I seem to have spent most of the last week in various stages of finding suppliers. From formal pitches to writing an initial brief and several points in between. In all cases the companies I was working with were looking for professional services. Or buying in skills and expertise in some similar form.
Finding trusted suppliers is another on the long list of hard choices a startup leader has to make. In the early stages you might use external suppliers for anything. From building your product to traditional services like legal and accounting. The wrong choice can cause extensive damage. Getting it right is about looking beyond price to find the right talent. Someone with the skills you need and the courage to tell you what you don’t want to hear. Its Never just price
Let’s start with the biggest bugbear. Price is a terrible way to choose a supplier of anything. And for services there is no worse measure of value. At least with commodity style goods you can compare like with like. When a service is delivered by a skilled team, this is impossible.
Even when a service is described as a commodity (basic accounting or legal for example), the comparison is not so simple. Professional advice is like an insurance policy. When everything goes well it doesn’t matter who you choose. But when a problem (or a claim) arises, the pain caused by having the wrong advisor will be terrible. So price is never the only factor. If you can’t see any other difference between suppliers, you need to look harder. The Kakocracy TrapNoun: kakocracy - Rule or government by the worst of the people
The first step in finding the right supplier is making a list that includes the best options. There are two regular ways of doing this:
Both techniques are useful. But someone also needs to do a bit of research. Scan the internet. Think about whether your job is one that needs a local supplier. Don’t be afraid to go global for some things. The test is the skills you need and the quality of communication. Talk to people you know. Especially those who don’t come forward with recommendations. This is an area where the startup ecosystem adds a lot of value. And silence is not golden but red for danger. By all means speak to advisors as well. Only remember there is a lot of back scratching in these networks. Advisors and mentors can be helpful but they are also the prime source of the trap. There is a cost in time to making a good list of suppliers. It will be outweighed by the benefits of making the right choice more often. The jobs to be done mirror
The absolute foundation for buying any type of service is to be clear about the expertise you are buying. Its the precise reflection of the jobs to be done framework for evaluating a startup idea. Before you spend any money, understand the job you need done and the skills it requires. Choose a supplier based on those critical areas of expertise.
In some ways its like hiring. You want to find the right talent. The big difference is that you only need this talent for the short term. This means you select a supplier for experience and track record. Whereas you should always hire for potential and fit. However, track record is not the same as finding someone who has done the same project 10 times before. No two projects are the same. When you look at supplier experience focus on the core skills needed for your project. Take up references. And ask about expertise not just the results. Take market research as an illustration. Don’t bother about someone having researched the same market you want to look at. What matters is the ability to reach the right audience. Skills in asking the right questions and probing for the real answers. And an intelligent evaluation of the responses. Be clear about the things your advisor does that you cannot. And agree a scope of work that is defined by those key areas of skills. An outcome not a result
You are buying an outcome but not a result. A good professional supplier gives you and honest and independent assessment. Often this is not the result you wanted. Get over it. And understand this in advance. Choose a supplier who will give you a great outcome. Don’t try to buy confirmation of your own opinion.
The same principle applies to skills outside the traditional professional arena. There is no point in outsourcing software development because you can't code. And then restricting the developer by your own limited knowledge of the subject. When you are choosing a supplier, the best test of this is how they set expectations. Look for someone who questions your project objectives. Not just blind agreement. And choose a supplier where communication of changes and new ideas is embedded in their approach. A word about incentives
Once you get people involved, the psychology of incentives is an inevitable part of success or failure. (I sometimes think Alan Turing over complicated matters. The test of true artificial intelligence will be when a machine offers an emotional reaction to an incentive.)
A key area of incentive when choosing suppliers will be the pricing mechanism. There is no right answer but think about these three things:
The Chairman's View
Finding and buying services from suppliers is a bit of monster. Big corporations devote entire departments to getting it right. And still make mistakes every day. Its an important job for a startup leader. Yet its not critical. For me I want to see a CEO who contains the risk. I don’t expect you to get it right every time.
So think about:
Comments
I am going to continue my current theme of selling to the enterprise. (See my posts on SaaS Sales and SaaS for the Enterprise). By definition this is a subject for B2B SaaS companies. And this makes it important because SaaS has the potential to disrupt big business for the better.
This disruption comes in two forms. Replacing the traditional business software model with a cheaper, better and more flexible approach. Or driving change by enabling more efficient and effective business. In both cases, many B2B SaaS companies offer a proposition based on cost reduction. It is straightforward to make the business case for such cost reduction. Yet the proposition suffers from a simple structural disadvantage. Cost reduction is a tough sell. Always. There are two reasons for this. Cost reduction is an uncomfortable and challenging subject for any business leader. And radical cost reduction strategies carry genuine risks. Your chances B2B SaaS success will be better if you are aware of this backdrop. And address these concerns by designing a patient and more subtle sales culture. The elephant in the room
At various times in my career I have found myself sitting opposite a leader from a business in genuine trouble. Perhaps in a struggle for survival. Or enmeshed in the legal process of administration or insolvency. In these circumstances, eliminating costs is an absolute imperative. Yet there is still resistance.
