Sales and Marketing 101 for SaaS (and Recurring Revenue) Businesses

I often find myself working with small- to medium-sized software and recurring revenue businesses. I do a lot of work with search fund acquisitions where an aggressive young CEO (typically out of a top business school) buys what has been a lifestyle business from the founder and attempts to grow it through professionalizing management and in particular by putting in place a solid sales and marketing process. I find myself saying the same things a lot, so figured I would just write them down here. 

People in the software as a service (SaaS) world have gone nuts with their metrics and nomenclature. After all, the granddaddy of all SaaS businesses is the sales force itself. Some of this approach is just stupid. But at its core, it's a useful way to think about building a predictable marketing and sales machine and making sure it is maximally efficient and also that you are spending the right amount on it for the results you are getting. 

The key questions you want to be able to answer with your sales and marketing process are:

1. 1) How do I best grow revenue?
2. 2) How do I make my revenue growth predictable?
3. 3) What are the most effective ways to generate leads and then close deals?
4. 4) What is the right level of sales and marketing spending given the results I am producing?
5. 5) What's the best way to compensate my sales and marketing people to increase results?

I'll take the sales process in steps.

First, you have to identify the entire universe of potential customers, not just the companies that could use your product but the people in those organizations who are the decision-makers who have the budget to buy your product.

Second, you have to reach those people and introduce them to your product. Generally, that happens one of two ways: marketing or inside sales (or a combined effort between both groups). This is what most sales teams would call the generation of "marketing qualified leads." This just means that you have reached the right person in the right organization, and they have scheduled a demo of your product. Everyone in marketing and inside sales is measured, and paid, based on how many demos with pre-qualified prospects they generate each month (someone who isn't from the right kind of company who isn't the decision-maker with a budget to buy doesn't count). A lot of analysis can be done around different kinds of marketing and inside selling to improve efficiency. How much does each MQL cost at this conference vs. this white paper vs. this inside sales guy? You should do the stuff that generates MQLs cheaply and stop the stuff that generates MQLs that are expensive.

From the demo forward, the lead is in the hands of the outside sales team. In most organizations, after the first demo, the lead either dies or turns into a sales-qualified lead because the potential customer has had a demo and is interested in moving to the next step.

From that point forward every company is unique in terms of the process and timing of what needs to happen to get from first demo to the close. But the important part is to identify different buckets based on progress through the process that correlate with an actual data-driven analysis of probability to close. If someone who has had a second demo and received a pricing quote is 50% likely to close (based on past experience), maybe that is a bucket. If someone who has verbally committed and has the proposed contract in hand is 60% likely, maybe that is a bucket. If someone who has actually returned the first redline of our contract is 75% likely to close, that's another bucket.

The goal is to constantly have a sales funnel of all potential new customers from MQL all the way to just waiting on signature, which allows us to see the total dollar amount of the pipe unweighted for probability and then the probability adjusted amount and then just that amount, which is very near the end of the process with a high degree of certainty. And watch how each of these categories CHANGES over time, as well as how process improvements at the top of the funnel and between each bucket change the historic percentage of conversion.

The final question is really whether or not we are spending the right amount, too much, or too little on marketing and sales. This applies to efficiency, or what folks in the SaaS world call CAC. There are a ton of ways to define it, but the way I think about it is, if you annualize your all-inclusive sales and marketing spending, how much does that buy you in terms of new contracted revenue on an annualized basis? When people talk about revenue, there are really three concepts: the annual revenue of a contract, the total revenue in a multi-year contract, and the lifetime value of a contract, which is derived by figuring out how many years your customers stick around on average (using the inverse of churn) and multiplying it by the annual contract value. People also talk about CAC as the amount of time it takes to pay back the investment in sales and marketing.

In general, for these kinds of business you want to spend up to the point where your sales and marketing team expense equals your first year revenue from new business, since contracted and lifetime values tend to be much bigger than just first year revenue, and everything beyond that first year is then profit. So a CAC of 1.0 is good. If you are getting a lot more than 1× your first year revenue out of your sales and marketing team, it means you probably should spend more to grow your business more aggressively. As you spend more money the incremental dollars will gradually become less effective until you reach equilibrium. If you are investing more than 1× your incremental first year revenue in sales and marketing, something is wrong. You may need to cut costs, figure out what's going on with your product, your market, or your approach. 

I'll stop there for now. There's plenty of good stuff on the web on all this, but here's a good general summary of some of the above: http://www.forentrepreneurs.com/saas-metrics/

In SaaS businesses the gross margin is generally 90-plus-percent and lifetime value of a customer is several years of revenue.  In other recurring revenue businesses you may need to adjust these calculations if your gross margin is lower and/or your customers tend to stick around for a shorter period of time.  Otherwise the analysis should be the same if you are selling software or cable television.