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 donâ€™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 canâ€™t seem get it together on this approach? Youâ€™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 Donâ€™t #4). If youâ€™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. Iâ€™ve seen plenty of SaaS sales organizations that do not follow this model and they usually have good solid reasons for doing otherwise. So, itâ€™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 customerâ€™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 customerâ€™s customers is the primary driver of future revenue? And, how important is the continuity of interpersonal relationships between the customerâ€™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.
Whatâ€™s Your Magic Number?
Iâ€™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 donâ€™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?
Whatâ€™s your magic number?
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[…] only person orchestrating the sale and indicates a highly transactional SaaS sales model. If your SaaS sales organization includes ancillary staff, e.g., lead qualification, technical support for on-boarding, account […]
Good post Joel.
Not sure about targeting 5% annual churn seeing as how 5% of businesses go out of business each year (making your effective churn 0%).
Also curious how you feel about replacing Sales Margin w. CPA…