Category: sales
Posts
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Our portfolio company Chorus.ai released the State of Conversational Intelligence 2020. The report uses data from 5m sales and customer calls to benchmark sales team performance.
There’s lots of great data in the report. Some of the data reaffirms rules of thumb. For example, the typical win rate of a sales qualified lead is 19%.
Other data points are surprising. For example, the average SDR dials 106 people to schedule one meeting.
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Selling based on ROI (return-on-investment) sounds great. A salesperson lays out an iron-clad case for how the customer will make 5x or 6x or 10x their initial investment in a piece of software in three years or less. The champion will use ROI math to assuage upper management and procurement's concerns. Or so the thinking goes.
If we reflect on the most successful software companies, the very largest, very few sell based on ROI.
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There's a new debate about marketing efficiency recently, and it's an important one in the era of product-led growth. If a startup has great net dollar retention (NDR), should it be willing to increase its customer acquisition spend proportionately?
I remain a believer that months-to-repay is the best metric for measuring customer acquisition efficiency for a single reason. You know the answer immediately and accurately. With the annual contract you have in your hand and the amount of money you spent in sales and marketing to acquire a set number of customers in a period, you know exactly your MTR.
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Imagine a hypothetical startup with 10 account executives that is growing quickly. This startup has two AEs that outperform meaningfully, six that are at typical quota attainment, and two that are underperforming. Where should your sales enablement team focus their time?
This is the team's performance last year. They generated 8.6M in bookings on 10M in quota capacity (which is really good). Most teams aim for 70-75% attainment.
If the sales enablement teams had focus on the top quartile AEs and improve their performance by 20%, the company would have booked $9.
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A public market investors asked me if there are any patterns in the list of recent software IPOs with the best sales efficiencies. As I looked through the list, I noticed one.
All of these businesses sell bottom up with small initial ACVs that grow dramatically. Atlassian, Zoom, Twilio, Slack, New Relic, Elastic. All of them target small groups of users within larger organization who introduce the vendor. Over time, usage grows, accounts expand.
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Since writing The AI Agency: A Novel GTM for Machine Learning Startups, I've been meeting many companies who operate this way. These startups use machine learning to disrupt an industry traditionally dominated by agencies: law, accounting, recruiting, translation, debt collection, marketing…the list is long. I will publish a landscape soon on the area. If you're operating an AI Agency, I'd love to hear from you.
In meeting many of these innovative businesses, I've observed they face four strategic questions.
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A founder posed me a question earlier this week: Do you have any data/perspective on whether it's worth keeping the unassisted free trial flow vs. providing only one path which leads to a demo and an assisted free trial? This is a complex question. Let's break it down.
The unassisted free trial has benefits. There's a deeper discussion in this post: Confessions of a Perpetual Freeloader.
You capture the buyer at the point of maximum intent and reduces the activation energy of the sale.
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At Saastr yesterday, I presented thetop 10 learnings from the Redpoint Free Trial Survey that we distributed in October. The data confirmed many rules of thumb but also raised some interesting new questions about the best way to use trials.
When we distributed the survey, we never would have expected the response. About 600 companies submitted data. They span single digit ARR businesses to publicly traded SaaS companies. These businesses sell at every price point and sell to every operational buyer.
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As you start to go to market, there are two things to prioritize from early customers that matter more than cash. Feedback and marketing rights.
The feedback matters for obvious reasons. The product is early; customer feedback will help you hew the raw granite of your initial product into shape.
The second may not be so obvious. Every prospect championing a software purchase will be asked by the opponents of the sale and decision-makers: “Who else is using the software?
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If you have one marketing dollar to spend on your startup's growth, should you spend it on acquiring a new customer or on expanding an existing customer?
Mining the existing customer base for customer expansion seems very logical. Customers know your product and your sales team, so increasing the account value should be easier.
Plus, the strategy is successful in practice. The PacCrest survey suggests upsell drives somewhere between 8-26% of new bookings for SaaS companies, depending on the scale of the business.
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Your startup is just getting off the ground. You might have a few account executives and a sales leader in place; maybe some revenue and a handful of customers. The sales team costs real money, and the question before the company is: how do you know what quota plan to assign to the account executives?
I've seen four stages in early stage software companies. Some businesses employ all four, others just use one or two.
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You have a good pipeline of prospective customers. You pitch them but things aren't working out. You can see it in your low close rates. They are below 15-20% conversion from sales accepted lead to closed customer. You need to answer an important question: are you losing these opportunities because of sales execution or product insufficiency?
