Lesson #143: Upselling, Cross-Selling and Freemium Techniques

I was recently working with a startup that was having trouble growing its sales.  Part of the problem was the quality of its sales team (the people), part of the problem was what they were selling (the products) and part of it was how they were selling (the techniques).  We are going to tackle this third piece: the importance of upselling and cross-selling techniques within your sales efforts.

First of all, what's the difference between upselling and cross-selling?  Upselling is selling the same individual more things to increase their average order size.  Think of McDonald's who tries to upsell you fries or a soda to go with your burger.  Or, Best Buy trying to upsell you the extended warranty plan to go with that new digital camera.  You are trying to get more dollars out of that one customer at that point of sale. 

If you are a software company, an upsell could be something like: instead of our Silver Edition with basic features for $1,000, have you considered our Gold Edition with additional desired features for $2,000.  Or, instead of buying 10 licenses at $1,000 each ($10,000 total), I can get you 20 licenses at $750 each ($15,000).  Or, instead of running reports once a year for $1,000, you can run reports four times a year for $2,000.  All designed to get the fish on the hook, to eat even more in an economically advantageous way to the customer.  Firstly, to help drive additional sales dollars.  But, most typically, to also help drive materially more gross margin dollars, with limited incremental costs associated with that higher sales spend.

Cross-selling is more  about the concept of "landing and expanding" within a particular company.  Oracle may first break into a company selling them their database products to the IT department.  But, they are quick to spread like a "virus" within the organization to also sell the finance department their financial software package and the marketing department their CRM package.  Cross-selling is typically selling to different people or different departments, within the same organization.  And, is much more longer term in nature, than upselling more items into an immediate transaction at hand.

Any good sales organization needs to have effective upselling and cross-selling techniques built into their go-to-market strategies and tactical "bag of tricks".  So, when you are building out your sales kits and training your sales teams, you can't be satified by only selling them one version of something, only once.  Build multiple versions of increasing quality, to upsell them up the product curve.  Get them addicted to the product, buying it for more people in a higher frequency.  And, use this first sale, as step one of a longer term plan to "land and expand" internally from there.

Based on the above, I am a big fan of the freemium models that many software-as-a-service startups are employing these days.  Freemium models start off with a basic product that a company gives away for free to rapidly get new users into the family.  Then, they add additional desired services into a deluxe product for a monthly fee, and even more highly desired features and functionality into a premium product, for an even higher monthly fee.  Hence the word "freemium", at the intersection of "free" and "premium" versions of your product.  At the end of the day, freemium models are just an elegantly pre-packaged upselling technique for software companies.  LinkedIn is one of many examples using this model, letting anyone sign up and use the product for free, but charging for access to premium reports.

What I love about the freemium model is that is removes any "friction" from the selling process.  Who isn't going to be willing to try something out for free??  But, if correctly implemented, companies will give their new customers a chance to taste the "Kool-Aid" version of the product, to hopefully get them addicted and wanting even more from the "Dom Perignon" version of the product.  A very clever sales and marketing tactic you should consider in your own businessess.

So, think through your own upselling and cross-selling opportunities, and watch your own sales and margin dollars start to accelerate.  It all starts at getting more muscle out of a single transaction from a single salesperson to a single customer, and then scaling up your success across additional salespeople, corporate clients and individual departmental contacts from there.

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Lesson #142: The Power of Content Marketing--A Red Rocket Case Study

For a lesson on content marketing, we are going to study the Red Rocket Blog, as a case study. 

Back on February 28, 2011, I wrote Lesson #1, my first blog post.  I didn't really know what to expect, as I had never been a blogger before, and had never even heard the term "content marketing".  All I knew was a wanted to prove to visitors of the brand new Red Rocket website, that I was smart on launching and funding startups and well versed on digital strategy and marketing.  Writing a few "how to" lessons seemed like a good idea to do that.

Over the last two years, I have written a total of 188 blog posts, including this Lesson #142.  It takes me between 30-60 minutes to write a post, depending on its complexity, and I write around one post per week.  So, about 140 hours of time has been invested to date, spread over two years.  And, each blog post is between five to 10 paragraphs in length.  I try to limit each post to around a 5 minute read with clear, easy-to-understand action items with real life datapoints for the readers to action upon in their own businesses.

In addition to writing content, I do my best to get the content discovered.  I try to select popular topics and use engaging titles, that are already getting a lot of monthly search traffic at Google, based on data from their keyword suggestion tool.  And, I distribute the content to my social network of followers (e.g., Twitter, LinkedIn, Google+), including posting each lesson to the relevant group discussions that I am a member of on LinkedIn (after joining 38 relevant groups on startups, digital marketing and venture capital).  I only post the tweets once, not multiple times, which would get me even more exposure for the content throughout the day.  In addition, I look for various third party content sites (e.g., Crains, Founder Institute, Alltop, Alley Watch, Technori) to help me get exposure for the content, by republishing portions of the articles from their sites, including links back to my site, which helps with promotion and backlinks for search engine support. 

