Once you develop the product, you have to be prepared to sell it.
When the founding team of a startup gets together to discuss the future of its venture, the discussion focuses on the technology. As it should. Offering a differentiated technology is the obvious prerequisite for launching a new company. Naturally, the bulk of expenses in the early phases of the company is allocated to engineering.
Soon, all the other departments of the company need to be addressed, as well. The product is ready and sales and marketing are needed to take the product to market. Administrative roles need to be filled to handle the growing operations.
Let’s spend a bit of time on the sales department, which is bound to grow into a large expense for a company that wants to increase revenue through multiple products in worldwide geographies. It is important to select a sales strategy, understand its components and budget for its implementation.
A look across mature technology companies indicates that there are several options for developing a sales channel that carry different cost structures. Understanding these options and making an educated choice when building a company is of paramount importance.
For example, a simple analysis consists of breaking down operating expenses (OpEx) of public technology companies between the components of R&D, sales and marketing (S&M), and general and administrative (G&A). Results indicate a wide range of percentages for these three key departments. At Synopsys, the EDA market leader, R&D expenses top 50% and S&M represents 33% of OpEx. In contrast, National Instruments’ ratios are significantly different with R&D at 30% and S&M reaching 59% of OpEx. Vastly different numbers for two companies that operate in fairly similar businesses offering design and test tools for chip development. Both are well-run, profitable market leaders.
These two companies were chosen because their cost structures are at the opposite edges of the range commonly found in technology companies. They indicate that companies can thrive with different approaches to running a sales channel. The data also demonstrates that S&M can exceed R&D in cost even for companies that continue to innovate on technology.
How does the founding team choose when launching a new company? The most obvious approach is to look at the closest competitors and partners to determine which sales strategy was most widely adopted. This could be the easiest path since customers will be used to the business model.
The founding team should note the sales strategy of companies in the relevant ecosystem to understand how they sell, and whether the channel is direct, reseller or OEM partnerships. Sometimes, it’s a combination to try to extend the reach of the company’s channel.
The next bit of research should be to identify where to sell. Not all geographies are equal when it comes to opportunities for new technology. And, of course, the pricing model needs to be examined. For software, subscription is replacing the purchase of perpetual licenses.
Moving on, discounts offered by competitors should be established. As a startup, the list price can be defended because the pressure to meet quarterly goals is reduced. Discounts are expected in the business world and may vary by region.
Many other factors must be considered, some not so obvious. If the startup is positioned for a quick exit through acquisition, perhaps it makes little sense to build a large direct channel. The acquirer most likely has a large sales channel and the startup’s channel will be redundant.
Innovating on the business model is always an option but a dangerous one. A technology startup already implies substantial product risk for the employees, investors and, most important, customers. Business model innovation usually results in longer negotiations with customers who need to familiarize themselves with the new price structure. This delays orders and lengthens the path to cash, a dangerous proposition for a startup. Doubling up on the risk through business model innovation might not be wise for early-stage startups.
For any startup, the focus is on technology in the early days. As soon as the technology is ready for commercial use, the sales strategy should be ready to be implemented with a range of options that require decisions critical to the company’s success.