There is some obvious psychology at work here. Costs are not a fun or sexy subject. Growth and making money have far more appeal. Remember this in any sales conversation. You may be excited about the opportunity. But you are talking to someone who is facing a bill. Not the same mindset. That mindset runs a bit deeper. Suppose you present clear evidence that your SaaS will save money at a rate 10X the purchase price. (Please don't with the “no brainer’ cliche.) In the mind of your customer you are laying down three other challenges. Sending these messages to your potential customer:
Beyond psychology, the real business risk
Any buyer is likely to be in defensive mode. Framed by the list above, their arguments may seem unreasonable. And a good sales pitch will set out to counter. Presenting rational analysis of real benefits.
You need this in your armoury. But don’t allow the emotional to disguise the true business risk your customer faces. Adopting any B2B SaaS requires business change. When the objectives involve cost reduction, there will be losers from business change. It could be your competitor products. Or it might be people of power and influence within the customer organisation. At the lower end of the scale, an innovative SaaS might eliminate information barriers. The type that protect silos within large businesses. Scale up the impact and budgets, departments and jobs come under threat. The result is that change is harder for business to implement. And it brings downside risks of negative disruption or reputation damage. A responsible customer will want to weigh these risks before buying your SaaS. You need to respect that view and help. Not just challenge it hard. The Chairman's view
None of this means cost reduction is not a great value proposition. An essential function of innovation is to improve the efficiency of existing businesses. And the Fortune 500 is full of stagnating companies. Struggling to make good returns in a world of flat revenues. Entrepreneurs will build some great B2B SaaS businesses on the back of this opportunity.
But you need to understand that this is a difficult and sensitive sales process. At the extreme end you will be offering your customer a live grenade to blow up their existing business processes. This requires more subtle culture and content for your sales proposition:
Enterprise sales are a long process. When the main customer benefit is cost reduction, the path is both longer and tougher. You can fight this. Or you can understand the psychology and the business risk. And build a sales process that leads to long term success.
In my last post I talked about selling your SaaS product to big companies. It included some of the key challenges for boards and CEOs. And No 1 on that list is building the right team.
In my subsequent discussions with companies and other NEDs, one problem in this area has dominated. At least in Scotland, finding sales people is proving difficult. Many SaaS companies feel hamstring by a failure to identify suitable recruits. A group of NEDs and advisors are gathering in a few weeks to share ideas. In advance, I wanted to do a bit of thinking aloud. My basic idea is simple. Why buy an expensive sales team with long track records? And offer further rewards with hard to define commission structures. Instead try to find young people with potential and ability to learn. Let them grow into the role like everyone else. Confusion reigns
When I talk to entrepreneurs about this subject, the discussion centres on three things. Finding a candidate with the right experience and track record. Designing an appropriate (and expensive) salary and commission package. Confusion and uncertainty about the exact needs of the business.
At one level the last point is not surprising. For a SaaS company at the start of the scale up journey many things are unclear. Seeking larger customers is fine. But which are the best fit for your product? You know that selling to the enterprise is a longer and tougher road. Yet the steps along it and the path to success are unknown. Revenue depends on both new logo accounts and upsell. What is the right balance of resources between them? SaaS Scale up - You don't know what you don't know
The reality is that hiring a sales person is not going to resolve these issues. At this stage of growing a SaaS business you are still exploring and experimenting. You must find the answers to a whole series of fundamental questions, including:
This is a job for the CEO and the whole team. A sales person may have the right skills and experience to help. But there is not a defined and measurable role waiting to be filled. Sales, account management, customer support and product development all need to combine to get to the right answer. Ability to learn not ability to sell
So the reason you are unsure about the exact needs of your business is that you don’t know. And the critical task is to find out the answers. Not to sell an established product to a well understood target customer base. That comes later (if you are lucky).
In this light, the two earlier questions (track record and package) need quite different answers. Take skills and experience first. The critical qualities needed to succeed in this role are:
It may well be that you can find a sales person who fits this description. But you will need to look well beyond their pure selling skills. Hire for potential
Reading the list above again, does it remind you of anything? These are the talents that everyone in a startup needs. Every other senior appointment tends to be someone with little or no experience in the role. The CEO and founder may be a first time entrepreneur. The CTO will be a great software engineer but have they led a development team in the past?
