I just have to say it. SaaS sales compensation is not nearly as complex and mysterious as it has been made out to be. I’ve read so many discussions on SaaS sales compensation that claim you should do this in one case and that in another case, such that by the time you finish you can’t see the forest for the trees. Since I’m in the middle of this series on SaaS metrics, it seems high time I got around to addressing this topic (which I’ve been avoiding simply because I did not want to plant yet another tree).
So, here is the scoop….

Wait! Relax. Although at first glance, lifetime value may appear to be an overly complex metric to use for sales compensation, it is always proportionate to recurring revenue. So, you simply have to replace “price” with MRR or QRR or ARR in your favorite sales compensation model and you are fine. That’s it! Now you can apply any of the various sales compensation models that you already know and love. Your particular choice should match the specific goals, products, pricing and culture of your specific business, as with any other sales compensation design challenge.

The primary principle of sales compensation is to pay the sales rep in proportion to the value of the deal, usually measured by the price of the product. The value of the deal in turn is wrapped up in the sales commission percentage, which is calculated by dividing the target commission at quota by the sales rep quota:

commission % = target commission at quota / quota

The quota in turn is determined by what is achievable for such a sales rep in terms of number of deals and the average deal value.

quota = target # of deals x average deal value

And, the actual sales compensation is calculated by multiplying the commission percentage by the actual sales.

sales compensation = commission % x actual sales

The target commission is determined by the labor market rate for the type of sales rep you need to fulfill the sales role. This is important, because it is at this point in the sales compensation plan design that we clearly see that sales compensation is NOT about paying the sales rep a percentage of revenue, it is about allocating a target commission payout based on a measure of performance (quota). The measure we use for performance (license revenue, recurring revenue, margin, etc.) is completely arbitrary. We consciously choose a measure that scales with deal value, so that sales compensation aligns sales rep performance with company performance.

You can get really fancy with tiers, spiffs, margin vs. revenue, etc., but these basic formulas are the cornerstone of any sales compensation plan, and this does not change for SaaS. What does change is how you measure deal value, and thus the relevant measure of sales performance.

In a subscription business with a recurring revenue stream, the value of the deal is not as clear cut as the price of a software license. As any MBA or bond trader will gladly tell you, the true value of a subscription deal is the present value of the future cash flows, which amounts to summing up all the recurring revenue over time, taking into account churn, and discounting it by your cost of capital. For a simple subscription with constant recurring revenue, “RR”, this is given by the following formula:

SaaS Subscription LTV = RR + RR (1 – a)/(1 + i) + RR [(1 - a)/(1 + i)]^2 … RR [(1 - a)/(1 + i)]^N

SaaS Subscription LTV = RR ( 1 + i ) / ( i + a )

Where “i” (for interest) is the cost of capital and “a” (for attrition) is the churn rate, and N is the number of payments made over the customer’s lifetime. If the customer follows the normal churn rate, the top LTV formula simplifies to the bottom LTV formula. Again, the MBA’s in the audience will recognize this as the formula for the present value of an annuity.

I say again….do not fear! As previously mentioned, the LTV of the deal is always proportionate to recurring revenue of the deal. The salient word here being “proportionate.” When it comes to designing our SaaS sales compensation plan, we can use ANY measure of recurring revenue (MRR, QRR, ARR) that is proportionate to lifetime deal value. We do not need to calculate the absolute LTV for the deal, because the commission percentage will scale up or down as needed to make sure we payout the target sales compensation. Thus for SaaS, we simply change the calculation to the following:

SaaS commission % = target commission at quota / quota in recurring revenue

SaaS quota = target # of deals x average deal value in recurring revenue

SaaS sales compensation = commission % x actual sales in recurring revenue

Recurring revenue can be measured monthly, quarterly, or annually, because the sales commission percentage scales accordingly. But, once a time-frame for recurring revenue is chosen for calculating the sales commission percentage, it is critical to stick with the same recurring revenue time-frame throughout your SaaS sales compensation plan, i.e., if you calculate average deal value and quota in ARR, then you must measure actual sales in ARR as well to get the correct actual sales commission payout.

Failing to stick with the same recurring revenue time-frame throughout creates an expensive bait-and-switch problem that is the root cause of SaaS Sales Compensation Mistakes 1 & 2 below. Psychologically it is often best to base your SaaS sales compensation plan on a recurring revenue time-frame (monthly, quarterly, or annually) that equals your most common contract renewal term, e.g., if you mostly sign annual renewal contracts, then base your sales compensation plan on ARR, if most renewal contracts are monthly, then use MRR.

To recap…replace unit price with MRR/QRR/ARR…done.