Those are the two possibilities. Either the company's sales techniques are failing to persuade customers to buy the product.
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In early markets, customers prefer entire solutions, not best in class point products. These solutions often include significant professional services and education. At the beginning of a new wave, most customers don't understand the technology well. So, they seek experts to guide them.
Companies that provide services and education often win the early market. They develop customer relationships, reinforce their expertise with a strong brand, define the purchasing criteria in their favor and ultimately grow faster.
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Your sales team is starting to close some terrific accounts. As your startup grows, your sales team will experiment with different sales techniques. For example, qualification, pricing, positioning, incentives and contract structure. This is a wonderful phase for a startup. However, there's a common mistake to avoid.
Your VP of Finance should model the impact and approve each experiment. Many startups don't do this at the early stages of go to market.
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The Ideal Customer Profile. The perfect customer. Can you describe it for your startup? The more precisely you can describe it, the better. That will simplify disqualification. But articulating the ICP well isn't enough.
Vague ICPs are problematic. The company will focus on too broad a customer base, waste time and effort with unqualified prospects, and blunt their sales pitch with irrelevant value propositions.
Clear ICPs can also be problematic. To describe the ideal customer well is not enough.
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It's one of the most important questions a CEO can ask. Why does our sales team lose potential sales? One of the companies I work with, Chorus, listens and analyzes sales calls to provide insights to heads of sales and account executives. Chorus explored the reasons account executives lose sales opportunities.
Set aside losses from competition. Of the remaining lost opportunities, 48% of prospects lacked budget. A further 38% demonstrated no urgency to buy.
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Recently, I wrote about customer/revenue operations, an idea that seems to be taking hold at many different SaaS companies. Instead of optimizing the performance of each individual step of the customer lifecycle, customer operations optimizes it over the entire journey. This is a fundamental change in the way a business manages its customers, and it's now starting to be reflected in the organizational structure of SaaS startups
Two advances in thinking have led to the idea of customer operations.
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One of the major trends facing SaaS companies today is the rising cost of customer acquisition. Data on this trend has been difficult to find. Fortunately, Patrick at ProfitWell sent me his survey results across about 800 companies. The chart above shows the increasing cost of customer acquisition on a per company basis. Those surveyed have observed a ~65% increase in cost of customer acquisition over the last five years.
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Recently, a VP of sales told me about the way he views the dynamic between inside and outside sales. Inside sales is the drumbeat, a highly predictable sales organization whose consistency enables outside sales to swing for the fences. I never heard it expressed quite this way, but I do think there's some truth to it. To prove it to myself, I ran a Monte Carlo simulation for hypothetical startup.
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How much should a SaaS startup invest in sales and marketing at different stages of the business? This is a very nuanced question, but benchmarks do provide some guidance for what is reasonable. Sales and marketing investment depends on many different factors including establishing product market fit, the business's sales model (inside, field, freemium), and not least, cash balance and fundraising capacity.
The chart above shows the sales and marketing investment of publicly traded software companies at different revenue levels.
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One of the most difficult go-to-market strategies for startups is platform. Platform go to markets mean selling software that can do many things, depending on the customer need. Selling a platform is challenging for five reasons.
First, most customers buy software to solve a particular and immediate problem. When pitching a platform, the potential buyer has to imagine what the platform can do for them. On the other hand, point solutions present a more concrete alternative of what is, rather than what could be.
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Every startup's sales commission plan is different. But it's key to understand the theory and the benchmark data that governs the creation of sales commission plans to create a good one for your business.
Before we begin, let's define a few terms. Sales compensation is communicated in OTE, On Target Earnings. OTE has two parts: salary/draw and commission. Salary is the annual amount paid to the employee irrespective of how much business he/she closes.
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The cash conversion cycle is a key metric for startups, but one that often isn't talked about until a business hires a CFO. Once a business established product market fit, the cash conversion cycle is a key metric of a company's cash efficiency - how quickly a company can convert a dollar of investment into a dollar of cash flow.
To calculate the cash conversion cycle for a software company, the formula is
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At some point in the life of most SaaS companies, the business will be faced with the question, when should we move up market? The strategic question might be catalyzed by increasing cost of customer acquisition in the core SMB segment. Alternatively, a surge of large customers paying for the product might trigger the question. Or account executives might raise it. Whatever the reason, this is a key strategic question.
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I've asked many VPs of Sales the same question. Which is the best book on the fundamentals of selling? Almost unequivocally, they respond, “Miller-Heiman.” The New Strategic Selling is an updated version of the original Strategic Selling, which was published in 1988, and describes the key activities of successful sales people. I resonated with two concepts in the book: the 4 Seller Response Modes and the authors’ recommendations on how to prioritize a salesperson's time.