The result of the above effort is a Red Rocket Blog that gets around 8,000 reads from around 3,000 unique visitors per month.  Starting with zero reads in February 2011, the blog has grown exponentially in each year, from 2,000 monthly reads one year later to 8,000 monthly reads today, just over two years later.  So, it took some time for the blog to attract an initial readership, and for search engine optimization benefits to kick in.  But, today, traffic is starting to accelerate, with the 8,000 monthly reads this month, up from 5,000 monthly reads in January!!

So, why does this all matter??  Here is what has happened to me and the Red Rocket consulting business during the same time: (i) it has help me build my personal brand; (ii) I get a lot of PR requests for interviews and free exposure in major media outlets (e.g., Entrepreneur, Wall Street Journal, Crains, Forbes); (iii) it has dramatically increased my social media following and Klout score; (iv) I received a few unexpected honors and awards (e.g., Crains Tech 50, Mentor of the Year finalist); (v) I was invited to speak or participate at several industry events (e.g., Techweek, VentureShot, eFactor, Lean Startup Circle, IRCE) and guest lecture to entrepreneurs at the local universities (e.g., Northwestern, U-Chicago, U-Illinois Chicago, Columbia College); (vi) Red Rocket has become the #1 or #2 link in Google for "startup consultant"; (vii) I get about 200 inbound consulting leads a year, with which to drive Red Rocket revenues; and (viii) Red Rocket's reach has expanded far beyond Chicago, with leads coming in nationwide, and even from overseas.

And, what did this cost me, other than a little bit of my time?  Nothing!  So, take lessons from here for your businesses, scaling up or down your traffic estimates based on your content type, quantity, frequency and distribution.  Embrace content marketing around your industry or business, and watch the new found leads roll in.  But, as you read, be patient; it does take a bit of time before it takes off.

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Lesson #141: How to Pitch Business Development Partners

All the way back in Lesson #6, we talked about How to Structure Strategic Partnerships.  This lesson is about how to pitch prospective business development partners, in a way you will capture their attention and increase your odds of closing the deal.

The other day, a startup was telling me about their recent pitch to a prospective biz dev partner, and her frustration they didn't want to move forward with discussions.  I was puzzled, since I saw a relatively good fit between her startup and the prospective partner.  So, I asked her, "what exactly did you pitch to the partner when you pitched the relationship."  She proceeded to tell me all about how she highlighted a summary of her company, all the great features and functionalities of her product, and how much a relationship with this partner would really help her business. 

I chuckled, and said, "I can see why the partner was not interested", which was met with a puzzled look on the entrepreneur's face.  I told her, nowhere in your pitch did you talk about the partner's needs and how this relationship would economically benefit them.  Instead of focusing on her cool website features, she should have been talking about how this new relationship can increase the partner's revenues by 25%.  Then you will have their attention.

So, lets look at a case study.  Let's say your startup makes restaurant recommendations and reservations, and you are pitching Ticketmaster, the event ticketing business.  Don't simply say, "we would like to add our restaurant finder on your website", where Ticketmaster may be skeptical of adding the service of an unproven startup to their website, especially with big entrenched players in the restaurant reservation space, like Open Table.  Instead, try the following.

Put on the hat of Ticketmaster, and say (i) we are completely unique in our space, as a next-generation service (e.g., you can't get these services anywhere else); (ii) we power these services for many other partners (e.g., you are not a guinea pig, call our other corporate references); (iii) we have thousands of happy consumers using the service which sing our praises (e.g., so your customers will also be well taken care of); and most importantly, (iv) here is a model I built on how we can credibly build a $100MM restaurant reservation business together, targeting Ticketmaster's event ticket purchases at the point of sale (e.g., opening up a material new upsell revenue stream and materially accelerating your stand-alone growth curve).  And, if the partnership is material enough, don't be afraid to offer them an equity stake in your business, so they can share in your upside success, which they are helping you build.

As another example, which you may recall, my first startup, iExplore, built its business on the coattails of a strategic relationship with National Geographic.  iExplore was a six month old company, that convinced a 112 year old media brand, to make a cash investment and help iExplore to promote and build an online adventure travel business.  That deal got cut directly with the CEO, who bought into the vision of National Geographic being in the "travel dream creation" business, through awe-inspiring images, and iExplore being in the "travel dream fulfillment" business, potentially opening up a large and material revenue stream for them, at exactly the same time they were looking to diversify their revenue streams as insurance against a declining print magazine industry.

So, help solve material problems and open up material revenue streams for your prospective business development partners, and that should materially increase your odds of getting a contract signed with these companies.  Your pitch should not be about you; it should be all about them, to get their attention.  And, the more significant it is to their business, the higher up their organization you should pitch it, to get the ears of the key decision makers.

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Lesson #140: How to Build a Bridge to a 10x Return for VC's

Most entrepreneurs simply approach venture capitalists asking for money "hat in hand", without educating the investor on how they will get a 10x return on their investment, which is what they need to see for your idea to break through the clutter of other startups that approach them every year.  This lesson is designed to help you build that bridge to a 10x return for your investors.