The picture above shows a quick visualization for two sales compensation plans for two sales reps with similar skill sets and market labor rates: one at a software company, and another at a SaaS company. In both cases, the sales rep has a base salary of $50K. On the left, the goal is to motivate the software sales rep to bring in $2M in license revenue. The software sales compensation plan has an accelerator such that payout is $100K at $1.5M and $150K at $2M, and unlimited upside if the sales rep can blow it out of the water.

On the right is a SaaS sales compensation plan where the goal is to motivate the SaaS sales rep to bring in $1M in annual recurring revenue. The plans are IDENTICAL except for the scale of the performance measure on the x-axis (swapping license price with ARR). The SaaS sales compensation plan has a base pay of $50K and an accelerator such that the payout is $100K at $750K ARR and $150K at $1M ARR, and again with unlimited upside to motivate your top sales performers. If we want to recast the SaaS sales compensation plan from ARR to MRR or QRR, we simply change the scale of the x-axis by calculating average deal value, target quota and actual sales in MRR or QRR, 1/12 or 1/4 of ARR respectively.

OK. Visual, but maybe not so easy. Below is a simple numerical example that walks you through the calculation.

How much easier could it be? Well…here are some very common mistakes to avoid.

SaaS Sales Compensation Mistake #1
Paying SaaS sales compensation on explicit total contract value

Happy customers renew their contracts. Unhappy customers don’t. Unhappy customers cancel early, and ask for refunds. If your customers are happy, then the primary benefit of a long term contract is up-front cash payment, not lock-in. Happiness = Lock in. Your SaaS sales compensation plan should reflect this reality. Consider a service that costs $100/month. A monthly renewal contract appears to be worth $100, while a 1 yr renewal contract appears to be worth $1200, and a 2 yr renewal contract appears to be worth $2400. In reality, all three contracts have the same recurring revenue ($100 MRR or $1200 ARR), and should therefore pay the same baseline commission. This is the essence of Bessemer Law for being SaaS-y #1, which states that “bookings are for suckers.”

Longer term contracts are worth more, but the difference in value is your cost of capital which is typically in the 5-30% range depending on your source of funding. The financially sound SaaS sales compensation approach is to pay a baseline commission on the recurring revenue of the deal, then provide an accelerated payment incentive for longer contracts in the 5-30% range that reflects your own cost of capital. (See the numerical example above for a more detailed explanation). If you base your SaaS sales compensation plan on ARR, then sign a 2 yr contract and foolishly plug the explicit contract value of $2400 into your SaaS sales compensation payout formula because the deal FEELS like it is worth $2400, then you are paying as if the deal was worth twice as much. It isn’t.

SaaS Sales Compensation Mistake #2
Trying to manage cashflow through your SaaS sales compensation plan

This is the reverse bait-and-switch of SaaS Sales Compensation Mistake #1 above, arising when you sign contracts with short subscription terms, e.g., monthly. In this case, there is a tendency to not what to pay out sales compensation in advance of receiving payment. Tough! It isn’t the sales rep’s job to manage cash flow. It’s the sales rep’s job to bring in the deal. If your customers are happy, then a monthly payment plan is just as valuable as an annual plan, minus a small percentage for the time value of the money. The best approach is to pay the sales rep in-full, up-front based on the recurring revenue, then tack on a 5-30% penalty for short term contracts as described in SaaS Sales Compensation Mistake #1 above.

If you are one of those lucky SaaS companies that has high early churn and then things settle down, you might want to break the payment up into two, e.g., 50% now and 50% when things settle down. But, you should NOT leave the sales rep waiting and waiting to get paid over time in an attempt to match cash flow to sales compensation. If your churn rate is very very high, say 50%, then you might ask yourself if you are in a recurring revenue business in the first place and simply revert back to paying on actual contract value.

SaaS Sales Compensation Mistake #3
Not including fully loaded sales compensation in customer acquisition cost

Customer acquisition cost should include all the labor it takes to get a new customer signed, not just out of pocket sales and marketing costs. Generally, adding up all sales and marketing expenses is the best way to calculate your customer acquisition cost. This way you don’t miss anything. When you do this, you will almost certainly find that fully loaded sales compensation costs are a dominant contributor to total customer acquisition cost. As indicated in the SaaS metrics series, controlling acquisition costs is a critical factor in reaching profitability. Therefore, it is important to set a target for the ratio of fully loaded annual sales compensation to new annual recurring revenue that gives a sales contribution sufficient to support overall business profitability (i.e., sales contribution = 1 – sales expense ratio).

