SaaS Economics - Part 2: Scaling the Business This is the second part of a 2 part series that discusses the cash flow trough that happens to SaaS, or other subscription/recurring revenue businesses when they decide to scale their business by ramping sales and marketing. These kinds of SaaS businesses face a cash flow problem in the early days, because they have to invest up front in sales and marketing expenses to acquire customers, and only get payments from those customers over a delayed period of time. The first part of the series can be found here: SaaS Econonics – Part 1: The SaaS Cash Flow Trough. The greatest value from this post will come from downloading the model and inputting your own variables. Where is this applicable This model is applicable to any recurring revenue business that uses a sales force.This model does NOT apply to SaaS businesses that don’t use a sales force. Scaling the Business Ramping Sales Hiring The model shows that the worst loss is $190k per month, and that the first profit comes after 21 months.
Will your 2011 Plan stand up to investor scrutiny? We have just gone through the time of year when startups present their 2011 plans to their boards for approval. In many ways, these meetings are very similar to the meetings we have with new startups that have projections for how they believe their revenue will grow. What I always find interesting in this process is looking at how the management team came up with the bookings forecast, and what steps they took to validate the number. The smart companies will have built a bottom up model that shows how making certain investments in sales and marketing will lead to the top line number that they are looking for. (For an example of how a model like this might work for a SaaS business, take a look at the model included with this blog : SaaS Economics). To help you prepare for your investor meetings, I’ll talk about how I, as a board member (or potential investor), would go about questioning you to validate your 2011 revenue forecast. Let’s look at a three examples to see how this works:
SaaS CEOs: Measure Customer Engagement - Increase Conversions & Lower Churn The goal of a SaaS CEO should be to increase the profit they make from each customer (LTV), and lower the costs in sales and marketing that it takes to acquire each customer (CAC). Measuring Customer Engagement is a key tool that will help you achieve that goal, as it will allow you to increase your trial conversion rates, which directly reduces CAC. And it will help you lower your churn rates, which directly increases LTV. How customer engagement has changed in the on-line world In the old world, most of the ways that companies engaged with their customers would involve human interactions either face-to-face, or over the phone. There are some tools that help us judge how customers as a whole are behaving on-line, but so far those tools have not allowed businesses to analyze customer behavior at the individual level. Why should you care? You might ask why would you care about how individual customers are behaving? There are also additional benefits: How do you measure Customer Engagement?
Multi-axis Pricing: a key tool for increasing SaaS revenue Scalable pricing is a powerful tool to grow revenue in a SaaS or software business. It allows you to capture more of the revenue that your customers are willing to pay, without putting off smaller customers that are not able to pay high prices. It also provides a great way to continue to grow revenue from your existing customers. This post looks at how to create scalable pricing using multiple pricing axes, and discusses the different types of axes that can be used. Introduction Many SaaS startups begin life with one product that has a simple pricing model. However as time progresses, they may hear comments like: “I would have been happy paying far more for your product as it provides such great value to me”“I didn’t consider your product as it was too cheap, and didn’t look like a credible option to handle our more advanced needs”“I only needed a subset of your functionality, and your product was too expensive” Let’s look at these to items separately: Emotional Willingness to Pay 1. 2. 3.
