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They Have Money. Can They Spend It?

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Most B2B entrepreneurs have a general sense of the ROI they would get by selling to any particular client. Sell your product to the government, for instance, and be prepared for years of investment and dedication before seeing any money. But once you’re in, your company has a client that is willing to pay very well for your work. If you were to sell to smaller organizations, you could likely get away with much shorter sales cycles — but there is a significantly tinier pot of money on the other end.

So there’s a direct relationship between the amount of money a client can spend and their difficulty in spending it. But it’s certainly not a perfect relationship, and I’ve seen the imperfections trap many entrepreneurs — including me. In fact, the relationship probably looks something like this:

Relationship between money to spend and purchasing process difficulty

When selling software or services, being below the line of best fit is critically important to keep yourself sane and your margins high. Go too far above the line and it’s unlikely that you can even make the business work — the cost of selling each unit will overwhelm the available revenue.

I learned much of this the hard way. My first company, GoCrossCampus, promoted campus-wide games through student governments. Another company I was involved in sold software to technology transfer offices within universities. For both of these businesses, the amount of bureaucratic red tape involved in the purchasing process was way out of proportion to the amount of money our clients were able to spend. University bureaucracies are notoriously budget-constrained, and student governments can rarely spend more than a few hundred bucks on any particular purchase.

While there are often fewer competitors in these difficult markets, I would caution any entrepreneurs against reading too much into the competitive landscape. Often, highly frictional organizations will stick with fundamentally inferior products (e.g., mainframe systems) rather than switching to any new solution — yours or your competitor’s. If there isn’t any competition because all the other firms have entered or left, that isn’t a good thing. In other words: when you see a graveyard, don’t play there.

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Written by Brad Hargreaves

September 11th, 2010 at 12:00 pm