4 Practices Every B2B Company Can Learn from the SaaS Sales Model
Over the last five years, CRM and marketing automation firm HubSpot has been growing revenue at a compound average growth rate of 37%. For sure, companies like HubSpot that are growing exponentially have amazing products and winning business models. But they also have sophisticated sales organizations that fuel that growth. In our March 16 Webinar with HubSpot (click here to watch), we unpacked the high-growth SaaS sales model and explored how both SaaS and non-SaaS businesses can benefit from the approach. In this article, we will focus on what any B2B company can learn from these highly effective SaaS revenue engines.
Before we dive in, allow me two caveats. First, I’m never a fan of blindly copying successful models and “best practices”. Instead, I strive to understand the underlying reasons why something works, and then carefully help business leaders apply those ideas where it makes sense. Hopefully this article helps you do the same. Secondly, I’m not saying that every SaaS sales organization is great or that companies selling subscription software have found the holy grail of growth for all businesses. That said, as I’ve worked with these high growth digital businesses over the last 8 years, I believe that “necessity has been the mother of invention” for this industry; a new business model (SaaS) has led to creative and effective practices that are helpful far beyond the industry that birthed or sharpened them.
With those disclaimers out of the way, here are 4 practices that successful SaaS companies use to build a sales organization that fuels exponential growth, and any B2B company can improve their revenue engine by paying attention.
Practice #1: They figure out what a customer is worth, and then invest accordingly
Most B2B sales organizations base their investment in sales and marketing on budgets that are set to ensure that reasonable profit targets are hit. Makes sense, right? If we know how much revenue we generated last year, what our expenses were, and then estimate how revenue and expenses will change this year, we have our budget. But early stage venture-funded SaaS companies aren’t usually concerned about profitability. With the major constraint being the burn rate of cash, and a mandate to grow quickly, these companies must answer a different question: How much should we spend on acquiring customers, and how much revenue can we expect from those customers in a given time horizon? Ecommerce companies face the same question. This requires the use of a new metric[i] that compares the lifetime economic value derived from the customer to the total cost of initially acquiring the customer.
Customer Lifetime Value (LTV) is the value of all future cash flows from the customer to the seller over their entire relationship. Often this is calculated as:
Customer Acquisition Cost (CAC) can be calculated by adding all the sales and marketing expenses over a given period of time, divided by the number of new customers acquired during that given period of time.
When we divide LTV by CAC, we get the LTV:CAC ratio. If the ratio is 1.0, then you are only breaking even on each new customer you acquire.[ii]
Many SaaS companies target an LTV:CAC ratio of 3.[iii] For every dollar they invest in acquiring customers, they get back $3 in gross margin. If the LTV:CAC ratio is much below 3, it may indicate that the customer churn is too high, gross margin is too low, or sales and marketing spend is inefficient. If the LTV:CAC ratio is 5 or higher, it may indicate the company is not investing enough on sales and marketing, and is therefore restraining growth.
Let’s bring this back to a non-SaaS B2B business. LTV:CAC is not a SaaS metric or an eCommerce metric. It’s a great business metric. And though CAC and LTV numbers vary wildly across industries, knowing what a customer is worth to your business, what they cost to acquire, and then investing accordingly is a simple yet powerful concept that should be central to your growth strategy.
What’s your business’s LTV:CAC ratio?
Based on that, and other key factors in your business, what adjustments should you make to how you invest in growth?
Practice #2: They deploy specialized roles against a “full funnel” approach
Sales and marketing are often bifurcated in B2B businesses, with siloed fights about the poor quality of leads from marketing or the sales team’s inability to convert leads to sales. In contrast, most SaaS businesses I work with have a full funnel approach to customer acquisition from Day 1. By “full funnel”, I mean they are integrating seamlessly across both the marketing funnel and the sales funnel, removing the constraints at each of the four major portions of the funnel — creating awareness, generating leads, obtaining sales appointments, and winning sales opportunities.
That integrated viewpoint is a good start. But great SaaS businesses take it a step further by deploying specialized roles at each major point of the “smarketing” funnel. A typical SaaS revenue engine looks like this:
These specialized roles create focus, and the focus results in clear accountability and excellence. This is especially true of the Sales Development Rep (SDR) role, which serves as a critical link between marketing and quota carrying AE’s. Compare this to many B2B sales organizations who still expect quota-carrying salespeople to generate their own leads, set their own sales meetings, close new business, and sometimes manage implementation.
How well does your marketing and sales organization cover all aspects of the Smarketing funnel? At which point is your greatest constraint to growth?
Where would specialized roles in sales create much needed focus and accountability in your organization?
Practice #3: They figured out how to fix the leaky bucket
In many B2B sales organizations, AE’s are expected to not only find and win business from new logos; they are also expected to manage and grow existing accounts. Since finding new revenue from new logos is about 6x harder than getting revenue from an existing account, companies with this model find salespeople gravitating towards “farming” instead of “hunting”, and the percentage of company revenue from new logos begins to shrink. Or, if enough heat and pressure is applied to the new logo business, existing customers get ignored, resulting in a leaky bucket that is constantly being poured into, but never seems to fill up. To address this, a third organizational strategy honed by SaaS organizations is the use of an Account Manager (AM) role focused entirely on renewing and expanding business in existing accounts (see the last role in the above diagram). By having two discrete roles, each focused on either new business or retention (but not both), the SaaS sales model can achieve YoY revenue growth that would otherwise be unattainable.
Does your offering provide opportunity for customers to continue using it over time, buy more/additional products, or use your service and support?
If so, how well does your sales structure maximize new revenue from existing customers?
Practice #4: Beware the Assembly Line
In many ways, SaaS has done for sales what Henry Ford did for the automobile; they both created an assembly line. Like me, you may have an initial aversive reaction to the idea that sales, with all its human dynamics and “art”, can be treated like an assembly line. Perhaps it would be more palatable if we thought of this as a well-designed and effective process. Whatever terminology you choose, assembly lines are a double-edged sword. On the one side, specialization and repetition create the opportunity for efficiency and continuous improvement on each section of the assembly line. On the other side, assembly lines foster more rigid thinking by which people lose the big picture, focus solely on their little piece of the process, and have difficulty adapting to changes in the broader environment. For this reason, the SaaS sales model should come with a warning label stating what the best (and really only the best) SaaS companies have learned:
- Caution! Entire sales process must be continuously improved.
- Watch out for broken linkages and clunky hand-offs.
- No silos. Organize in small teams. Build in cross-training.
- Keep all eyes fixed on customer value and overall company success.
Oh, and fasten your seatbelts. Your business is about to take off.
P.S. If you enjoy learning from other smart, collaborative heads of sales and CRO’s, stay tuned for Entheon’s Revenue Mastermind Group. The next group is forming in May and kicking off in June. Contact me directly if you would like to inquire prior to the official announcement.
[i] As best I can tell, the use of Customer Lifetime Value had its beginnings in software sales in the late 1980’s. My theory is that the explosion of eCommerce did a lot to emphasize the metric and add the idea of calculating a ratio that divides LTV by CAC. If you have additional insight, please leave a comment below!
[ii] Since this metric only takes into consideration sales and marketing costs and costs of goods sold, but not operating expenses and product development, it can’t on its own indicate the overall health of the business.
[iii] Like most business metrics, LTV:CAC is a subject of much debate and must always be considered in the context of your specific business.