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What could be more natural than a marketer selling a product to other marketers? Or an engineer pushing a new devops tool to other developers? Or a customer success person pitching CS tools? After all, they both speak the same language, come from the same domain, will develop trust quickly. Consequently, they will sell faster and more efficiently. This might seem like a very logical argument for differentiating on sales processes, but it's a fallacy.
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How much revenue do you want to book for your SaaS startup next quarter? And in 12 months? It is one thing to put a number down on the financial plan. It's another thing altogether to have the sales team staffed to close that amount of business.
The bookings capacity of the business is the amount of business a sales team should book in a certain period. Bookings capacity is calculated as:
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My algorithm is better than yours. My algorithm performs better on the precision/recall tradeoffs. It surfaces fewer false positives. It converges to an answer faster. Perhaps it requires a bit less data. Those statements might all be true. But none of these advantages confer a competitive sales advantage in the market. They aren't technology innovations leading to a go-to-market advantage.
I first observed the use of large scale machine learning at Google.
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There are approximately 22 million trucks in the US. Many of these trucks run software to track the location of the vehicle, manage inventory, and comply with regulation. There are two SaaS companies operating at greater than $100M in ARR in the space and they illustrate one of the mantras on this blog: there are many different ways to build a SaaS company.
After last week's post, Is There a No Man's Land in SaaS ACVs, a founder asked me to highlight some of the go to market strategies in different segments.
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A founder asked me recently if a dead zone in ACVs (average contract value) exist around the $10k price point. Yesterday, I listened to a podcast in which an executive asserted that infrastructure software priced lower than $250k in ACV threatens the viability of the company. What does the data show?
I've plotted the distribution of ACV at IPO for all public software companies. There are no yawning gaps but a smooth progression from $87 to $780,000.
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After a startup establishes product market fit, scaling demand generation becomes the the next major challenge. Doubling or tripling ARR each year for several consecutive years is not easy. The best marketers create a demand generation portfolio. There are four axes to measure this portfolio: scale of investment, sophistication, breadth and potential.
At the outset, a startup may rely on a single channel of customer acquisition. But over time, in order to achieve larger and larger bookings, the company must diversify.
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A friend recently asked, “Which path is better for SaaS startups? SMB to mid-market to enterprise or straight to enterprise?” It's a key strategic question for many founders building software companies.
Startups that initially target small to medium businesses benefit from several key advantages. First, these businesses are faster to revenue. Simpler products satisfy SMBs, so startups can begin to charge smaller customers much sooner than enterprise customers in a product development lifecycle.
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Over the last year in particular, Revenue Ops is a term that's gaining some mindshare in the SaaS world. Revenue operations teams combine marketing operations and sales operations into one team. Yesterday, I heard time a further refinement of this idea: Customer Operations.
As one SaaS executive described to me, marketing operations teams are the engines of the marketing team. The creative marketing functions produce the fuel – the campaigns, the positioning, the art.
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There are three kinds of software value propositions. Software that increases revenue, software that reduces cost, and software that promises improved productivity. To maximize the effectiveness of your customer success efforts, you need to understand which type of software company you are building.
Software that increases revenue is the easiest to sell. For most companies, growth is the most important priority. Growth trumps cost-reduction because growth increases the value of the business more.
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After a SaaS startup has gained traction with SMBs and mid-market customers, they often feel a pressure to move up-market. Sometimes, demand for a product is so great, larger customers the pull the company up-market before they are ready. The startup finds itself in a critical position - both the product and the sales motion must evolve quickly.
Zack Kass is a friend who advises SaaS startups on their enterprise selling motions and playbooks, refining the account executive profile, and developing a deal strategy.
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There are three ways to create negative churn that I have observed in the market. First, usage expansion. Second, feature expansion. Third, product expansion.
Usage expansion is the most common way to create negative churn. Utility based pricing models like buying SMS credits on Twilio, or compute on Amazon or data processing on Mulesoft lend themselves to gradually increasing account sizes, as customers use more and more of the product. Per seat pricing also leads to usage expansion if product lends itself to growing within an customer.
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Most SaaS companies dream of attaining the $100M ARR mark. The very fastest attain the goal in 6-7 years. Last week, Workday halted trading to announce it had signed Walmart as a customer. Brian White, research analyst at Drexel Hamilton investment bank, estimated this one customer could generate $100M-$200M per year for Workday in recurring revenue - a single customer.
