SaaS B2B: PLG, Incentives and Game Theory
This article was originally posted on my linkedin on January 20, 2023
These are some learnings and thoughts I wanted to share while reflecting on SaaS sales. No other purpose rather than sharing these ideas.
PLG is taking over Enterprise Sales through the consumption model
Product Led Growth has taken over VSB’s and SMB’s now it is time for enterprise.
As Jacco from Winning By Design points out: “enthusiastic pro-users act as its marketing/sales employing Word of Mouth. This approach lowers the Customer Acquisition to <3 months of subscription.”
The consumption model is not new, we have seen the incredible growth of companies such as VMware, AWS, Azure, Snowflake, Confluent, MongoDB…the list goes on and on.
Consumption-based pricing provides aligned incentives between sellers and buyers because they now also have a stake in the success of the buyer's project.
No success = no expansion = no money.
Not only the consumption model works for enterprise but the current buying experience of “high-end software” is miserable:
If you want to buy: You will have to talk to at least 3 different people (SDR, AE, Sales Engineer) on several different channels before even knowing the price and the product in depth. And this is the best case scenario without the politics involved.
If you want to sell: Good luck working on that RFP with prerequisites, that sure no other competitor has helped build up ;) Want to talk to the owner of the project? Sure, have a 40 min conversation with the sourcing department first.
Not to say that enterprise customers do not need directions but this is broken.
Check out this amazing Tale shared by Dave Boyce to have an overview on the current landscape.
“Show me the incentive and I will show you the outcome”
This is quote from Charlie Murger but you can extract that from Game Theory as well: you want honest behavior to be the dominant strategy. Meaning, incentives must be aligned in such a way that the players play the game without malicious individual intent. Meaning, a win-win situation for all players involved.
In a business model such as B2B SaaS, you are incentivized to grow revenue by any means.
In doing so, you create a huge misalignment between sales and every other department in the company. It is the classic Prisoner’s Dilemma.
Not only that but the start-up risk rests almost entirely on the sales team.
The sales department carries the biggest responsibility in every B2B company: drive revenue up. No other roles in the company, aside from the founders, have that much skin in the game.
You need parallel and sustainable growth in the entire company, not just sales. There are several support pillars.
As this great article points out, SaaS Sales has evolved into a Multi Level Marketing scheme. The “hire sales!” plan can only get you so far before the model breaks down.
Regression to the mean
The growth we have seen in SaaS in the last few years is not normal.
Reading through Thinking, Fast and Slow by Daniel Kahneman I came across this phenomenon called Regression to the mean (RTM).
"RTM is a statistical phenomenon that can make natural variation in repeated data look like real change. It happens when unusually large or small measurements tend to be followed by measurements that are closer to the mean."
If you are in sales you probably know this, a good year is generally followed by a not so good year. A bad year is generally followed by a not so bad year.
Everything goes back to the mean eventually and we are seeing this with SaaS right now.