Optimizing the Cost of Sale: A Strategic Approach for SaaS Companies

Since the dawn of commerce, a fundamental principle has held true: the buyer ultimately bears the cost of sale. However, in the world of Software as a Service (SaaS), this principle faces a unique challenge.

In the early days of a SaaS company, the cost of sale often far exceeds the market value of the product itself. Imagine trying to sell a $1,000 software solution when your cost of acquiring each customer is $10,000. Clearly, passing this entire cost to the buyer is not feasible.

So how do SaaS companies manage this discrepancy? The answer lies in a two-pronged approach:

1. Venture Capital Subsidy: In the initial stages, many SaaS startups rely heavily on venture capital funding to absorb these high costs. This allows them to price their products competitively while still covering their operational expenses.

2. Strategic Cost Optimization: As the company grows, it becomes imperative to progressively reduce the cost of sale. This isn’t just about cutting expenses; it’s a strategic process that requires careful planning and execution.

The journey of optimizing the cost of sale is critical for SaaS companies transitioning from early-stage funding to sustainable growth. It involves several phases, each building upon the last, and the sequence of these optimizations is crucial for success. In this article, we’ll explore a three-phase approach to optimizing the cost of sale in SaaS companies.

The Three Phases of Optimization

For simplicity, I have categorized the optimization process into three distinct phases:

Phase 1: Reduce the Cost of Participation

At this stage, the focus is on lowering the initial costs involved in engaging potential customers. It is about getting the buyer to consider you as an option, meaning being selected in their shortlist. You might have an excellent solution, but if your product/brand is not coming in the buyer’s path, then you will get ignored. This requires designing your GTM motion to align with the buyer’s journey. See the diagram below for an illustration of the buyer’s journey

Examples of Phase One Optimization:

• Improving search engine optimization (SEO) for your brand

• Creating a presence on review sites like G2, Gartner, and Forrester

• Optimizing your presence on search forums such as Reddit and LinkedIn

• Enhancing visibility in YouTube libraries and similar platforms

• Writing thoughtful articles for publication on third-party sites, cross-referencing your product

• Developing a go-to-market motion that allows website visitors to request demos or meetings with your sales team

Phase 2: Reduce the Cost of Losing a Deal

Once participation costs are managed, the next step is to minimize the costs associated with deals that don’t close. This involves optimizing resources and processes to ensure that you are #1 in the buyer’s shortlist. Research shows that the win probability of the #1 vendor in the shortlist is 84%. Checkout the research here.

Examples of Phase Two Optimization:

• Optimizing the “book a meeting” experience to ensure simplicity and effectiveness

• Building competitive materials to position yourself as the top choice

• Creating listicles on your website comparing your product to competitors

• Encouraging fans and champions to provide positive reviews and testimonials

• Showcasing customer testimonials and ROI reports on your website

• Highlighting reasons why you should be the number one choice, even if some reviews, like Gartner’s, don’t list you as such

Phase 3: Reduce the Cost of Winning a Deal

Finally, the focus shifts to lowering the costs of closing deals. This is about refining and streamlining the final stages of the sales process to ensure that winning a deal is as cost-effective as possible.

Examples of Phase Three Optimization:

• Having BDR teams handle discovery to reduce the burden on your sales team

• Dividing the sales team based on deal sizes (e.g., mid-market vs. enterprise)

• Implementing a low-cost model for self-service customers with lower payment potential

• Building teams based on geographies to match the cost of the seller with the buying potential of the buyer

• Creating hands-on demo experiences to reduce the need for lengthy expert-led demonstrations

• Developing a POC environment that allows buyers to self-conduct proof of concepts

The Importance of Sequential Optimization

Following the correct order of optimization phases is crucial. Attempting to apply later-phase optimizations prematurely can lead to significant setbacks and wasted resources. Consider this example:

A new SaaS company invests $50,000 in advanced sales automation software (a Phase 3 optimization) before establishing market presence or lead generation processes. The result:

1. Few leads enter their pipeline due to lack of basic visibility (Phase 1 activities).

2. The expensive software sits largely idle.

3. Unqualified leads waste sales team’s time (missing Phase 2 optimizations).

4. After six months, $50,000 and countless hours yield little improvement in sales.

Had they followed the sequential approach:

1. They would first invest in SEO, content marketing, and review site presence (Phase 1).

2. Then develop lead qualification processes and competitive positioning (Phase 2).

3. Only then, with a steady flow of qualified leads, invest in sales automation (Phase 3).

Conclusion

Optimizing the cost of sale is a strategic process that requires careful planning and execution. By following a phased approach, SaaS companies can systematically reduce costs and improve their go-to-market strategies. This not only ensures financial sustainability but also enhances the overall efficiency and effectiveness of the sales process.

By implementing these phases step-by-step, you can ensure a more coherent and successful GTM strategy. Stay tuned for more detailed insights and examples in our next article.