SaaS Sales Compensation Mistake #4
Not scaling sales compensation with sales productivity

Some good benchmarks to plug into the commission formula above are $100K in total sales compensation for $1M ARR. On a 50:50 split, this gives a commission percentage of 5%. But, what if you are a start-up and a quota of $1M ARR is just plain unachievable? For example, if your current average deal size is $1000, your sales rep would need to close 1000 deals/year! In this case, you might need to pay 20% on a quota of $250K ARR just to get your business off the ground. However, a sales contribution of 60% is unlikely to be profitable in the long run, because you are paying $100K in sales compensation for a measly $250K ARR (i.e., 60% = 1 – 100K/250K). In this scenario, you should work hard to increase both your average deal value and your achievable quota. As you grow, it is important to scale your commission percentage in lockstep with your increasing achievable quota, otherwise you will get locked into a low sales contribution percentage that will sink your long term profitability.

The growth challenge of most SaaS vendors can be boiled down to the following simple formula:

revenue growth = price x volume = average MRR x new sales velocity

Delivering on the promise of low total cost of ownership, the price of SaaS is often an order of magnitude lower than the price of licensed enterprise software. This low price point creates enormous pressure on volume. Reaching profitability may require a new customer every week, every day or even every minute! Increasing sales velocity is the essence of the SaaS business challenge.

At each stage of the buying process, your SaaS prospect will encounter adoption costs and risks that reduce your sales velocity. I like to compare this to scaling a cliff where adoption costs are measured by the height of the cliff and adoption risks are measured by the difficulty of the climb.

How high are the adoption costs and risks that your SaaS prospects must surmount?

…Here are seven proven strategies for increasing SaaS sales velocity by reducing the adoption costs and risks more >>>

The preceding is an excerpt from a guest blog post by Chaotic Flow at Sandhill.com
Just click through for the complete post. Cheers! JY

If you read my SaaS Sales Management Tips series, then you may have noticed a glaring absence of detail with respect to specific SaaS sales organization strategies. The reason for this conscious omission is that there is no one right strategy. There are only the strategies that are right for your specific SaaS business at a specific point in time with your specific situation, i.e., customers, products, growth, maturity, etc. However, these strategic decisions can make or break the growth and profitability of the business, because more than any others they determine the balance between maximizing revenue and minimizing acquisition cost. They are some of the toughest choices a SaaS Sales VP or CEO has to make.

The SaaS Adoption Dilemma
The third post in the SaaS Sales Tips series discusses strategies for accelerating organic growth (SaaS Success Do #3) by making it possible for your customers to buy from you even if you don’t show up for work. But, what do you do when you need revenue today and your under-educated customers and your overly-complex SaaS product just can’t seem get it together on this approach? You’ve just encountered the SaaS Adoption Dilemma, a situation that arises when your adoption costs are way too high and you must choose a strategy for lowering them. Your very unpleasant short term choices are a) forego revenue until your online marketing and support reach maturity or b) cover up the problem with people and wreck your acquisition costs (SaaS Don’t #4). If you’re measured on revenue as opposed to margin and you earned your sales stripes in enterprise software, then you will probably choose option b) without a second thought. But, you may have just made your quarterly commission while sinking your company, your stock options and your job when the business runs out of cash.

The organizational strategies of option b) typically come in two flavors: pre-sale lead reps to find, educate and qualify prospects and pre/post-sale technical services reps to ensure successful on-boarding and ongoing use of the product. While the vision should be for these activities to be 100% automated, the reality is that they rarely are in the early days and that there is a limit at maturity to the achievable degree of automation set by the inherent complexity of your product and self-serviceability of your customer. These constraints imply a steady state organization at maturity–for example a ratio of 3 sales reps to one lead rep and one technical services rep–that you are sure to overstaff in the early stages before you have fully automated adoption through online marketing and support. The danger is that you lock into this bloated, early stage organization model and create excuses for not simplifying adoption through automation, thus killing your long term profitability. A great way to stay on top of this threat is to include all ancillary staff in your calculation of sales productivity: revenue per rep, where rep includes everyone required to acquire and keep a customer, not just the sale rep.

SaaS Sales Organization Options Arranged by the Strategic Dimensions They Address

Hunting, Farming, and Other Pastimes
Conventional wisdom holds that SaaS sales organizations should be split into separate sales and account management groups that are responsible for new business and recurring business, hunters and farmers respectfully. While this is a good rule of thumb, it is not always the case. I’ve seen plenty of SaaS sales organizations that do not follow this model and they usually have good solid reasons for doing otherwise. So, it’s worth reviewing the rationale for this split in the first place: churn. Churn is the rate at which customers cancel their subscriptions. If it is greater than your new business bookings rate, then you are shrinking instead of growing! Many SaaS businesses target a churn rate of less than 5% annually, which is no small feat–it requires very, very satisfied customers, hence the account management function. In addition to lowering churn, a strong account management organization will also drive upgrades by increasing use of the product through continuing education and support. The overarching goal of this organizational strategy is to maximize lifetime customer value, the topic of SaaS Sales Tip #9.