Each company will have its own mix. The guiding principle is the same. A typical team is a group of ambitious, talented individuals doing something new. And taking on different and stretching roles as they do it. As a founder you understand this. You look to hire people with potential to grow and achieve great things. Why would you approach sales any differently? Most often, the CEO is the best person to “sell” your SaaS in the early days. Of course as you grow, you don’t have time to make every sale. But you can coach others. This article by Steli Efti on coaching junior reps offers a basic framework. Reward for growth
Yet the reality is different time and again. I look at business plans and the most expensive planned hire is the sales lead. Often paid more than the CEO. The job spec includes 10 years experience. The objective is to find the finished article. One person who can rewrite the growth curve single handed.
On top of the big salary, sales reps are also looking for commission. If your SaaS is at the start of the enterprise journey you don’t know who you will sell to. What exactly you are selling. Or how much your customers will pay for it. How do you design the right reward systems? You can’t. Commissions and other sales rewards are systems of incentives. They work well in a world where the role of sales is defined in detail. The product options and margins are established. And the target market is clear. Then you can motivate the right behaviours. And set stretch goals. Where these things are not well understood, incentives are fraught with danger. Without any ill will on either side, it is easy to encourage the wrong things. Sell at the wrong price. Sign up the wrong customers. Push for revenues too early. And a hundred other ways to damage your business. So is a high paid VP of Sales the answer. Is a commission structure that no-one fully understands the best way to spend money? The Chairman's view
Experienced sales people are difficult to find. Bringing them into a startup is high risk and high cost. It may still be the right strategy. But it is worth considering an alternative approach.
Look for people who are young, ambitious and talented. The type who fit well with the nascent culture of your organisation. Maybe someone who is in a sales training scheme. Or doing a sales support job and getting frustrated perhaps. Offer them a fair base salary and some options. You can always add a commission scheme later. Work with them. Help them learn and grow into the best sales team on the planet. And they will help you find the right market and business model to build your SaaS….or is this all crazy?
I love to talk to people about their businesses. Thinking through strategy. Tackling challenges and opportunities. Helping leaders take tough decisions. That has been my working life and there is nothing I would rather do.
Every so often, I facilitate a group of SaaS entrepreneurs based here in Scotland. This means I get to talk business with a dozen or more startups at the same time. Heaven. The focus of the group is to share common challenges in SaaS. When we met on 4 October the discussion topic was selling to enterprise customers. This is a great sign. A number of companies in the group are now mature enough to be targeting deals with larger customers. (We also had some new joiners so the community is growing nicely.) Our discussion picked up some great ideas that would help anyone dealing with large companies. The main things in my mind are: Team/ hiring; target markets; patience and process; land and expand. Build the right team
Enterprise revenues are like every other aspect of your business. The biggest determinant of success if the quality of your team.
You need to find a way to sell your product to large and complex customers. A good SaaS pricing page and clever inbound marketing are not going to cut it. You will need to build a team. That means some combination of hiring and developing/ promoting your existing talent. People are the biggest decisions you make as CEO. So think through the type of person you want. Get a second pair of eyes and ears involved in the interview process. For example, an advisor, mentor or NED might be able to help. Design the right package for the best talent. And remember, at the end of a recruitment interview, maybe means No. Target the right customer
Making a sale to an enterprise customer is often a long process. Growing that initial deal into substantial revenue requires even more time. And there is no guarantee of success when you start. How can a startup or scale up with limited resources handle the demands?
Focus on the right target. It can be tempting to respond to every corporate enquiry. When a household name approaches your little SaaS it is flattering and exciting. There is nothing wrong with having an initial discussion. Use that time a bit of research to find out if this company is a genuine opportunity for your product.
Patience, Patience, Patience
Completing an enterprise sale takes a long time because the process is complex and slow moving. Large companies have whole departments just to buy stuff. Called procurement, purchasing, supply chain or whatever. These teams have systems, processes and standards that take time and effort to navigate. Often it feels like you are up against the deal prevention team.
And procurement is not the only challenge. You must convince and reconvince the business of the value in your product. You may also have to prove you are better than the competition. No wonder one of the companies in the SaaS group had planned for 9 months to complete its first enterprise sale. And is running behind schedule! Tactics and specifics for managing these matters is a big subject. The biggest risk is impatience. Push too hard. Appear desperate for a deal. Or just let your frustration show. And the prize will slip through your fingers. Hunt for thrills, farm to live
Winning deals with enterprise customers is worthless. The goal is revenues. Actual cash in the bank. Sustainable and underpinned by rapid growth.
For a SaaS company that means the long and painful sales effort is only the tip of the iceberg. The value is only delivered after the contract is signed. Persuading and supporting individuals, departments and divisions to adopt and use your product. All the moving parts inside your new minted enterprise customer. A bit of new language has grown up around this. Customer success, upsell, negative churn etc. These are all terms for an old fashioned business fundamental. Account relationship management. You should plan for your SaaS to have account management people, systems and resources. Think about the organisation you want after you win the deal. Develop budgets to reflect a realistic view of the way enterprise customer revenues develop. The Chairman's view
Moving from an SMB focus toward enterprises is not an easy road. From a board/ investor point of view I want to help the leaders of SaaS companies focus on the key decisions. Give entrepreneurs the best chance to realise the opportunity and manage the main risks. You should for an experienced head to help you with:
All are interdependent. Nothing happens in a neat sequence. You never have all the information you want. Welcome to leadership!
