Value Realization, not just Value Proposition
I work with many enterprise class B2B software and SaaS companies. Many are continually looking for ways to increase the value proposition to grow average deal size, but in their search for greater Value Proposition, they often miss the concept of Value Realization.
Consider this example. You are the maker of lead generation software operating in a SaaS business model. Most of your customers are small-medium businesses.
Based on your market research, companies in your target market need to generate ten marketing qualified leads (MQL) to achieve five sales qualified leads (SQL) which results in one closed deal worth on average $25,000. Based on this research, you calculate your value position based on each lead you provide to your customer generating $500 of revenue for them. Based on how your product performs, you can show your customers that you can generate 100 net new leads a month, as such offering them the opportunity to increase revenue by $50,000 per month.
Given your value proposition, your sales cycles are short, your prospects are easy to sell, and your solution is low cost to implement.
Unfortunately, your customer churn is high with over 35% of your customer base not renewing when their license term expires. While you continually investigate the reason for churn, you can not identify any consistent pattern that leads to increasing customer retention.
What is happening here is that although your value proposition is high, your Value Realization is low.
What is Value Realization?
Simply put, it is the ability of your customer to convert your value proposition into tangible results. Just because the math underlying your value proposition is compelling, it does not mean that your customers will realize your proposed results.
Consider what is takes to convert a Marketing Qualified lead into a Closed Deal and consider all the possible points of failure that are out of the control of your solution that generates the MQL. The best lead in the world is not worth much if
- Your customers’ solution is priced too high for the market
- Their sales team is weak and ineffective
- Their product or solution is poor
- Their customer service is weak
- Your customer has problems adopting your new solution such as the lead is ignored and not worked on while it is fresh, the customer is incapable of enforcing best practices to use the new system, or the customer chases shiny things and always has “projects du-jour” that come and go
- And the list goes on….
So what is your problem?
Your problem may be simply that your business model is wrong. The reasons that your customers’ sign on and then abandon your attractive value proposition is that the solution you offer does not do enough to help them realize the opportunity.
Many companies respond to the situation above by reducing their solution cost in the mistaken belief that it will make the value proposition more compelling and create greater stickiness. To compensate for the lower price point, they reduce internal costs to maintain profitability levels. These reductions in internal costs often limit the amount of service and support offered and while they succeed in making the buying value proposition more compelling, they further reduce their customers’ value realization. Sales increase but churn increases by an even greater percentage.
So what is the solution?
Consider the company who tries to exercise greater control over the value realization process.
Continuing in the lead generation solutions market, consider a company that offers a service that instead of generating Marketing Qualified Leads, they sell a service that generates Sales Qualified Leads. They do this by generating the same MQL’s as in the first example, but they then continue to work the lead in order to qualify it to the point of being Sales Qualified. In doing do, they filter out all the points of failure caused by product fit, service fit and poor processes on their clients’ part. As experts in their own solution, they also create stronger SQL’s than their clients’ could.
As a result, their Value Proposition is that they only need to generate three Sales Qualified Leads for their customers to result in one closed deal worth on average $25,000. As a result, they calculate their value proposition based on each SQL that they provide to their customer generating $8,333 of revenue for them. Based on how your product performs, you are able to show your customers that you can generate 20 net new SQL’s a month, such offering them the opportunity to increase revenue by $166,667 per month. The product you are selling is no longer a Marketing Qualified lead but rather is a booked meeting between their customer’s sales rep and a fully qualified prospect that has been professionally nurtured by you through the buying process.
By expanding your participation in the value realization curve, you have increased the complexity and cost of offering the solution you offer but have both increased your Value Proposition and reduced the possible number of points of failure that your client has in realizing the Value Proposition.
Why SaaS companies need robust Professional Services teams!
There is a myth in the start-up SaaS world that Professional Services revenue is bad and high ratio’s of Software Subscription revenue to Professional Services revenue is good. While I agree with the second half of the sentence, I strongly disagree with how companies try to achieve this. Common wisdom is that a start-up accomplishes a high Subscription to PS revenue ratio by keeping the PS team small, keep the PS quotes small as a proposition of the SaaS quote and try to make your software as frictionless as possible to implement. Again, while I agree with the last part of the sentence, I think in the B2B enterprise software world, trying to keep PS teams small and PS revenue low, only handicaps early stage software companies from achieving value realization of their value proposition.
Unfortunately, the bottom line is that most customers struggle to implement technology solutions not because of the quality, ease of implementation or technical nuances of your product, but because they suck at managing the change in their own businesses.
As a result, similar to the example above, start-up and emerging SaaS vendors can have a compelling product value proposition, but never are in control of their customers’ value realization. While it is rare to see SaaS companies with less than 90% SaaS retention rates, this does not mean that the SaaS company isn’t leaving a lot of money on the table by only exercising a small position of their true Value Proposition, if only they could deliver full Value Realization.