If your SaaS application follows the monetization model of end user-based pricing broken out by functional level such as base, professional and enterprise versions and it is frequently adopted by a smaller group within a larger organization, then there is a very good chance that the tried-and-true hunting vs. farming split will work for you. In this scenario, revenue from existing customers is maximized by deepening and broadening each customer’s use of your application. But what if greater product use is NOT the primary driver of revenue from current customers? What if you sell a large portfolio of relatively straightforward products, like Zoho or Xignite? In this case, revenue from current customers is just as likely to come in the form of up-selling additional products. What if you are a B2B2C platform, where the growth rate of your customer’s customers is the primary driver of future revenue? And, how important is the continuity of interpersonal relationships between the customer’s decision makers and your sales team? Given all the organizational choices presented here, the worst case scenario is that your strategic relationships are continually shuffled from lead rep to sales rep to technical services rep to account manager and back again. In addition, the split between new sales and account management is time-dependent on market maturity, i.e., prospects vs. customers, so it will change as the business grows.

What’s Your Magic Number?
I’ve mentioned several times already that the root cause of these tough SaaS sales choices is the trade-off between revenue generation and acquisition costs. In theory, there is an optimal strategy for growth that doesn’t sacrifice long term profitability. When it comes to measuring the impact of sales organization strategy on both growth and profitability, the magic number to watch is revenue per rep.

revenue per rep = average deal value x close rate x qualification rate x leads / reps

And, its close financial cousin sales margin.

sales margin = 1 – cost per rep / revenue per rep

Where revenue and deal value are valid SaaS measures for recurring revenue
for a given time period, i.e., monthly (MRR), annual (ARR), or lifetime (LTV), and reps are the staff
responsible for producing said revenue and costs during that time.
Broader measures that explicitly include churn, upgrades, etc. and all relevant staff
are best for avoiding the recurring revenue mirage.

Most SaaS companies follow an inbound sales model where the sales capacity must be matched to the inbound lead flow, otherwise adding reps causes revenue per rep to decline (note the ratio of leads/reps in the formula). Simply put, if marketing delivers 100 leads and you have 2 reps, then they each get 50. If you have 4, then they each get 25. And, so on. This is in contrast to an outbound sales model where leads per rep is a constant and the number of leads scales automatically with the number of reps, i.e., more reps, more sales calls, more leads. Adding reps in an inbound sales model when you don’t have the leads to support them is the proverbial pushing on a string.

Therefore, the labor-intensive sales organization strategies above should only be applied when the investment demonstrably increases revenue per rep in the form of higher qualification rates, higher close rates, higher deal values, and shorter sales cycles (less time per deal). A sales organization that generates $2M ARR per rep and has an annual cost per rep of $100K will be far more profitable than one that generates $200K ARR per rep. If you are at $200K ARR today, can you increase the efficiency of your sales organization and accelerate organic growth to reach $2M tomorrow?
What’s your magic number?

Revenue is the fuel that powers the engine of any business. It enables movement, acceleration and maneuverability. Without revenue, there is no profit and eventually you run out of gas. While venture funding may provide a startup with a temporary reprieve from this harsh reality, confusing revenue with cash will only result in failure and loss of what might be your lifelong dream. You can borrow cash, but you cannot borrow revenue.

So, it would seem like building a sales operation that generates sufficient revenue to cover costs and scale profitably would be axiomatic and there would be no need to include it in a list of tips for SaaS sales executives. Unfortunately, the characteristics of the software-as-a-service rental model–vertical integration requiring more up-front capital investment combined with low pay-as-you-go subscriptions–have conspired to obscure this unavoidable economic fact. The challenge of the SaaS sales executive is more subtle than that of the traditional enterprise counterpart. While large up-front enterprise license deals support an expenses-be-damned all out attack on revenue, the SaaS model requires a more measured approach that maintains a lock on acquisition expenses, high capital efficiency and a relentless drive toward profitability.

SaaS Sales Tip #10 – Match Supply to Demand
Selling enterprise software in 1995 was like expanding into a vacuum. Innovation was everywhere, business productivity leaps were huge, and new product categories were emerging everyday. If you sold well and could demonstrate immediate ROI, then you could close the deal. In many sectors, the sales rep could show up cold and single-handedly unleash latent demand. This is rarely the case today with SaaS. Most SaaS businesses are built on the premise of expanding to underserved market segments, e.g., SMBs out to the long tail, or replacing traditional enterprise systems for lower TCO. Either way, the sales hurdles are higher and they create scenarios where acquisition costs can overwhelm revenue potential. The secret to SaaS sales success is not selling harder, it is selling smarter.