I couldn't validate that this is the largest contract ever signed by a SaaS company, but if it is not the largest, it is most certainly the top 5.
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Sales leaders consistently underinvest in sales team training and development. As SaaS startups scale, sales execution becomes the most tangible metric of a business’ success, and the one by which the business’ health is benchmarked. Not to mention how the head of sales is evaluated. When is the right time to invest in sales training? And how much should a business invest?
Let's take a hypothetical SaaS company with five sales reps, each with a $750k quota.
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As a SaaS startup begins to reach critical mass, the business generates more of its revenue from upsells and expansions, reaching about 30% at between $40-75M in revenue, which is in line with some of the models we've created. Many times startup teams ask how to compensate a sales team for renewals and upsells. The 2016 PacCrest Survey contains a wealth of information about these types of go to market questions.
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What is the optimal contract length with for your SaaS startup? Monthly, annual, multiyear? It's common to see SaaS startups initially price their products on a monthly basis, then add an enterprise “Call Me” plan which hides behind it an annual contract. As the business increases its price point, it may eventually book contracts spanning two, three or even five years.
This pricing pattern has a certain rationale to it. It enables an early-stage software company to rapidly gather feedback.
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How fast could a SaaS business grow on paid acquisition? If the business decided today to sprint and acquire as many customers as possible?
We can model it with some assumptions, some of which are quite aggressive. Let's take a startup with $1.2M on the balance dedicated to customer acquisition. Assume a $10,000 CAC, an 80% gross margin and a payback period of 12 months. We'll assume customers begin to pay the month after they sign up, and all this math implies customers pay a monthly fee of $1042 ($12,500 ACV over 12 months).
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Creating and optimizing a sales plan for an early stage SaaS company is a challenging task. There are lots of different variables to manage and the truth is it's always a work in progress even for massively successful businesses. But at the very earliest days, where do you start?
Quota is a function of number of deals closed, sales cycle, price point and conversion rate. When a SaaS company is just releasing its products, none of these are known figures.
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Sales teams are the tip of the spear for SaaS companies. They close accounts and book the revenue. Many sales teams often find themselves confronting the same issues. Mike Anello and Kane Hochster, two HBS students, researched this topic by surveying more than 30 VPs of Sales. The survey included both rising and seasoned leaders across a range of revenue ranges but with a concentration in earlier stage startups.
Mike and Kane aimed to find the areas where sales teams underinvest across seven key responsibilities: hiring, onboarding, pricing, process, structure, training & development and upsell.
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When you're selling a SaaS product to a potential customer, you have to convince them switching is worth the effort. And once you've sold the product, you have to do the opposite: convince the customer that switching to anything else isn't worth it.
In chemistry, there's a notion of an activation energy. A Swedish scientist Svante Arrhenius coined the term to describe the minimum amount of energy required to start a chemical reaction.
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Where is the budget to pay for your SaaS startup's software coming from? There are three possible pockets. First, they are dollars the competitor you displaced used to collect. Second, the company enlarges the current budget to finance the purchase. Third, the company creates a new budget.
Which budget is an important question. The answer informs product, marketing and sales strategy. It's also a frequent question investors and employee candidates will ask during their respective processes.
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What is the smallest price point at which a SaaS startup can justify building an inside sales team? This is a natural question that many SaaS startups raise as they begin to complement bottoms-up, product-led adoption with assisting customers through the sales process.
There are publicly traded SaaS companies at nearly every price point - even very small ones. At IPO, Wix went public with an average annual revenue per customers of $87.
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On the prospects list of every SaaS startup, you will find a list of company names and next to them a projected dollar amount projecting the potential revenue from closing the deal. Each line item might represent a sale to team, department or the entire company. Regardless, there is a single champion advocating internally for the company to invest in this software product. If the project succeeds, that person will be promoted.
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When is the right time to increase sales headcount for a SaaS startup? It is one of the most strategic decisions for early-stage business to make given the amount of effort and expense involved in building, managing and scaling a sales team.
While there is no single absolute sign, neither qualitative nor quantitative, these are some of the signals I have found indicate it might be a good time to scale sales.
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There are two main ways of building a SaaS sales team: top down or bottoms up. Top down SaaS sales organizations start with a VP of Sales who often hires senior account executives. Bottoms up sales teams hire the first account manager and promote from within. Which is better?
Let's create a framework to compare the bookings capacity, the ramp period and the cost for three levels of sales hires. These figures will vary by company and sales team.
