In the B2B startup world, there’s no shortage of metrics (usually in acronym form) to determine what the fledgling company should be spending, how fast, to achieve how much in sales, by when, etc. Probably the most highlighted are Cost of Customer Acquisition (CAC), the sales / marketing spend it takes to get paying customer aboard, and the Lifetime Value of a Customer (LTV / LTVC), or how much payback each one of those sign-ups will get you over its time as a customer. Churn matters a lot there, clearly, and so does your product’s Average Sales Price, or Average Contract Value (ASP / ACV). People try to weigh these two and assign multiples to how much bigger LTV should be than CAC, etc., but the idea is that generally, there needs to be a relationship here. E.g. if you need to fly a salesman across the country to wine and dine a client to win him or her over, I hope you’re charging a high enough price on your product to warrant it. If you get tons of sign-ups inbound off your website, then sure, a lighter price point might just work.
In the pre-revenue stages of a startup, though, these aren’t data points that can be modelled out definitively. Until some history of recurring revenue has been built up, these metrics, in my view, are useful more as frameworks for thinking about market entry strategy. As an entrepreneur, being able to define your method of market entry (and committing to the corresponding sales strategy) isn’t necessarily about running the numbers and saying “my LTVC = 4x CAC ergo I’m set,” it’s about knowing your product (how much and how long will it cost to build, market and sell this thing, really) and your audience (who will pay what amount and can I get them) in order to go about proving a fit between the two. An improper market entry strategy can doom even an idea whose time has come.
In my head if not aloud, I always come back to a super simplified framework when I first sit down to think about market entry. It has two basic models for success: the “Toyota” and the “Cadillac.” “Toyota” = high volume, low ASP, low CAC. “Cadillac” = lower volume, high ASP, higher CAC. There are endless nuances, exceptions and examples of companies that have blended the two, using multiple product lines, value-added services and customization (e.g. Atlassian, SalesForce, etc.). But successful, new-to-market product lines tend to align with one or the other early on due to the basic necessity of a linear relationship between CAC and ASP. Below I’ve outlined some generalized features that each model might have. Key to remember, however, is that alignment to one or another is determined by product (e.g. R&D required, technical complexity, integration / service support needed) and audience (e.g. line employee vs. CXO, receptiveness to specific founder, current vendor prices), not simply how an entrepreneur decides to attack.
1) “Toyota” ModelPrimary Audience: Employees / Developers, Group Heads, SMBsPricing: Tiered, sometimes freemium; higher-end usually caps out around a few thousand / month for all (or say 1/10 of that if by head); other models allow free usage until defined usage limits / typesSales Methodology: Low-touch, self-serve, transparent pricing, 1 or 6-mo. contracts w/out SLA, no or inside-only sales team, paid advertisingFactors For Success: excellent marketing strategy (educational content, email, word-of-mouth), consumer-friendly UI and purchase path (to obviate need for sales / service calls), if any sales reps are needed they handle many customers / on-boardings, freemium / free trials, little / no need for live support, inside sales machine and deep understanding of the startup’s funnel, customer evangelism (e.g. hacker community)Examples: Yammer, Hootsuite, Zendesk, Hubspot, Asana, Webtrends Social, Chart.io
2) “Cadillac” ModelPrimary Audience: CXO, VP of Focus AreaPricing: Billed as “custom” & not shared on website, but generally $100K to a few million / year for licensing / subscription + often (in the past at last) large 1-time implementation costs + support / service fees of 10-20% subscription cost (not including stand-alone outside services like consulting)
Sales Methodology: High-touch, longer sales cycles, needs-based negotiated pricing, longer contracts (usually with upfront payment)Factors For Success: Access to top CXOs (founder has prior high-lvl. roles in relevant enterprises), well-connected “pro” sales heads w/ commissions, usually a highly developed technical product, sophistication tech / customer support staff to provide integration + ongoing support to clients, savvy use of customer testimonials / case studies / references,Examples: PivotLink, Passkey, Innotas, CapitalIQ, NetSuite, Marin Software, OpenTextThese examples (for both Toyota and Cadillac) are by no means exhaustive. Sticking to the viewpoint of market entry, however, I simply haven’t seen exceptions to the rule: you can’t do both to begin with, and usually your product and audience will only allow for one right path. Few startups ever come in with a defined plan that immediately launches Toyota and Cadillac approaches, but many spend a ton of time speaking to market size and general pain points, leaving specifics around market entry strategy undefined.
General Motors great Alfred Sloan strove to develop and offer “a car for every purse and purpose.” Some great enterprise startups will go on to do just that in their space over time, and others will benefit from a more singular focus. But I’d make a bet that nailing initial market entry is a common thread to their early-stage success.
Bowery Capital shares key insights regarding funding and growth from our 2022 B2B Marketplaces research.