Scaling First Revenue: Don’t Forget ARPU Expansion.

Most Enterprise markets are somewhat finite regarding the number of customers: F1000 by definition has exactly 1,000 companies (d’oh!).

Getting new customers is good. That usually comes in cycles:

  1. yay, the first customer!
  2. Oh no, who’s next?
  3. I think I figured it out….
  4. Darn copy-cats!

You will hit the point where competition isn’t sleeping anymore. More people start moving into your market. And your customer acquisition cost is getting higher and higher to maintain the same velocity per sales team. Oh yeah: you also hired more sales teams, which cost money, and you are frantically trying to replicate your sales motion and playbook.

If you have not focused on expanding your Average Revenue Per User (“ARPU”) yet, then that’s probably the point where you are quietly crying under your desk.

Instrument Action

Make sure your product has enough instrumentation to identify compelling events for up-selling or cross-selling.

  • What do your product guys or sales or marketing departments think are compelling events?
  • Which actions point to that?
  • Do you have a hypothesis?
  • Can you experiment accelerating that user experience towards the compelling event? Is it time-driven or usage-driven?
  • Are you automatically adding the potential as new leads to the pipeline, or do you need a special upselling team for existing customers?
  • How would you measure if you get better at up-selling and cross-selling — what does “better” mean?

Incentivize Incremental Sales

Sales organizations are coin-driven. If you don’t adjust the incentives to spur up-sell and cross-selling everyone will nod their heads, and nothing is going to happen. I’ve seen different models work for different people, depending on the CRO and VP Sales:

  • Treat incremental opportunities as new opportunities, but because salespeople know these deals close faster they automatically prioritize these deals.
  • Don’t cap incremental commissions.
  • Have a higher multiplier on incremental sales (versus a lower multiplier on initial sales — psychologically this is a reward-versus-punishment approach).
  • Have a dedicated up-selling and cross-selling team with separate incentives.
  • Reward faster sales cycles — which usually leads to smaller initial contracts. This only works if you have a separate incremental sales team as well.
  • Reward volume of logos — which usually leads to smaller and faster deals. This only works if you have a separate incremental sales team as well.

Pitfalls of Incremental Incentives

This could be its own book. Here are some things I’ve observed:

  • Your incentive plan becomes really complicated, sales understands how to game the plan, you make the plan even more complex to curb the gaming, and now either no one is motivated anymore, or you end up with the most absurd account structure.
  • You incentivize faster sales, which leads to less qualification, which leads to less incremental sales or higher churn down the road.
  • You make lots of smaller sales faster (good!) but you forgot that your product needs a critical mass to be useful or see the benefits of other paid features or products. You end up with less incremental sales.
  • Your incremental sales team is so hot that it sells packages and features that the customer is not using or doesn’t need. You end up with lots of churn.
  • In the middle of your incremental sales strategy, you start experimenting with bundles of features with discounts for more incremental sales. That increases velocity by 15% (good!), but at renewal time of your previous incremental customers you either don’t have a bundle that fits them, and you lose them; or they now pay less for a bundle even though they were totally fine paying the full price before (bad!). And just when you’re about to raise a new round your absolute renewal $$ flatline and your ARPU seems to compress.
  • Depending on your culture, you might need to push part of your initial sales compensation into the incremental sales. Initial sales might otherwise end up not qualifying customers for incremental sales potential (you end up with one-off accounts). Or you could create friction between sales teams (“We’re doing all the heavy lifting to close the first deal, and you just pick up the easy stuff and get the same reward — I wish I had your job!”)
  • You forgot to adjust your product’s instrumentation for incremental sales to a changed market environment or a changed product use case or customer journey.
  • You have great incremental sales from cross-selling other products. But your customer success team isn’t aware that the product mix for the customer changed.
  • You have great incremental sales with product uptake in other divisions of the same customer logo. But your customer success team or sales account management can’t handle the volume, or your incremental sales team is bitter to lose one of their easiest accounts to a named account manager.
  • You have great incremental sales with product uptake in other divisions of the same customer logo. But your product instrumentation for support or bug fixing cannot understand that this is the same account or infrastructure, and your fixes for parts of these accounts start playing ping-pong with each other or lead to other unwanted side effects.
  • Churn in one division after incremental sales could be an indicator for an enterprise-wide technology refresh or a change in vendor or product strategy. Your incremental sales teams don’t realize the change because of lack of instrumentation. Sales cycles seem to lengthen for no apparent reason. Incremental sales focuses on dead accounts. Coin-driven sales teams drop accounts too early instead of calling in the value/rescue sales team. Your incremental sales today might all churn away in the next cycle.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s