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One question founders often ask is which is the right customer size to target? What is the optimal ACV for a SaaS startup? One way of answering this question is to reflect upon the success of previous SaaS companies and analyze how they did it.
The chart above plots the total revenue of publicly traded SaaS companies by ACV bucket. Enterprise companies average contract value is greater than $100,000. Mid-market companies span $10,000-$100,000, and SMB companies generate less than $10,000 per year per customer.
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The notion of channel sales in SaaS companies is becoming more common than in has been in the last few years, and for some businesses like Intacct, channel partnerships drive more than 50% of sales.
Channels used to be about software customization, delivery and support. Most SaaS has little customization, manages all the delivery and are better suited to handling the support. Plus, value-added resellers charged buyers on a per-project basis which doesn't align neatly with the recurring subscription intrinsic to SaaS.
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As a SaaS startup grows, recurring revenue begins to fuel the company. Not too far into the future, the existing customer base begins to contribute more of the startup's revenue than new customers and bookings. Each startup will observe this revenue composition transition at a different point in its evolution because it's a function of growth rate and churn rate. This evolution demands a focus on retention, upsell and cross-sell.
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When we discuss payback periods in SaaS, we implicitly mean customer payback periods. How much time does it take for us to recoup the capital outlay we invest in acquiring a new customer? But, there's a second and equally important payback period – the payback period on hiring a new account executive.
Let's take a hypothetical SaaS startup that sells a $20k product at a 75% gross margin. Clients pay monthly and commissions are paid monthly.
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When buying machine learning enabled software, it's easier to sell like Ironman than Robocop; a product that complements and augments the user's skills rather than a true replacement. As machine learning continues to become a key differentiator among SaaS products, a secular and positive trend, startups are learning how to sell the promise of the software better and better. These are some of the objections customers raise during those sales pitches.
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Mark Roberge, the Chief Revenue Officer at Hubspot, has spent 20 years in startups. As he told me a few days ago, he has observed the lack of sales management and sales execution skills as one of the most consistent deficiencies limiting the potential of early stage SaaS companies.
Sales execution deficiency manifests itself at roughly the same time as product market fit. There might be 20-30 people at the startup which is generating about $1-2M in ARR with 2-5 salespeople.
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What is the optimal quick ratio for your SaaS startup? Is it 4?
/ (Churned MRR + Contraction MRR)``` The quick ratio measures a SaaS company's growth efficiency. The formula for quick ratio is above. It's the new monthly recurring revenue (MRR) in a month plus the expansion MRR divided by the sum of the churned MRR and the contraction MRR. Churned MRR are customers who have not renewed contracts and contractions are those customers who have decreased their payments.
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Quota attainment is an incredibly powerful diagnostic tool when understanding your SaaS startup's go-to-market health. Quota attainment measures both the success of individual account executives and the performance of the team. To achieve best-in-class quota attainment, a startup must execute the go-to-market strategy well across five dimensions.
First, the startup must supply the sales team with a growing volume of high quality leads. SaaS companies generate leads in many ways including through sales development reps, search engine marketing, paid social, lead capture on the home page, events, customer referrals, evangelists and channel partners.
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Last week, I interviewed Tien Tzuo, the former CMO & CSO at Salesforce, and founder/CEO of Zuora. During our conversation, he spoke about one of the major challenges facing fast growing startups. He called it recognizing the breaking points of management.
At the founding a startup, the structure of the company is flat. Everyone is effectively a peer. At about 8 people, a leader must emerge to shepherd the growing team, and so the first management layer is created.
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In sales processes, showing a product is always better than talking about a product. Better still is co-customizing the product with the customer during the sales pitch. This customization could be as simple as integrations or changing colors. There's no better way for customers to understand a product, imagine how it would fit their needs, and become committed to the purchase than customizing their instance during the sales process. I've watched this brilliant sales tactic fuel tremendous growth at Looker, a fast growing analytics company.
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How big is your SaaS startup's sales pipeline? How big does it need to be to achieve next month's bookings target? What is the ratio of the sales pipeline to bookings? What should it be?
When asked these questions during a fundraising pitch, one CEO responded with the number of demos per account executive per day to attain next month's bookings, impressively conveying his command of his business. A startup's leadership should know the number of customers, sales and marketing qualified leads to meet or exceed plan at all times.
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One of the most powerful levers for SaaS companies to master is payback period. Payback period is the number of months a company requires to payback its cost of customer acquisition. The median SaaS startup has a payback period of 15 months on a gross margin basis.
A short payback period confers two massive advantage to a startups: smaller working capital requirements and a consequent ability to grow much faster.