The most exciting news for me in the last couple of weeks was the announcement of a new partnership between Appointedd and ABCN. For any reader that does not know I am an investor in Appointedd and I also sit on the board. I am incredibly proud of CEO Leah Hutcheon and the whole team for pulling this deal off. They have built a great product and are growing a fantastic business. This is a huge step forward.
You can read full details about the way the deal works here. It offers a useful spotlight on a big picture trend that is important in B2B SaaS. Distribution has been seen as a choice been online signups and direct sales. A different model built on networks and partnerships is emerging. This should be good for growing B2B SaaS startups. And for their customers and investors. The seductive illusion of online sales
The online only model is one of the great attractions of SaaS for any entrepreneur. If you have the technology skills you can build a business with little or no sales and marketing cost. Google and Facebook ads plus various forms of inbound marketing will bring in potential customers. The software will do the rest.
With gross margins in the 80-90% range this looks like a great business model. No expensive sales force. Limited customer service and support. Get the conversion metrics and the cost of acquisition under control and watch the money roll in. The real world doesn’t quite work like this. Online only sales are fine for SMBs. But these customers offer low revenues and short(ish) customer lives. And the cost of acquisition in the big bad world of online ads is hard to control. Then the conversion rates are never quite good enough. Moving your SaaS upmarket
Before long the numbers start to look tough. Yet there is a still a route to success. Move up the scale and look for those enterprise sales. Bigger initial revenues. Lots of opportunity for upsell. More customer loyalty reduces churn. With a bit of traction this is the route to success.
The solution is to build up a sales team. Hire proven professionals and design the right incentives to drive revenue growth. These sales are complex and the upsell is vital. So you add a customer success team. Careful organisation structure and well managed revenue and retention metrics drive everything. And provide the basis for strong management. Sales ops are the final piece of this jigsaw. Creating this structure is expensive. Yet with a good founding team, a sound product and some traction you can raise investment. All those metrics build into a convincing business plan. Enough volume and the right performance from your extended team will get you there. The long road to B2B SaaS success
In truth both these approaches work. Study any of the flagship success stories of the SaaS world and you will see elements of one or both. Tom Tunguz wrote an excellent pair of articles explaining the strengths and weaknesses. The Innovator’s Dilemma and The Innovator’s Solution.
But it is a long road. Another thought leader in the SaaS world Jason Lemkin explains why in It Takes at Least Seven Years in SaaS. Jason and Tom have done as much anyone to create the SaaS explosion of recent years. And both are realistic. Success is a long hard road. There are lots of reasons for this. Two stand out for me:
A better model for B2B saaS
I am not sure what percentage of startup investment dollars not goes on sales and marketing. I would bet it is close to 80%. This is not efficient. Being honest, it is not even real investment. Money circulates without generating any asset of substance.
B2B SaaS needs a better distribution model. By which I just mean a more efficient and effective way of reaching customers. And new improved distribution channels are starting to appear. One category is the marketplaces operated by leading SaaS players. Salesforce.com and Xero have both established networks. Through the Salesforce AppExchange or the Xero App Marketplace smaller SaaS players can reach out to the customer base of these giants. The Appointedd/ ABCN deal represents a different type of distribution. ABCN is a successful company with a loyal B2B customer base. Like any great business they want to keep offering better value to those customers. Appointedd’s business scheduling software and unique time zone function are just right. The advantages of better distribution work both ways:
Linking together in this way also allows both companies to focus on what they are good at. As a result, customer enjoy better software, better service and achieve greater benefits. No shortcut to SaaS success
There is no silver bullet here. Great B2B SaaS companies will still take time to build and Jason’s 7 years may well prove to be accurate. He has far more experience than I have.
Yet I think entrepreneurs, investors and customers will benefit from a better distribution model. The market will be more efficient. Probably in two ways. Better return for investment dollars and faster exposure of failure. The best companies will be more integrated and more focused. And as a buyer, less consumer style marketing of B2B products will be welcome! ABCN and Appointedd have a great deal that will work well for both parties. The launch is an exciting time. And the hard work starts now.
Delighted that this blog is a guest post from Steli Efti, CEO of Close.io, startup selling guru and all round top man. Thanks Steli.
Not all customers are created equal, and selling to the wrong customers is one of the quickest ways to kill your business.