Optimizing your Customer Acquisition Funnel This blog post focuses on how B2B companies can optimize their customer acquisition funnels using a customer-centric methodology to analyze and remove blockage points. Acquiring customers in the B2B world involves using a variety of marketing and sales steps with the goal of converting prospective customers into paying customers. The process is often thought of as a funnel (see diagram above) where you pour in suspects at the top, and various steps in the process, some percentage of prospects successfully convert to the next stage, making the funnel narrower as the process evolves. No matter how large or successful your business is, you will have at least one place that is a blockage point in your customer acquisition funnel. As an example, you may have too few visitors coming to your web site, which you see as the top of your funnel. In this blog post, I will talk about a method that I have found to be highly effective at removing blockage points. Identifying Blockage Points Concerns
HubSpot's Best Practices for Managing SaaS Inside Sales Best practices for inside sales managers. An interview with Mark Roberge, VP of Sales at HubSpot, discussing how he blends science and process with the art of selling. HubSpot is a SaaS company selling Inbound Marketing software. HubSpot has grown revenue over 6,000% in the last four years, placing them #33 on the Inc 500 fastest growing companies list. They now employ about 300 people. I have always been very impressed with how Mark has run their inside sales organization, which has now grown to 110 people. Mark’s background is unusual for a VP of Sales. How did MIT Sloan School influence the way you think about managing? It taught me to seek out science and data whenever possible to understand the business and make decisions. What are your goals as a sales exec, and what is your strategy for achieving them? Goals are Predictable, Scalable Revenue Growth My Strategy is best summed up as: Hiring Starting with hiring: Tell us a bit about what attributes it takes to sell HubSpot? Onboarding
Understanding the Customer Buying Cycle and Triggers This article looks at why customers expect different interactions with you depending on where they are in the buying cycle. It also examines how specific events trigger them into a buying mode. It then explains how you can use this information to make your marketing more effective. The Customer Buying Cycle A simple way to look at the buying cycle is to break into three stages: Awareness – when a customer first becomes aware of your product. How Buying Cycle impacts the sales approach needed Imagine that you wandered in to a clothing store while walking around the neighborhood. Now imagine that you have gone into the same store. What’s the difference? The difference between these two examples is where you are in the buying cycle. Depending on where you are in your buying cycle, your expectations for how the sales people in the shop should treat you are different. How do you adapt Marketing to a buyer’s stage in the cycle? What to do with visitors that are not ready to buy? Conclusions Thanks
How Sales Complexity impacts startup viability There is no question that success for the entrepreneur starts with a breakthrough (or at the very least great) product or service. Yet too often, entrepreneurs fall into the “field of dreams” mentality (in the words of Terence Mann, AKA James Earl Jones: “build it and they’ll come”). But the truth is that defining the product is just the beginning. Entrepreneurs must spend significant time thinking about the complexity of their sales process and the cost of customer acquisition, as these factors will strongly impact a company’s ability to make money and attract investors. An obvious requirement for a successful startup is that they are able to make more money from a customer than they spend for a customer, i.e. Understanding Sales Cycle Complexity Let’s start by looking at the sales cycle spectrum. The following diagram attempts to portray the spectrum that exists from the simple to the complex: Freemium No Touch Self-Service Light Touch Inside Sales High Touch Inside Sales The Amber Zones
Why Churn is SO critical to success in SaaS Summary: Illustrates graphically why churn is a huge problem a SaaS company gets larger. It also looks at a very surprising factor that can massively accelerate SaaS growth: negative churn. (This article is applicable to any recurring revenue business, not just SaaS.) Introduction As a SaaS company becomes larger, the size of the subscription base becomes large enough that any kind of churn against that base becomes a large number. The red and yellow lines show the lost revenue due to customers cancelling their subscriptions (churn). Looking at the graph above, we can see that Churn is really not that big of a number in the early startup months. The graph below shows the impact on Total MRR (monthly recurring revenue) of each scenario, which is fairly substantial. The Impact of Negative Churn It is possible to run a SaaS, or any other kind of recurring revenue, business in such a way as to get what I call Negative Churn. The result is quite shocking. It’s an amazing result.
SaaS Metrics - A Guide to Measuring and Improving What Matters This blog post looks at the high level goals of a SaaS business and drills down layer by layer to expose the key metrics that will help drive success. Metrics for metric’s sake are not very useful. Instead the goal is to provide a detailed look at what management must focus on to drive a successful SaaS business. For each metric, we will also look at what is actionable. There is an updated (re-written) version of this post available here: SaaS Metrics 2.0. Before going any further, I would like to thank the management team at HubSpot, and Gail Goodman of Constant Contact, who sits on the HubSpot board. Let’s start by looking at the high level goals, and then drill down from there: Key SaaS Goals Profitability: needs no further explanation. Two Key Guidelines for SaaS startups The above guidelines are not hard and fast rules. In the next sections, we will drill down on the high level SaaS Goals to get to the components that drive each of these. Three ways to look at Profitability Other Metrics