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When writing the post Vertical SaaS Startups Require Different Go To Market Than Horizontal SaaS Companies, I realized that there is a perception on my part and perhaps more broadly that vertical SaaS companies enjoy greater sales efficiencies than horizontal SaaS companies.
After all, vertical SaaS companies target a smaller number of potential buyers. The marketing team concentrates their media buys to target this audience, the sales team focuses on a smaller lead list.
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The SaaS ecosystem has been evolving incredibly quickly. Most of the time, the changes in the ecosystem are embodied in one particular company which grows exceptionally quickly. Focusing on these fast-growers, the macro shifts can be hard to discern. Last week, Okta released a report Business at Work sweeps across SaaS to reveal these recent evolutions. These are the points that I found most interesting.
First, most companies, irrespective of size from 1-4k+ employees, use 14 SaaS applications.
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The most potent weapon in sales is understanding a buyer's perception of time. As Mark Roberge wrote, “At HubSpot, this lacking sense of urgency is the number one objection we face in the sales funnel.” To succeed, SaaS startups’ sales teams must consistently create urgency in the sales process.
Time is scarce. Either the seller's time is scarce or the buyer's time is scarce. Understanding that scarcity and focusing the buyer on it is the key to repeatable sales.
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The prevailing wisdom for hiring the first VP of Sales is roughly $1M in ARR, or whenever the company has figured out some repeatable sales process. The rationale behind this advice is, at this point, the company needs someone to build recruit, incentivize, coach and manage the team that will grow to acquire more and more business. While that all makes sense, I was curious to see if startups do this in practice, and whether the timing of the VPS differs by ACV.
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“People don't buy what you do, they buy why you do it.” This line from Simon Sinek's TED talk captures the power of a values based marketing campaign. Simon contrasts feature-based marketing - start with what the company is selling continue to how they do it and finishes with why - to value based campaigns which reverse the story-telling order. Values campaigns start with the why.
Starting with why is a simple but powerful framework for startups to develop a unique marketing message, particularly in a competitive marketplace.
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One smart SaaS entrepreneur told me last week he prefers bottoms up businesses to top-down companies because bottoms up sales and marketing efforts enable startups to pursue hundreds of paths into a company. Unlike top down sales processes which offer a startup one shot at closing an account (a meeting with a CEO or VP), for bottoms up products, each employee is a credit-card-carrying-decision-maker.
As the number of total potential buyers expands, so does the universe of sales processes.
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Financial discipline is a hallmark of great companies. It's what enables businesses to build exceptional go to market models, weather difficult times, and ultimately succeed. Sometimes, financial discipline in startups is imposed by financial markets, like in 2008 when the total amount of venture capital investment plummeted after Lehman imploded. Other times, financial discipline is imposed by founders and management teams. The tweet above is from Lew Cirne, founder and CEO of New Relic, a $1.
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Creating a sense of urgency is one of the most powerful sales tools available to SaaS companies. There are many different ways of accomplishing this, but one of the most common ways is to offer discounts that expire. Discounts are powerful incentives to increase sales. But, they have to be crafted correctly, or they can have dramatic impact on a startup's cash position. This is why sales incentives should be designed hand-in-hand with the company's finance team.
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In the Innovator's Dilemma for SaaS Startups, I outlined the path of many software companies, which disrupt incumbents by first serving the small-to-medium business and then move up-market by transitioning to serve larger enterprises with outbound sales teams. I argued this transition is largely due to the more attractive characteristics of larger customers, namely higher sales efficiency and reduced churn rates. This is the “traditional” way of disrupting. But, as Kenny van Zant of Asana and Mike Cannon-Brookes of Atlassian told me, there's another way, a novel way of building companies that still isn't very well understood: the Flywheel SaaS Company.
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Sales cycles, the time from acquiring a lead to closing an account, vary quite a bit by industry, product type, and price point. But universally speaking for startups, shorter sales cycles are better. Maintaining a short sales cycle is a competitive advantage for several important reasons.
First, faster sales cycles accelerate the discovery of a repeatable sales process. Different sales approaches must be tested: which role to sell to? which pitch (cost or value)?
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Whether implicitly or explicitly, it’s critical for a startup to map out accounts to understand the purchasing dynamics of a buyer. When sales teams start selling, their goal should be to create the sales playbook. The playbook all begins with understanding the key dynamics among the five players in the sales process. These are the five people:
The Proponent of the Sale champions the sales. The Salesperson must equip this champion with all the tools to convince the other stakeholders to pursue the transaction.