But who are the “wrong” customers? Or the “right” customers, for that matter? Many founders and salespeople aren’t sure, so they make educated guesses. But here’s the problem: At best, those guesses are usually incomplete. At worst, they’re 100% wrong. The customers you sell to are too important to leave to chance, so let’s take out the guesswork. We’re going to take a look at a simple system to identify your ideal customers with pinpoint accuracy. But first, let’s talk about what’s at stake when you sell to the wrong customers. The dangers of selling to the wrong customer1. Bad Data
Data is the most valuable tool you have for diagnosing and resolving problems in your business.
But data is only as reliable as its source. If your product is in front of the wrong people, the data will be be inconclusive at best, and harmful at worst. 2. High support costs
Selling your product to the wrong customer is like giving a hammer to a seamstress.
They might be able to get the job done, but they’re going to have tons of questions, require a bunch of attention, and ultimately get frustrated when your product doesn’t meet their needs. 3. High churn rates
Churn measures the ultimate sales failure: Customers who have tried your product and decided it isn’t worth paying for.
If you’re selling to the wrong people, they’re going to figure it out eventually. And when they do, you’re going to bleed customers at an unsustainable rate. 4. Damaged reputation
When your customers churn, they aren’t going to be happy. As far as they’re concerned, it’s your fault for selling them a solution that didn’t meet their needs. And they’re right.
In a social media-driven world, it doesn’t take long for bad reviews to get around. When they do, and they will, you’re going to develop a reputation you might not be able to recover from. 5. Poor morale
All of this will eventually lead to poor team morale.
Salespeople won’t be motivated to sell when the majority of their accounts churn. Developers won’t be motivated to develop a product everyone complains about. Support won’t be motivated to support when most of their tickets are users wanting refunds. The solution: Create an ideal customer profile
You can avoid that mess by making sure you sell to the right customers.
But how do you know who the “right” customers are? Simple: Create an ideal customer profile. An ideal customer profile is a tool that describes a fictitious individual or organization that gets significant value from your product and provides significant value to your business in return. The profile is highly effective, but it requires at least 10 current customers. Without them, there won’t be enough data to create an accurate profile. If you aren’t at that stage yet, check out our guide to landing your first 10 customers. Now, here’s how to create your own ideal customer profile in three steps. Step one: List your best 10 customers
Your best customers are those who are the most successful with your product, not necessarily the ones who pay you the most money or “like” all your social media updates.
When compiling this list, make sure to separate happy customers from successful customers. Happy customers like your product, but successful customers need it. Your most successful customers should receive measurable, quantifiable value that proves they get more than they pay for. Step two: Identify their defining attributes
Create mini profiles for your top 10 customers that describe their defining characteristics; things like industry, location, and annual revenue. Not sure where to start? Here’s an outline to get you going:
Step three: Define commonalities
Place your 10 mini-profiles side-by-side and look for similarities. What characteristics do they have in common? In most cases, you’ll find a handful of key elements that most (if not all) of your most successful customers share.
If you’re having trouble finding commonalities, it probably means you weren’t detailed enough in step two. Go back and dig a little deeper. Identify more defining characteristics. If you need to, get on the phone with your customers and ask them a few questions. Create your ideal customer profile by compiling all the shared traits into a single form. This new profile should now serve as a benchmark for all incoming leads. If you find a lead that matches the profile, you’ve found a high-value deal. But if you come across someone who wants to buy but doesn’t match the profile, you know to let them go; they’ll end up being more trouble than they’re worth. Types of ideal customer profile
You can arrange your new profile however you see fit, but here are a few common formats you might want to consider.
The novel
A detailed, long-form profile (5-8 paragraphs) makes it easy to identify high-value prospects. It also makes it easier to identify low-value prospects, which can save you major headaches in the long run. I recommend starting with a more detailed profile like this, then creating a simpler version for your sales reps to memorise.
The summary
The summary profile is usually little more than a 3-5 sentence paragraph detailing only the most important characteristics of your ideal customers. By keeping the profile short, you make it easier for your reps to memorise.
The list
Structuring your profile as a list makes it easy to review on the fly. If you organise your list well, your sales reps can quickly and easily find the information they need to make on-the-spot decisions.
My challenge to you
If you don’t have an ideal customer profile, set aside a couple hours this week to create one. And if you already have one, set aside some time to update yours. If you can, make it a company-wide project.
Bring everyone together to get insights from all sides of your business. If sales and engineering have two totally different ideas on who the ideal customer is, that’s something you need to know and resolve. Create a profile, then follow it exclusively for a month. Compare every incoming lead against your profile and, if they don’t match up, let them go. If you aren’t impressed by the quality of customers you’re onboarding by the end of the month, forget about it. Shred your profile and go back to the way you were doing things. But trust me: You won’t be going back. Once you’ve had some success with your profile, come back and share your experience in the comments below. I’ll look forward to hearing your success stories. Until then, get back out there and crush it. About the author
The Profitwell blog from Price Intelligence is often an interesting read. Rather than focus on outright promotion of their product, the team share the lessons learned from their customers. This bodes well for the future of that business. Listening to customers is a clear strong point. It also offers some genuine and surprising insights.
