Subscription Software’s New Playbook

Selling software to small business isn’t for the faint of heart. But companies that do so are drawing big interest from venture capitalists optimistic about their ability to deploy certain best practices and tactics to retain customers. These tactics are also valuable for the growing number of startups selling subscriptions, such as food delivery and media services.

What they’re up against: For companies that sell software for running small business, like accounting and sales software, subscription prices have to be low, sometimes only a few hundred dollars a year. So these firms can’t justify using expensive sales teams to seal the deals. Furthermore, about half of small businesses fail within five years, according to the U.S. Small Business Administration, so subscription software firms must constantly fight a huge amount of intrinsic churn, which puts a downward drag on the average lifetime value of their customer base.

Here are several examples of approaches working for Zendesk, Freshdesk, Xero and Shopify, the last of which filed papers to raise $100 million in a U.S. IPO last week.

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Correction: An earlier version of this story misstated Xero’s payback period for customer acquisition costs as six months. It is 12 months.

Sam Whitmore commented on this article.
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“They can be incentivized as sales professionals off a deal size that would be of no interest to their peers here,” said Dilawar Syed, president of North American operations for Freshdesk.