Early stage B2B SaaS companies, and tech companies more broadly speaking, are typically very focused on adding new accounts, growing existing accounts (up-sell and cross-sell) and serving their account base as best they can (customer success). These activities drive revenue growth, which in turn drives valuation, market credibility, ability to hire talent and a whole host of other important things.
While this focus is certainly well placed, in the process of focusing on revenue generating activities, many B2B SaaS companies forget to periodically assess their accounts from a profitability perspective and ensure that their sales coverage models are appropriately positioned given the varying profitability of the underlying accounts being served. The result is that many of these B2B companies end up relying too heavily on large direct sales forces when:
- The profitability of the underlying customer accounts doesn’t justify the use of direct sales reps in all situations
- There are often lower cost to serve models that are not only cheaper but also more effective with many types of customers.
As such, if you rely heavily on a large direct sales team, it can often be helpful to do a quick coverage alignment exercise to determine whether it is worth re-assessing your account coverage model. While this is primarily a cost-saving activity (e.g. moving some accounts from a higher cost direct model to a lower cost indirect model) there can many times also be revenue-generating opportunities as well because many customers actually prefer non-direct sales channels.
The first step to reassessing your account coverage model is to plot out the full distribution of all your customer accounts from a gross profit (not revenue) perspective. It is important to look at profitability and not revenue here as revenue alone will not help identify accounts that could be moved to different coverage models. Breaking out the distribution into deciles is often helpful in terms of bucketing accounts into different categories. Many B2B tech companies have a distribution that looks something like this:
As seen in the chart above, a minority of customer accounts are driving the vast majority of the gross profit. In this example, 30% of accounts are driving ~90% of the total GP. In most cases, it makes sense to continue to serve these high-value customers through a direct model. Losing these customers or serving them in a different way could be devastating.
That being said, there is also a long tail of low or even unprofitable accounts. For the most unprofitable accounts (e.g. very negative accounts), in some cases it may be better to simply stop serving these customers altogether because you are losing money on each one with no way to profitably serve the account.
For the “long tail” of customer accounts that are low profit or even slightly negative, this is where it is worth re-assessing your coverage model and thinking through other lower cost to serve options with the end goal of improving GP. There are at least 3 viable coverage options that could be used to improve the profitability of these accounts (and maybe even grow them).
(1) Inside sales: Inside sales reps come with less of the overhead and expenses that direct sales rep comes with. They have much lower (if any) travel, lodging and entertainments costs. Inside sales reps also tend to be cheaper and can have more flexible roles (i.e. as hunters, farmers, sales support, customer care, etc.)
(2) Channel: Indirect reps or channel partners can also be used to lower the cost to serve and improve account profitability. This go-to-market strategy can be more appealing to customers who are used to making purchases from a trusted channel partner. In addition to saving money on expensive direct sales reps, many of the same levers used to compensate direct sales reps (tiered commissions, accelerated payout above 100% quota attainment, etc.) can be used with indirect sales reps. If managed correctly, these compensation levers combined with the right channel partner could actually drive further top-line growth.
(3) Off-shoring sales support: Reducing the cost of sales support is another lever lowering the cost to serve. Sales support (e.g. admin functions, sales operations, product support, etc.) can often be handled in near-shore or far shore locations via virtual support at a fraction of the cost of on-shore resources. While this approach should be balanced with a need to serve customers well, many sales support activities (including some that are customer facing) can be handled in lower cost locations.