A couple of weeks ago Patrick turned his attention to SaaS benchmarks. The industry has developed accepted norms for certain numbers. Such as churn, expansion revenue and growth rate. These often quoted as essential thresholds to success for aspiring SaaS businesses to cross. Profit well also shows that they are all wrong. By big margins. This is the first of a series so you may want to sign up for future updates. You might also want to pause for a second and think about the purpose and value of benchmarks as a species. Who wants to be average?
By definition, benchmarks are an average of performance. Summed from a group of companies in an industry. Even the industry is defined by someone else. It may not be that close to the group of peers or competitors that you would choose.
This makes an interesting comparison but a terrible goal. Your ambition is to be a leader. The best product or business out there. Striving for average doesn’t cut it. Best practice v innovation and disruption
Benchmarks are a window into the past. They are a report of historic performance. And the individual definitions are also relics. Reflections of existing business customs, methods and practices. SaaS startups are out to disrupt these worlds. To use innovation to challenge and overturn the established order. The very stuff of benchmarks is irrelevant to this agenda.
Are these the best things for your business to measure?
In a fast growing SaaS company there is no shortage of potential metrics. The leadership challenge is selecting and focusing on the most important numbers for your business. Benchmarks chosen and defined by an external agency are unlikely to be the top of this list.
External numbers of this type pose another risk. The right metrics are the voice of your customer turned into data. Benchmarks are the amalgam of the voice of other people’s customers. I know which set of numbers I would rather listen to. How meaningful is SaaS benchmark data?
When you start out, benchmarks can be a useful to work out whether you idea is viable. You can use them as a rule of thumb estimate of profit potential for example.
Once you get beyond the back of an envelope stage, you need real data. It seems obvious that benchmarks can only be of value if they provide a reliable barometer. Profitwell shows that this is not the case for some common SaaS performance benchmarks. My experience tells me that more established data sources suffer the same problems. Remember that public benchmarking companies like Gartner, Forrester and IDC depend on the companies benchmarked as a source of revenue. When I have worked with these companies, they aim to be impartial and act with integrity. Yet they are still vulnerable. It reminds me of a conversation I once had with the sales director of a big insurance company. “If you want to know how independent our resellers are” he said to me “watch what happens if we double the sales commission on a product." In reality public benchmarking data is best used as a prop for sales pitches. Some people like that sort of thing I guess. As an operational tool, I am a serious sceptic. I recognise that estimating future performance or evaluating past performance is hard. More so in a startup. That is because of deep inherent uncertainty. Risk is both the worst and the best aspect of making business decisions. Don’t be fooled into trying to mitigate it through false and irrelevant numbers. And well done to Profitwell for challenging the consensus.
Negative churn is a bird in the hand that is worth less than two in the bush. It has emerged as a preferred and even promoted SaaS metric over the past couple of years. Yet by offsetting two (or even three) numbers against each other it obscures rather than illuminates business performance. Why would a goal that offsets two conflicting numbers be the right metric for your SaaS business?
To be clear, negative churn arises from two things 1. On the plus side, the increase in revenue from existing customers. 2. On the other side the loss of revenue from customers who stop using your SaaS (or churn for short). Thus “Negative churn” is the result of a sum, not a number or phenomenon in its own right. Setting this as a goal or celebrating it as an achievement creates an inherent conflict. Let’s start by examining the two faces of strife in turn. Customer or revenue churn?
The trigger for writing this blog was a post by one of my favourite SaaS companies, ChartMogul. How do I calculate LTV when I have negative churn? digs into the exact problems that this “accomplishment” generates. And the first issue centres around that single word churn.
Churn arises when a customer stops paying for your SaaS. At this point you are already losing two things: a customer and a monthly or annual revenue receipt. For an SMB SaaS these two numbers may give a similar message. The flat pricing structure and similar base limit dependence on key customers. But if you are winning larger customers? Then the monetary value of the revenue lost may not be an accurate reflection of the number that churn. Lincoln Murphy has explained this challenge well in SaaS churn: Measure customer or revenue retention. Lincoln believes the focus should be on the dollar value of retention. And he makes a strong case for the importance of this measure to SMB SaaS. I think there is value in tracking both types of churn depending on your SaaS business model. For now, think about the messages that these two measures of churn could be sending:
Make no mistake, churn is an important metric for any SaaS business. David Skok outlines the importance of churn in this classic article. And he continues by describing the growth that results from so called negative churn. But all he is saying is that increasing revenue from existing accounts is a powerful growth lever. Growing revenue from existing customers
Both upsell and account expansion are ugly and jargonistic English so let me drop them now. We are talking about selling more to your existing customers. Either by increasing the number of users a customer pays for. Or by raising the value of the services your SaaS provides to those users. Often the revenue added will be a bit of both.