An example Series A venture financing may look something like this:  you raise $1MM in exchange for selling 20% of your company.  That implies a $4MM pre-money valuation, and a $5MM post-money valuation of your business.  So, the new investors will need to see a financial model on how you are going to build them $50MM of value (10x growth), over the next 3-5 years, with the monies you are raising.

Let's say you have $2MM in revenues today, implying your business was valued at 2x revenue on a pre-money valuation basis.  So, in order to build a $50MM valuation 3-5 years from now (to acheive the required 10x return), you need to show a financial growth plan that leads to $25MM in revenues by the end of that period (using that same 2x revenue multiple).  And, the plan needs to be credible, with enough sales and marketing support to rationally justify that size of a business can be built.  And, that size of business has to be reasonable in relation to the size of your industry (e.g., growing to 5% market share, is a lot more believable than growing to 75% market share). 

In addition, if additional fund raising will be required down the road in a Series B transaction, you need to take the resulting dilution into account for the Series A investor.  So, let's say that Series B transaction raises $5MM in exchange for selling another 20% of your business, implying a $20MM pre-money valuation and a $25MM post-money valuation.  So, your Series A investor got diluted down 20%, taking their original 20% stake, down to 16% stake.  So, make sure their 16% stake in the new model, can still keep their total returns in excess of 10x.

If you cannot acheive a model similar to the above for your business, you will have a very low odds of getting the attention of most typical venture capital firms.  So, before making those first calls to VC's looking for money, make sure you have fully thought through this investment from THEIR perspective (not yours), to see if you can reasonably acheive their 10x ROI goals, and communicate such credible plan to them, to get them excited about your business.  It also gives you credibility as an entrepreneur that understands the goals of the venture investors, of having thought through the model that far ahead.

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Lesson #139: How to Calculate Equity Split Between Founders in Startups

The other day, I got asked a question about how best to divide up the equity stake in a new startup, between the founders.  I told him that was a very big question, with lots of variables that go into to calculating a fair equity split.  So, it inspired me to write this post on the topic, to document my answer for all of you.

To me, the key variables that need to be considered here, include: (i) whose original business idea was it; (ii) who is funding the business; (iii) how important is this person's role within the company; and (iv) is this person taking a salary, or deferring compensation.  Let's tackle each of these points below.

In my opinion, there should be a big premium placed on being the originator of the idea.  With all other things equal, that means that a 50/50 split between two co-founders, could be 66/33 based on the premium for coming up with the original idea, and for starting the initial development efforts and sourcing the original team.

If people are funding the business, they should get a premium, because at the end of the day, cash funding founders are acting no different than a seed stage investor.  That means a 50/50 split, with all other things equal, would need to be adjusted for the cash investment.  So, let's say that one founder puts in $100,000 in seed capital, that could be worth 20% of a seed stage company's valuation.  So, a fair split, would be closer to 60/40 in favor of the funding founder, when diluted for the cash.  Calculated as follows:  original 50/50 diluted down 20% to 40/40 for the financing, and then the one founder gets that 20%.

Key executives should get a premium stake over non-key executives.  So, a CEO or CTO, would get a much higher stake than an office manager or a graphic designer, as an example.  So, in this case, I would take your total ownership and divide it up by employee tiers.  Maybe something like 10% each for five C-level executives; 2.5% each for  10 VP level executives and 1% each for 25 director/manager level staff (adding up to a total of 100%, with all other things being equal).  Understand that not all of this will be granted day one, with everyone having higher stakes in the short run, but you will have an equity cushion to play with as the employee base scales.

People that are not taking a salary, should also get a premium stake.  To me, that is no different than financing the business.  So, if someone is deferring a $100,000 per year salary, this is like a 20% stake in a brand new startup.  So, with all other things equal, a 50/50 split, would be closer to a 60/40 split, with the same calculation and logic we used in the cash investor example.

And, please notice, I kept saying "with all others things equal" in each paragraph.  You need to collectively take all four paragraphs into consideration, in calculating a fair equity split between the founders.  And, keep in mind, there may be additional considerations to take into account, like contributing patents, sourcing investors or other value to the startup.  So, make sure to take a wholistic view of what a founder is bringing to the table, across the board.

But, splitting up the pie is only half of the exercise.  This lesson should be read in conjunction with Lesson #124 on Vesting of Founder's Stock.  So, in the event the founders split ways, there are mechanisms in place to get any unearned equity back into the hands of the company.

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[NEWS] Nominations Now Open for 2013 Moxie Awards from Built In Chicago

It's that time of year again to nominate Chicago's best and brightest companies and individuals for a Moxie Award from Built In Chicago, for their acheivements in Chicago's digital startup scene. 

Last year, I had the honor of being nominated one of the five finalists for "Mentor of the Year" (thanks to all of your votes!!).  But, the award actually went to a well-deserving Troy Henikoff at TechStars Chicago.  So, if you think I have helped your business or Chicago's startup ecosystem via my efforts or the Red Rocket Blog, I would appreciate your support again this year.

Here is a link to place your vote:  http://moxieawards.builtinchicago.org/

You can vote multiple times (up to 1x a day), until the nomination period expires.  The winners will be announced at a big celebration gala at Park West on June 20, 2013.  So, mark your calendars, as it was a really great event last year.

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