Selling smarter entails distinguishing between where you can profitably create demand versus where you can only profitably service it. Then, matching that demand with the nominal sales investment required to close. For example, if you go to a trade show where there are too few prospects too early in the purchase process, then you may be pushing on a string. However, if your website brings in highly qualified prospects, then your sales investment should be well worth the return. Similarly, cold calling to a purchased list may return nothing, but calling to a targeted group of current customers or registered prospects with a specific offer might just work. Every SaaS business has a unique and complex mix of target prospects that vary by revenue potential, pain level, product understanding, reachability, etc. Knowing where to push and where to pull is not easy, but it is essential.

SaaS Sales Tip #11 – Consistently Increase Contribution
Assuming that you have mastered the art of knowing where to push and where to pull in your market, you still have the challenge of applying the exact amount of force required to close each individual deal. Apply too much, say too many reps or too much experience for the job at hand, and your acquisition cost exceeds the deal value. Apply too little, and you miss opportunities or lose deals that could have been won with just a little more effort. Stray too far too often in either direction and you cannot scale profitably.

This tip is your CFO’s perspective of the previous SaaS Sales Tip # 6 Qualify Ruthlessly, Convert Proficiently. When you are knee deep in the sales strategy for a specific deal or the details of your latest improvement to your pipeline management process, you should never lose sight of the fact that these activities are only the various means to a single financial end. The ultimate goal is to maximize sales contribution, i.e., revenue – selling cost. It is impossible to scale profitably if the operation that supplies the fuel for the business burns more than it provides. As the SaaS sales executive, you must show the same ownership of contribution that you show for revenue. Otherwise, your short term success can spell long term failure for the business. And, don’t fall victim to the recurring revenue mirage. Keep it simple and be accountable. Increase revenue while consistently increasing revenue per rep and lowering fully loaded sales acquisition cost, and profitability will take care of itself.

SaaS Sales Tip #12 – Fearlessly Face the Risk
Don’t think you can control it. This is the claim of Dont #8 of the Top Ten Dos and Don’ts of SaaS Success.   It is as much personal counsel for SaaS executives as it is strategic advice for the business. It is also perhaps the most difficult tenet of all for the SaaS sales executive to digest, especially when coming out of a traditional enterprise software background where the sales rep has maximum, albeit never complete, control over the deal. In SaaS, as much or more control lies in the sales process, and the boundaries of that control are defined by your market–it is a numbers game. But, managing by numbers and process metrics often feels like gambling. Kaizen does not offer the same level of managerial comfort as putting your top rep on a plane to bring in that million dollar deal before the end of the quarter.

Nonetheless, it is your job to bring in those numbers. Whether or not the company has fuel for growth, profitable growth, depends on your performance. Foolish attempts to eliminate risk by exercising control beyond the natural limits that your market, your sales process or any individual deal allows will cause you to over invest in unqualified demand, over spend on customer acquisition and spiral into long term unprofitability. You cannot buy control with cash. And, there is no room for doubt or hesitation. You must motivate your team, maximize their chances of success, and fearlessly face the uncertainty that remains.

This is the fourth and final post in a series of tips for SaaS sales executives. The first three posts focused on designing an effective SaaS sales organization, SaaS sales process efficiency, and accelerating revenue growth.

This is the third post in a series of tips for SaaS sales executives. The first two posts focused on designing an effective SaaS sales organization and sales process efficiency, respectively. This post is concerned with accelerating revenue growth. The final post will discuss scaling the sales operation profitably in a high growth environment. Enjoy!

In its simplest mathematical form, revenue is equal to quantity of units sold times unit price.

revenue = volume x price

Strangely enough, this basic formula captures the essence of the SaaS sales challenge. Accelerating revenue growth amounts to increasing volume and increasing price. For most software-as-a-service businesses, volume equals the number of paying customers that are using the product and price equals the lifetime value of each customer’s subscription.

SaaS Sales Tip #7 – Lever-up through Marketing
In SaaS, particularly in a SaaS startup, it is very difficult and expensive to drive revenue by sales reps working alone. Outbound calling and offline meetings explode acquisition costs by applying too much sales investment where there is too little prospect commitment (see SaaS Sales Tip #6). The price point and complexity of the typical SaaS deal imply an extremely tight integration between sales and marketing. As a SaaS sales executive, you should never go it alone.

Marketing activities provide leverage to your sales investment, because they move customers through the purchase process many at a time, whereas sales moves them though one at a time. You should work closely with the marketing organziation to provide the feedback and direction necessary to create programs and content that bring in high quality leads, automatically nurture less committed prospects and accelerate active opportunities through to close.