Measuring this type of revenue communicates an entirely different type of message:
Growing revenue from your existing customer is a powerful growth mechanism. Tom Tunguz argues in favour of negative churn on this basis. But recognises at the end of this intelligent article that this does not give the whole picture Two whites offset to make a black hole
The heart of the problem with negative churn is the combination of these two factors. Offsetting one against the other loses the messages that each is trying to send. Without offering any new value in return.
Sure, if churn turns negative it proves that your growth from existing customer is more than you lose from customers who cancel. So what? At the same time you could be missing:
Contrast this with LTV which also combines two measures. Revenue per customer and customer lifetime. Here both point in the same direction. And are supported by a common goal of better customer satisfaction and loyalty. Sound maths doesn't mean a good answer
Maybe part of the reason this metric has been promoted is that both elements affect LTV. David Skok has demonstrated in LTV - DCF provides the answer how the sums can account for both factors in your LTV calculation. He has even thrown a discount factor.
There is nothing wrong with David’s maths. But LTV is a summary measure. Once you have it, you break it down if you want to find the areas to make improvements. And in that breakdown the factors in negative churn apply in different places. The value part of LTV is based on average revenue per user user/ account (ARPA/ARPU). If you grow the revenue earned from accounts over time, this value will increase. A good thing and well worth managing. Revenue growth from existing customers is an important part of this mix. Lifetime is the inverse of churn (1/ Churn %). If churn is a genuine negative this is mathematically impossible. So even in the Skok formula you need to use the customer churn rate. In other words lifetime needs to be as accurate a reflection as possible of how long a customer stays with your SaaS. Building longer term relationships with customers is also a great thing to manage. And that is where the other half of negative churn comes into play. Focus on building a great business
Negative churn is not an accomplishment. It is not a real metric at all. It reminds me of Boris Johnson’s policy on cake. 100% pro having it and 100% pro eating it. Great fun but not that useful in the real world.
Tangling two things together means you could be missing what really matters. You risk looking in the wrong direction or misallocating your resources. Your business becomes more fragile. Because you narrow and obscure the voice of your customers. Forget artificial metrics. Focus on growing revenue from your loyal customers. And on extending loyalty by helping customers get the benefits of your SaaS. Listen to separate, clear metrics and learn from everything you hear. Use this to give your teams the right objectives. And put resources where they will add the greatest value.
For any business listening to customers and learning how to deliver value is vital. In a startup with a limited legacy of market knowledge this is doubly important. Every face to face contact with customers can be a source of understanding. Even when a customer objects there is something to learn.
In B2B SaaS sales and customer success talk to your customers daily. These teams need to generate revenues. But each conversation should also work two ways. Its a bit like making sure your golf grip is right. Your hands are the only part of your body in direct contact with the golf club. So the grip is the best opportunity to get it right from the start. Any discussion with a customer is an opportunity to listen and learn. So when a sales person meets customer that does not want to buy there are two options. Overcome those objections and drive the sale. Or listen, probe deeper and learn valuable lessons. This is your prime direct connection with your customers. I prefer to see it as a two way conversation. Steli Efti published 10 Objection Handling Techniques last week. In the post he articulates great strategies to surmount B2B sales obstacles - the overcome approach. I thought it would be fun to take the other tack. What can you learn from listening to those same 10 customer barriers: 1. Your product/ service is too expensive
Steli is quite right that you need to find out more. The simple explanation is that your customer does not see the value in your product. He may also be telling you that your competition are cheaper or better value. Or they may not have enough in the budget to pay your price. Bear in mind that customer budgets don’t just need to cover your SaaS subscription. Implementation and change costs need to come out of the same pot.
2. We'll buy if you add these features
This is both the most informative and the most dangerous feedback you can receive. The buyer is telling you what needs to change to convince them of the value on offer. This could be the exact thing you need to hit the product/ market fit sweet spot. Or it might be an expensive customisation that is only relevant to one customer. It is also possible that the features may not add anything. Some bells and whistles could just be what your contact needs to win the argument inside his own organisation.
The key is to find out why those features are important. What value will they add for this customer? Does this sound as if it applies to a wider market? 3. Your solution isn't a priority right now
First and foremost you have to show respect for this objection. You are talking to someone who has other problems. Maybe they don’t see all the benefits your solution offers. More likely those other challenges really matter more. Try to find out what is the top priority. Could be you product will help. Or at least you will have a clear idea whether this customer is worth pursuing further down the line.
4. You've got a great product but we're going to go with the [industry] standard
Go away, you have lost out on this deal. Frustrating for a startup because you need to find people who will take a risk on your business. But the customer has communicated a clear decision here. It won’t change unless you find something new.