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If you want to understand how to build a great SaaS sales organization, you should read Mark Roberge's The Sales Acceleration Formula. It's the single best book on the topic.
Mark is the Chief Revenue Office at Hubspot, a company which has created tremendous success by perfecting the inbound marketing plus sales model. The book is invaluable for every founder, CEO and member of the management team because it not only explains how the Hubspot sales team is structured, but why the structure came to be.
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There's a magical property to the classic sales funnel SaaS startups use to evaluate the effectiveness of their go-to-market organizations: an increase in effectiveness at any stage of a sales funnel cascades through to the end funnel. But improvements to the early parts of the funnel are more important than those later in the funnel, because they meaningfully improve key SaaS metrics like cost-of-customer acquisition and pay-back period.
Most startups employ a four stage funnel: prospect, lead, opportunity, customer.
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In 2009, the Corporate Executive Board, a consultancy providing expertise to some of the world's largest companies, studied the distinguishing characteristics of great sales people and well-run sales processes. They surveyed more than 6,000 sales reps across 90+ businesses. The analysis revealed three interesting things.
First, most customers don't perceive a difference between competitive products.
Over and over we found that customers, generally speaking, see significantly less difference between us and the competition than we do ourselves.
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After a SaaS startup has achieved some degree of product market fit, the business will likely ramp the go-to-market teams, and in particular the sales team. Measuring and tracking the performance of a growing sales team is critical to the growth and financial health of a business.
The report above is the most effective view of the performance of a sales team I've found for SaaS startups. A VP of Sales at a Redpoint portfolio company introduced this report to me, and now I can't live without it.
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SaaS companies are marvelous businesses. They are more predictable than most other kinds of companies and in addition they demonstrate leverage from technology. The best SaaS companies are able to build strong brands, develop scalable products and hire teams to bring those products to market effectively.
To show the power of the convergence of these forces, I've analyzed the employee productivity patterns of the 50+ publicly traded SaaS companies.
The chart above shows the headcount growth of the median publicly traded SaaS company from year four through year ten of the company's life.
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After writing about B2C2B companies last week, I received a lot of great comments about the differences between the B2C2B models, particularly the sales models after a company has acquired the initial Consumers.
These are three sales models I've observed B2C2B companies use to convert the initial momentum with consumers into dollars.
The first sales model is the 2 Phase Sell. LinkedIn and Duolingo employ this. LinkedIn attracts large number of consumers with a place to find jobs and post resumes.
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This week, an entrepreneur told me his startup is a B2C2B business. It was the first time I'd heard this acronym, and I thought it was a genius moniker. B2C2B (business-to-consumer-to-business) succinctly captures the critical part of the new customer acquisition model powering many enterprise startups: winning hearts and minds of the intermediate consumer, the employees of a company.
B2C2B models are behind much of the innovation in every part of the enterprise stack, from applications to platforms to infrastructure.
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One of the most important forces in SaaS today is the Consumerization of IT. Instead of a centralized IT organization deciding which products to buy, product managers and marketers and engineers and data scientists determine which products they think would serve them best and buy them directly, often using a credit card.
This movement is transformative and its impact is immediate. The chart above plots the median Average Revenue per Customer by Year of IPO for the 50 SaaS companies that have gone public in the past five years.
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It's hard to overstate how powerful negative churn is for a SaaS company. Both New Relic and Zendesk have grown to billion-dollar-plus publicly traded businesses by achieving fantastic negative churn figures: 114% and 120% respectively. in other words, each year existing customers pay these businesses 14 and 20% more than last year.
The recent 2014 SaaS benchmark survey aggregated by Pacific Crest and Matrix indicates that expansion revenue accounts for between 8-26% of total annual bookings, increasing as the company scales.
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The modern SaaS startup asks marketing to fill the top of the funnel, sales to qualify and close leads, and customer success to retain customers. Conceptually, this trinity works in unison to grow a business rapidly.
But sometimes, SaaS companies struggle with this model, particularly when churn rates increase in a business. The knee-jerk response may be to ask how to change the customer success team's structure or incentives to increase the revenue at risk save rate (the fraction of dollars that might have churned, if not for the efforts of the customer success team).
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A terrific SaaS VP of Marketing once told me, “If the sales team is focused on hitting this quarter's revenue target, then the marketing team ought to be focused on next quarter and the following quarter.” In SaaS companies, one of the marketing department's primary responsibilities is generating sufficient customer interest to enable the company to achieve their revenue targets.
If that's the case, determining how and when to scale a sales team in a SaaS company is contingent upon the marketing team's metrics.
