourselves.
    We sold seats for our “tool” for $x until we got a grasp of how to play this game and then started selling solutions to companies for $10-15x. And to our own surprise customers get a better ROI when we sell them a solution because we solved their “problem”. And all the investment in Business Consultants, Prof Services etc were so huge but from year 2 we have a happy high paying customer.

    Thanks for sharing

  • How did you go about charging for solutions in your contracts? Did you bundle it in the subscription price or charged separately as pro services?

    • For us, always a bundle. But others charge sep. for services. As long as the non-recurring part of your business in < 20% of your revenues, it doesn't really matter.

  • Pingback: The Best of SaaStr: Our Top 100 Posts, Organized by Topic (Sales, Marketing, Customer Success, etc.) | saastr()

  • Pingback: Aaron Levie of Box: “If We Just Sold to Silos-in-the-Enterprise, We’d Only Be a $25,000,000 Business” | SaaStr()

  • Pingback: Aaron Levie of Box: “If We Just Sold to Silos-in-the-Enterprise, We’d Only Be a $25,000,000 Business” - CloudAve()

  • Great post Jason. Considering that enterprise sales requires connections at the top, can have long sales cycles and will need teams to service them would you recommend targeting enterprise customers from get-go for any startup that’s just about to launch ? Can you give me some examples of startups that have gone with the enterprise sales models from day one ? Thanks.

  • Hang Abarca

    Excellent article – Apropos , if anybody requires to merge PDF files , my employees came upon text here

Share This