2
By Kevin Dobbs
Montclair Advisors, LLC
The best-in-class SaaS companies are obsessed with operational efficiency, and they are constantly testing and monitoring all different types of business processes to improve speed and reduce costs.
A good example of this focus on efficiency is the use of the Customer Acquisition Cost (CAC) metric to measure the overall effectiveness of marketing and sales efforts. Since it is not possible for a SaaS firm to spend as much to sell new customers like a traditional software company, this becomes a very important efficiency metric to track because it has a direct impact on both the top and bottom line of the company.
SaaS Metrics
Just like CAC, there are a number of other process-specific SaaS business metrics that are commonplace for firms to use to monitor all areas of their company. Leading firms will usually track some subset of these types of these SaaS metrics on a quarterly, monthly or even in some cases daily basis. Here is a list of sample SaaS metrics that I have shared with my clients that can be used to kick start the discussion with operational groups inside of a firm that is considering a move to SaaS:
The most obvious areas to track are revenues, COGS, cash flows, bookings, CAC, profits, customer satisfaction, customer lifetime value, revenue per unit, customer satisfaction and churn. Beyond that there are a myriad of process specific metrics and dashboards that can be tracked and monitored, but start with the most important ones first.
Other Resources
Here are some great sources of information on SaaS metrics including:
David Skok of Matrix Partners, forEntrepreneurs blog and his SaaS Metrics post, which is really comprehensive and easy to read.
ReadWrite Cloud’s, 6 SaaS Metrics You Should Track
Michael Dunham of Scio Consulting, Haut SaaS Blog did a great post on SaaS Metrics – SaaSoNomics 101
Joel York’s Chaotic Flow Blog is always really useful and he did a fantastic post on SaaS Metrics and Economics. Joel provides a very scientific approach and a lot of details for those who are really interested in getting into what comprises SaaS metrics theory.
Some firms like j2Communications tracks hundreds of metrics related to their subscription software services but it took them ten years to get to that point. My advice to clients is always, start with something simple, make sure that works and then you can always add complexity as you go along.
by Kevin Dobbs
Montclair Advisors, LLC
When advising software clients who are interested in moving to a SaaS business model, one of the areas I really dig into is how are they selling to new customers. Most of us in the SaaS community realize that carefully tracking your Customer Acquisition Costs or CAC, is a critical component in building a successful and profitable company, but I think it is equally important to understand how traditional software sales and marketing models and SaaS models differ.
Traditional Software Sales & Marketing Model
Over the past 25 years there has been a traditional way to market and sell enterprise software which has been based on key principles such as:
- You need a Large direct sales force including a large support team, or as I used to call them, ‘The Cast of Thousands‘
- Front loaded compensation plans that pay out when deals are sold
- High average sales prices, including services, that would almost always be over $500,000
- Long sales cycles, usually 6-12 months, with pursuit costs averaging around $70,000 for every deal the company played in
- Win rates are in the 30-50% range
- Average face-to-face selling time that is around 15%
- Pipeline building using a combination of in-person events (seminars, tradeshows, user group meetings), telemarketing teams (inbound and cold calling) pounding the phones and a lot of paid marketing campaigns
- Lead pipelines that appeared full but always seemed to lack the appropriate level of qualified opportunities
- First generation CRM systems and reports that were produced periodically using Excel
Brings back the good ol’ days doesn’t it. Many software firms are still using this model and they are finding out that it doesn’t work very well in the new world of Software-as-a-Service sales. Some of the reasons it doesn’t work is that software buyer preferences are definitely changing, but one big issue is it is very expensive to operate this type of model, especially when you get your revenues paid out over time.
SaaS Sales & Marketing Model
There are several important differences in the SaaS model that make the traditional software sales and marketing model less than effective;
- SaaS customers pay a subscription based on users or usage of the software service over time, usually over three years. After the recession, this has become the new normal for software sales
- More focused solutions that usually have Average Sales Prices that are typically lower, so reps need to sell more deals to hit the same quota targets
- Key metrics like customer satisfaction, renewals, up-selling and cross selling are even more important for SaaS than they were in the past
- Sales method is more of a “penetrate and radiate” approach
- It takes a long time to build up a recurring revenue stream
Given these differences, then what should your SaaS Sales & Marketing model look like? Here are some ideas to consider when building out your SaaS sales and marketing plans for 2011 that can help you to build out a low-cost but high-efficiency sales and marketing machine;
Marketing
- Hire experienced marketing leadership and professional
- Evolve a good list of key influencers and industry contact and communicate with them frequently
- Develop a clean prospect database
- Mix paid and free social networking programs
- Build a vibrant customer community and market to them with products like Lithium
- Leverage social media like LinkedIn, Facebook and Twitter to generate interest and leads
- Use Web 2.0 marketing tools like Marketo, Eloqua, Pardot and try drip marketing
- Track everything (see the last Smart SaaS post)
Sales
- Hire experienced SaaS sales leadership and reps
- Your SaaS sales team should be more low touch than your traditional sales team
- Experiment with telesales even with high end enterprise products
- See is using an indirect channel makes sense for your business, if managed correctly these distribution partnerships can dramatically lower your sales costs
- Carefully track your lead hand off between marketing and sales, make sure leads are not falling through the cracks
- Track everything
Metrics like Customer Acquisition Costs and the Magic Number can help your sales and marketing teams see how effective their programs are and can provide insight when to invest and when to continue developing your repeatable sales model. I would also encourage you to learn more about Mark Leslie’s Sales Learning Curve, because it offers a more scientific approach to cost-effectively building out your SaaS sales team. Best-in-class firms that have profiled in this blog have adopted many of these techniques to build a scalable but cost-careful sales and marketing organizations.
Stay tuned for Tip #6 Package for Viral Adoption
Back to top