SaaS Sales Tip #8 – Simplify, Standardize and Automate
In the Top Ten Dos and Don’ts of SaaS Success, I claim that you should accelerate organic growth by encouraging and enabling your customers to buy from you even if no one shows up for work. In this context, organic growth is defined as revenue aquired with zero marginal cost, now that is leverage! When you have achieved this level of marketing proficiency, then the SaaS sales executive can take a step back and apply precious sales resources to only the highest value activities for highly qualified prospects–those places where your prospects and your pipeline benefit the most from a personal touch to move a deal along or increase its value.

However, the principles of simplification, standardization and automation that enable your customers to serve themselves should also be used to empower your sales team. Accelerating and scaling sales volume requires streamlining the entire purchase process from click to close, regardless of who is performing the activities: the customer, the sales rep, marketing, pre-sales services or support. Simple pricing and contracts, standard qualification criteria, opportunity scoring togther with automated tools for pipeline management, forecasting, ROI calculation, competitor intelligence, etc. will make your team more efficient and effective, allowing them to focus their precious time and energy on the most critical aspects of the most critical deals.

SaaS Sales Tip #9 – Maximize Customer Lifetime Value
One of the great benefits of the SaaS subscription model over licensed software is that you don’t have to re-book every dollar you made last quarter before you can grow revenue this quarter. Every new booking leads to increased revenue, because it is layered on top of renewal dollars. That is, if you maintain a low rate of attrition. For the SaaS sales executive, responsibility for revenue does not end once a deal is closed. It has only just begun. Don’t expect your customers to hang around if they suffer from poor ongoing customer service, technical support or product quality. While you may not have responsibilities for all these areas, you definitely have an interest and you should cooperate with the rest of the executive team to ensure that your customers receive the ongoing care that they need after the initial deal is done.

It is always easier to sell to an established customer than to a new prospect. Therefore, you should put in place programs for up-selling and cross selling to your current customer base. Targeting specific market segments with enticing discounts, bundles and upgrade programs can double and triple the lifetime value of your customers, depending on your product line. But, if you don’t put in place the right process, tools and training for your sales team, they will just wing it and are unlikely to realize more than a fraction of the potential. In addition, it is important to provide feedback to marketing and product development about where these opportunities lie. No one knows better than the sales rep speaking with a loyal customer with budget who is looking to buy something that you just don’t have to sell.

Note: The other three posts in this series are now available and focus on  SaaS organization strategy, accelerating revenue growth, and scaling profitably.

This is the second post in a series of tips for SaaS sales executives. The first post addressed the challenge of designing an effective SaaS sales organization. This post is concerned with creating and managing an effective, efficient sales process. The last two posts will provide tips for accelerating revenue growth and scaling the sales operation profitably in a high growth environment.

In the first post in this series, I claimed that the essence of the SaaS sales operation is volume and speed, and that depending on average deal size each sales rep may need to close on the order of 100 opportunities to make quota. As such, a close ratio of 10% vs. 70% means the difference between having to manage 1000 opportunities vs. 150. The efficiency with which the sales process is orchestrated impacts the business from top to bottom. Strategically, it determines the sales expense contribution to acquisition cost, while its practical impact is personally felt on a daily basis by the sales team with a direct correlation to rep motivation, burnout and turnover. These tips address the challenge of getting the SaaS sales process under control, so that you can set proper expectations for your management and your team, increase sales performance through continuous improvement, and lay the foundation for accelerated, profitable growth.

SaaS Sales Tip #4 – Set Clear, Objective Sales Goals
Setting clear goals is good practice for any sales organization, but software-as-a-service sales managers don’t have it quite as easy as their software counterparts, because of the subscription model. The value of a deal is more difficult to measure. It depends on time, renewal rates, and future events beyond the initial salesperson’s control making it difficult to define exactly the dollar value of the salesperson’s contribution. However, this murkiness makes it all the more important to clarify sales goals and remove uncertainty around compensation by having objective, clear measures of goal achievement. Having a simple, objective formula that defines the value of a deal based on recurring revenue is the easiest approach. But, you should also have a solid model of lifetime customer value and the contribution of sales to total acquisition costs, so that you can design goals and commission plans that will scale profitably.

SaaS Sales Tip #5 – Measure, Measure, Measure
The old maxim that you can’t manage what you can’t measure is especially true in software-as-a-service sales. Once you achieve traction in your market your sales pipeline and database will quickly swell to an unmanageable number of opportunities and prospects with a wide range of revenue potential, qualification, and complexity. While each deal requires individual handling, you must divide and conquer to allocate your organization’s time and money to the highest value opportunities with the greatest likelihood of closing. This requires a macro view of the sales process, objective qualification criteria for every sales cycle stage, and fact-based heuristic models of pipeline movement and bookings forecasting. But before you can reach this level of sophisticated modeling and decision making, you have to put the appropriate measures and reporting in place.

