I was looking at Workday financials the other day analyzing how economics works at scale for B2B SaaS products and one of the most astonishing discoveries for me was Workdays’ Customer Acquisition Cost (CAC) that apparently is north of $700,000 USD. Yes, make no mistake – the company spends on average more than half a million in sales and marketing dollars to get the next client on board. That is your entire seed round, huh?
And Workday is no outlier.
As the research shows, publicly traded SaaS-companies spend between 80 to 120% of revenue on sales and marketing before (and often after) going public, financed with venture capital or various forms debt financing. And moreover, the proportion of revenue (on a percentage basis) is essentially the same regardless of the size – so it’s not just the Workdays of the world that spend enormous amounts of money to attract new clients.
I talk and write a lot about the challenges of B2B sales overall and challenges specific to HR technology. One of my favorite rants is that the “build-it-and-they-will-come” philosophy doesn’t really work for enterprise sales (neither it does in the consumer world, but that is a different story).
If your strategy is to sell a fantastic kick-ass product to enterprise customer at a cost that is just a fraction of what Taleo or Workday charges for similar functionality – I am sorry to say, but is just not viable.
Anecdotal evidence suggests that lowering the price in B2B SaaS technology sales does not make your sales cycle any shorter or easier (more on B2B pricing in HR tech in my next article). Neither does a product that is 5x better than the competition nor a well recognised brand. Do you think IBM’s (SAP’s, Workdays’, etc.) sales cycles for their core products are shorter than your’s? Not so much. And at the same time they have significant brand equity and have been around the block forever (maybe even longer).
The thing is – you still need to go through the same procurement process, you still have to work with multiple decision makers, you still need to wine and dine with your clients if you are selling to an enterprise. Plus the budget cycles. Nobody escapes that.
So, my advice to HR technology start-ups? Be patient and prepare to match every dollar (or more) of revenue with a dollar of sales and marketing spend – and, plan your fundraising accordingly.