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What are the tradeoffs when considering different sales hiring plans and which is the right one for your startup? There are many different considerations in creating a sales hiring plan. Balancing them all can be tricky, but thinking through the trade-offs is important to scaling the business well.
First, let's compare the financial impact of three different sales hiring strategies: six sales people hired at once, two sales people hired for each of three quarters and one sales person hired each month.
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One of the single most effective tools SaaS companies can use in order to grow faster isn't tweaking the product in a particular way or implementing an AB optimization framework or adopting new marketing tactic. Rather, it's financial judo for structuring contracts and cash collection.
Cash is the lifeblood of startups. Cash empowers management teams to invest in all kinds of growth mechanisms. So, it's no surprise that maximizing a company's cash to invest in growth is a good thing.
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The chart above compares the contribution of two hypothetical inside sales people with $400,000 quotas to an early-stage startup's finances. In this case, contribution is the 18 month revenue of sold customers tallied cumulatively minus the salary costs of $100k annualized of the sales person. I've modeled a six month linear ramp for the sales person to reach 100% of quota.
The red line shows the case for a successful sales hire.
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Tien Tzuo, the founder and CEO of Zuora* and former CSO/CMO at Salesforce, knows SaaS businesses better than most. So when he pens an opinion about the subscription economy, a term which I believe he coined, I read it with great interest. Yesterday, Tien wrote “These Numbers Show That Box CEO Aaron Levie Is A Genius”, explaining Box's business and growth in great detail.
In the post, Tien argues two important points.
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Last week, Sean Ellis made an interesting comment in response to this post on public SaaS companies’ growth rates:
I'm guilty of giving the same advice to startup founders without providing a transparent rationale. This post is my explanation of why the 15-20% MRR growth number is a reasonably good target for post-Seed/pre-Series A SaaS startups to aim for.
Let's create a hypothetical SaaS startup called SaaSCo with a set of founders who aspire to a fund-raising trajectory like the one in table below.
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Most SaaS companies provide tools to help people accomplish a goal in a better way than they could before. A key part of a SaaS startup's toolkit, then, is changing end user behavior. A startup that doesn't change the behavior of a customer will see the customer churn in a few months or at the expiration of their contract. Customers don't change their behavior for many reasons. Sometimes the friction to adopting a new workflow is too great.
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What should the optimal revenue per customer be for a SaaS company? I could say million dollar contracts typical of enterprise sales provide more long-term stability and total revenue opportunity. On the other hand I might contend larger customer bases paying smaller license fees enable more predictable growth. Which is the correct argument?
First, lets examine the relationship between average customer value and total revenues, to see if smaller customers create a glass ceiling for total revenue.
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Last week, I spent some time at HeavyBit, the community for developer focused companies in SoMa, chatting with a few companies reaching scale. Across a handful of meetings, a recurring theme surfaced for these B2D (business-to-developer companies).
How should their sales and marketing apparatuses be built? Do the field sales models of infrastructure companies or the inside sales models of software companies apply when the initial user is a developer?
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I'll never forget the first time I was assigned a sales quota. I was six months into a sales role at Google in which I on-boarded and managed the accounts of social networks running AdSense ads. Our key metric was customer satisfaction and retention. After a few months, I was starting to get into a groove. And then, our team was assigned a new manager who put the team on a quota, sending me into a tailspin.
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For Google, seasonality is an important factor in forecasting quarterly revenue growth. In the advertising business, Q4 is always the strongest, followed by Q1. Q2 is the weakest. In Google's latest financial year, the difference between the weakest and strongest quarters was 22%: $14.4B in Q4 and $11.8B in Q2.
I wondered if the same were true for SaaS companies. Should SaaS startup forecasts account for differences in underlying customer purchasing habits?
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A key component in a startup's formula for success is educating customers about the product and driving sales. The sales and marketing teams of a startup are responsible for this. There are many ways to structure sales and marketing teams.
The diagram above outlines a sales and marketing team structure that I've observed across many startups. It is consistent with the organizational design Salesforce used to drive revenue from $0 to $100M, described Aaron Ross's book, Predictable Revenue.
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Every SaaS business suffers from churn. If churn isn't managed properly, the lost revenue from churned customers offsets new revenue and the business flat-lines or suffers negative revenue growth. I've seen startups employ three patterns for offsetting churn: acquiring new customers faster, upselling existing customers to buy more software, or structuring pricing to grow with customers.
Each strategy requires different levels of investment but achieves similar results. These strategies are often deployed in addition to a customer success team, which require their own investment.
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