SaaS Sales Tip #6 – Qualify Ruthlessly, Convert Proficiently
With a solid sales process model and objective measures in place, your focus can shift to increasing sales effectiveness through continuous improvement, Kaizen. Each stage in the purchase process from click to close offers opportunity for improvement. All else being equal, an increase in the conversion rate at any stage goes straight to top line revenue. Improving conversion ratios requires both ad hoc sales rep feedback and numerical measures at each sales cycle stage about the prospect’s level of commitment, the qualification of the opportunity, and the sales activities that you apply to the deal. Sound complicated? It isn’t. These are the same idea viewed through three different lenses: the prospects’s, the sales process, and the sales rep’s.

prospect commitment = opportunity qualification = sales investment

When you have balanced this equation, you have efficiently allocated your sales team and maximized your sales investment at a deal-by-deal level. Spending too much time on deals that won’t close or missing out on deals that should close can ruin your acquisition cost, team morale, and overall business profitability. In a high volume sales operation, there is no time to waste on window shoppers, unique complex custom requirements, or losing competitive scenarios. For each investment of a salesperson’s time that is made to help a prospect take the next step toward purchase, the sales rep should look for signs of equal commitment from the prospect. Developing objective criteria to qualify customers that fit your business, qualify out customers that don’t, and providing sales tools and training to move qualified prospects rapidly through to purchase is the name of the game.

Note:   The other three posts in this series are now available and focus on  SaaS organization strategy, accelerating revenue growth, and scaling profitably.

The essence of the software-as-a-service sales model is volume and speed. It is a reflection of the larger SaaS business model that assumes large economies-of-scale and low subscription-based pricing. The result is that the SaaS sales operation needs to be managed as a tightly integrated service delivery system, like an airline or a luxury hotel, with each functional group working in tandem to deliver a coherent customer experience. It requires a motivated sales team on the front line that is backed by a strong process infrastructure and a service-oriented culture, as contrasted with the lone-wolf road-warrior approach of traditional enterprise software.

This is the first post in a series of 10 Tips for the SaaS Sales Executive tasked with growing revenue and building the sales capabilities at an ambitious software-as-a-service startup. This post will discuss key aspects of sales organization strategy. Future posts will provide additional tips for accelerating revenue growth, improving sales process efficiency, and finally scaling the sales operation profitably in a high growth environment.

SaaS Sales Tip #1 – Instill Customer Service Excellence
Customer focus is not a new idea, but the difference between theory and practice can be striking from one business to another. Achieving customer service excellence begins with values and culture, but in a high-volume business it must also be ingrained in process. The best values in the world will not help if your salesperson fails to satisfy your customer due to faulty systems or information. In fact, over time faulty service processes will erode even the strongest cultural values, because everyone will lose faith as they see the hypocrisy between what you promise and what you can actually deliver. Moreover, if your business is going after the SMB market or some other under-served segment, then service can be a critical differentiator. It is more likely than not that your high-end enterprise software competitor qualifies out and ignores your sweet spot prospects, because it cannot service them profitably. This creates frustration that you can turn to your advantage by outperforming the competition in good old fashioned customer service. However, this advantage will be forfeited if you fail to establish a strong service culture and back it up with the right sales support systems, including your web site, communications infrastructure, sales automation, selling tools, training and interdepartmental cooperation, so that your sales team can deliver the goods.

SaaS Sales Tip #2 – Build the Right Team for the Job and Keep it Motivated
Sales is a tough job in any industry, but it is particularly so in SaaS. The skills required to bring in a $1M quota when the average deal value is $10K are distinctively different from those required when the average deal value is $1M. That’s 100 deals vs. 1 deal, and that can easily translate into 100 times the activity level and 100 times the frustration if sales staff are not supported by the right management, process and culture. SaaS sales reps are a unique breed and must possess a personality with an extremely high level of energy and enthusiasm that thrives on human interaction and constant activity. But, even the most energetic sales rep will need frequent encouragement and regular breaks in the action to maintain the level of motivation necessary to succeed over the long haul. Therefore, it is essential to maintain a work environment that is as motivating as it is intense. How this is accomplished will vary by organization but public celebration of individual success, ongoing coaching and mentoring, team building activities and a few fun perks are good places to start. Beyond that, it is a matter of hiring the right people, because hiring the wrong salesperson can be a very expensive mistake in terms of lost revenue and costs. To balance sales performance against acquisition cost, it is important to find candidates with just the right skill fit for the job. Over-hiring and under-hiring are both easy mistakes to make. You should develop a clear understanding of the ideal candidate profile required for success in your specific business before conducting a single phone screen.

