Whenever I talk to companies about their go-to-market strategy, no matter how big they are, I find myself going back to the same question. I call it the $100-million-question. Here it is: When you eventually become a $100 million dollar company, what will your customer base look like? Will it be:
- 1 customer paying you $100 million dollars a year
- 10 customers paying you $10 million a year
- 100 customers paying you $1 million a year
- 1,000 customers paying you $100,000 a year
- 10,000 customers paying you $10,000 a year
- 100,000 customers paying you $1000 a year
- 1,000,000 customers paying you $100 a year
- 10,000,000 customers paying you $10 a year
- 100,000,000 customers paying you $1 a year
You get the idea. It’s really important that you place yourself somewhere on that list, and I encourage people to pick one, not cheat and find something in between. Whenever I ask this question, some great dialogue always ensues because the answer drives a whole bunch of downstream decisions, including what type of sales force or distribution model you should be building, how much you should be spending on marketing versus sales, and whether your value proposition justifies the price points you need to hit.
So far in my career I’ve had the opportunity to answer the $100 million question twice, with very different answers and different results. I was the eleventh hire at Salesforce.com, and went on to serve in a variety of roles there including Chief Strategy Officer and Chief Marketing Officer. When we hit $100 million at Salesforce, we were closest to 10,000 customers paying us $10,000 a year. Our average sale was about $15,000 a year. In contrast, Workday, another cloud-based enterprise software company, is much closer to the 100 customers paying a million dollars a year (I think the reality is closer to $600,000 or $700,000 a customer, but it is definitely at a different point in the spectrum than Salesforce).
When I started my own company, Zuora, I thought we’d be more like Salesforce in terms of deal size. So that’s how we initially built our business model. Turns out we were wrong. We're closest to the “1000 companies giving us $100,000 a year” point. We sell a financial platform that is mission-critical to companies with recurring revenue and subscription-based models. It's high-touch. Our customers expect to be on a first-name basis with our Customer Success Managers. They need us to integrate with lots of other in-house systems, and we have to be able to work with big professional service firms such as Accenture, many of which are using us to replace established ERP systems like Oracle and SAP.
Now, does this mean we only do 100k deals? Of course not, we do $20,000 deals, $30,000 deals and $40,000 deals, but we also have customers giving us $1M or more a year, so it averages out. Determining where you live on that list is really important. The B2C companies like Dropbox and Evernote are going to be more on the bottom half. Facebook is rock bottom. A company like Palantir, on the other hand, is way up on top. Its price points and customer counts really define their product and their messaging.
Where you don’t want to be stuck is in a place where the math doesn’t work out. When you realize that you’re only going to have 1000 customers, you have to have a value proposition that enables you to construct deals worth at least a hundred grand for the whole model to work, or you have a big problem. Conversely, if you can only do $1,000 a year deals, you’d better be building a scalable model that can get you to 100,000 customers. You don’t want to be in a situation where your marketplace consists of roughly 10,000 potential customers, but you can only justify a $1,000 price point. That’s not a very big total market.
Too often you see companies hitting $5 million, $10 million, or $15 million in revenue but then realize that their prices don’t align with their model. They’re off. They can’t scale. Now let’s see how answering the hundred million dollar question helps clarify that first set of questions:
- What type of sales force or distribution model should you be building? Now you know whether it’s time to start looking into frictionless self-service models or developing a seasoned outbound team.
- Does your market have that many customers? Now you’ve got a go-to-market plan that can start sending off early warning signs if you’re not tracking towards desired customer growth.
- Does your value proposition justify the price points you need to hit? Now you can benchmark yourself against relevant competitors and focus your product team on creating a killer product for your price bracket.
- How much should you be spending on marketing vs sales? Now you know whether to put people in the field to chase after million-dollar deals, or invest more in inbound marketing, maybe with a freemium strategy, to grab those monthly Evernote-style subscriptions.
So answer the hundred million dollar question as soon as you can.
Tien Tzuo founded Zuora in 2007 and turned it into one of the fastest growing SaaS companies in tech. He was employee number 11 at Salesforce.com. Tzuo holds a bachelor's degree in electrical engineering from Cornell University and a master's in business administration from the Stanford Graduate School of Business. He is on the Board of Directors for Network for Good.