SaaS Sales Tip #3 – Kaizen
Kaizen is the Japanese concept of continuous improvement popularized in the Total Quality movement that originated in Japan and was exported to American manufacturing and service organizations throughout the 1980s and 90s. The SaaS sales organization should strive for continuous improvement that drives up sales efficiency and squeezes out unnecessary acquisition costs without degrading quality of service. In a rapidly growing business, continuous improvement can take on many different flavors. Although essential, it is not only a matter of increasing efficiency by automating routine tasks, such as online purchase or pipeline reporting. When your business is growing, your sales organization and process must not only improve, it must also adapt, which means maintaining a high degree of flexibility and tolerance for change as you increase efficiency. For example, you will frequently hear that you should separate sales and account management, hunters from gatherers. But, this is only one organizational variation that you may need to evolve into as you grow. Reps may wear multiple hats for months or years, and then need to have their responsibilities redefined as the organization grows. Have a long term organizational vision, watch the trends, and consciously decide when to take on new organizational complexity or to eliminate a manual task through automation. Keep your team in the loop, because the best improvements often come from the ground up. And, nothing kills motivation like missed expectations. One day your best rep is both a hunter and a gatherer. The next day this rep is only one. And, the day after that your best rep quits–unless you have managed the change effectively.

To be continued…

Note:   The other three posts in this series are now available and focus on  SaaS sales process efficiency, accelerating revenue growth, and scaling profitably.

Here is a picture I find myself drawing often. It is closely related my last B2B SaaS post regarding old enterprise habits, but it is actually much more general. Most Web application / Software-as-a-Service companies will find themselves spending up to 50% of revenue on sales and marketing. But, how much should you spend on sales vs. marketing. And, how tightly integrated do these two functions need to be? Of course it is common wisdom that sales and marketing need to work together, but this need is acute for most Software-as-a-Service companies. In enterprise software, where the price point is $100-500K per transaction, the marketing organization is only loosely coupled to revenue through lead generation, messaging /collateral / website, and generating awareness through events and PR. Contrast this with a consumer application, where the tables are turned completely and what sales does exist typically takes the form of partnering and business development—which may be revenue generating, but is not aimed at closing revenue directly, i.e., getting more users.

Most B2B SaaS offerings and B2B2C Web applications (e.g., email marketing, Gadget platforms, online survey research, customer and channel support, etc.) tend to fall right in the middle of this graph. One reason for this is subscription/transaction- based pricing (as opposed to a three year, 1000 user enterprise agreement), as well as the general expectation of a Web or SaaS application to cost significantly less than software. The result is that SaaS companies must continually strive for reduced selling costs, increased marketing efficiency and tighter sales-marketing integration to create a revenue-generating machine—often by leveraging technology to automate as much of the sales cycle as possible from awareness to trial to acquisition and even through to support and add-on selling.

For the last five years or so, the conventional wisdom has held that software as a service holds great promise for enterprise business applications. There has been a spectrum of observers from zealots to skeptics, but no one has been able to deny the successes of salesforce.com and WebEx. In addition, a number of other vendors, such as Taleo, NetSuite, and SuccessFactors appear to be hitting their stride. Nonetheless, most SaaS vendors are still struggling to acquire customers and reach profitability. Why?

Clearly, the requisite larger investment in a vertically integrated hardware/software SaaS infrastructure combined with lower up-front subscription revenue entails an inherently longer ramp up to profitability than traditional enterprise software. But, my belief is that profitability issues run deeper than simple break-even timing, because vendors do not always recognize and rigorously adhere to the fundamental commodity, mass market economics of the space. In plain English, old enterprise habits die hard and it is easy to overspend on customer acquisition and product differentiation by targeting undersized market segments, chasing unprofitable customers, ignoring inefficient sales, marketing and engineering processes, and investing in functionality over quality, reliability, scalability and security.

This post is the first in a series under the heading “B2B SaaS Applications – Flies in the Ointment” that will analyze some of the common day-to-day issues encountered by these vendors, and whenever possible offer potential solutions to their ills. Some of the issues addressed in this series include the following:

• I don’t have enough leads
• My customers want to customize my application
• Getting new customers up and running is too long and hard
• My prospects aren’t Internet savvy
• My sales cycle is too slow and takes too much effort
• My prospects always seems to want that one thing we don’t have
• My prospects don’t have enough time or interest to talk to my sales staff

Also, any suggestions of interest are welcome.