It is almost certain you will meet this challenge again so how can you tackle it? Find out where the customer sees the risk. Often the established competitor will cover a wider spectrum. So your SaaS may be a brilliant but partial fix. The alternative is that your company doesn’t meet the resilience test for this customer. In either of these situations, finding partners may be the solution. Systems implementers and consulting firms can provide both the strength and breadth you require. 5. Just e-mail me more information and I'll get back to you
I have to disagree with Steli on this one. When you hear this, you are being told there is no interest. Don’t hang up yet? If you are talking to me, every second you stay on the phone is making me angry. You are wasting my time and worse you are not listening to me. No matter what happens in future, I am not going to want to buy. And I am also not willing to help you by sharing the reasons for my lack of interest.
Thank the customer politely. And send that follow up e-mail. It costs nothing and shows you are professional. You can even mention in it that you would like some feedback. But write this one off. There is no sale to be made and nothing to learn. 6. I don't have time to talk right now
Check if you can schedule a better time and get out of there. It does not matter how little time you take up. Your contact does not want to talk and you need to respect that. If they offer a convenient time, chances are you will be able to have a constructive follow up conversation. Push too hard and the door will be slammed shut. Remember you are building a relationship in B2B sales.
Be professional and you will also have a learning opportunity. When you do have that sales discussion, find out why the previous time was not convenient. You could uncover other business issues or problems that fit with your solution. 7. I can't make a commitment until I meet with [other decision-makers]
Bite back your disappointment. this could be gold dust. Your contact is about to reveal some invaluable information about the organisation. With a little sensible dialogue you can answer all sorts of questions. How decisions are made? Who they consult with and respect? Who are the blockers or the people most affected by change? Even where to go for the next sale if land and expand is your strategy. Pin your ears back and listen.
I am with Steli that getting an invite to these conversation is great. Again, even a refusal tells you something about how the organisation operates. So well worth asking. The big downside here is time. Every big corporate customer takes their own time. If your cash reserves are not going to hold out that long then you have a problem. The ideal option is to survive through. And remember you have to stick it out until they pay. Not just until they place an order. But if you have no option, now can be a good time to approach a larger partner. At least you have something of value to offer in negotiation. 8. We'll buy soon
Hard to interpret. Could be a variant of 3. That is, they have more important things to worry about. Or a version of 7 where there are other interested parties. Might just be a pure admin hold up - process takes time.
It can also be a polite and absolute no. Finding out more is important but be gentle. The customer is not holding the door open. They are hoping the commitment will get you off their back. So you can’t assume they want to talk. Try to tease out the reasons but beware of the pushy sales impression here. 9. The gatekeeper
Gatekeepers are one of the great myths of the corporate world. I have met only one person in 30 years who was a genuine gatekeeper. In every other case you are dealing with someone who is resistant to the change. Your customer has to change to realise the benefits of your product. This means there are losers as well as winners. Most often the gatekeeper is one of the losers. Or they have a solution which deals with the same problem but suits their agenda better.
The point is so-called gatekeepers are blocking you. Only you. They are not just professional naysayers sent to beat up sales people. Here is where great interviewing skills come into play. Because this conversation can also be a mine of valuable insight. Why do they object? Who are the losers and why? How does your SaaS impact the wider customer? All this can be helpful. But not easy to dig out the answers. Get back to The Mom Test and think through your approach. 10. No, No and No
At any stage of the cycle this means No until proven otherwise. Assuming it is just a temporary setback is wrong. You may be able to change the customer’s mind if this is an early stage discussion. But you will not succeed if you don’t hear the negative.
Feedback that backs up a no can be useful in all sorts of directions. The more blunt the refusal, the greater the chance to open up an immediate channel. A route to finding out the reasons. If you have a way of combatting the objections this can be an opening. if not, again you will have learned some lessons. Don’t take no for an answer will not help your reputation or your brand. B2B SaaS - Learning or selling?
You can learn a lot from the ideas in Steli’s article. Judging when to step back and listen versus the right time to push through objections is a skill in itself. One the best sales people have mastered.
Just remember that B2B SaaS is about a long term relationship. Where you add value to customers over time - that’s why they call it lifetime value. Every contact is an element of that relationship. From the first marketing message, though sales to service and customer success. And quality, sustainable trusted relationships take time to build. Look to make sure your sales conversations contribute to that process every time. You may not sell as much the short term. But the quality and sustainability of customers will be better. And the value of your product will keep growing in the long term. "I can’t tell you why our business is growing
Ali Mese from Growth Supply published this article on Crew a couple of weeks ago. It might be the best post on sales funnels I have ever read. His point is simple. Why worry about the detail of your metrics when you could be creating more value for customers? And he cites plenty of great companies that share this philosophy.
Perhaps though he would not expect confirmation from the boss of Dior. In Lunch with the FT this week Sidney Toledano expressed his view of reliance on numbers: “Some people try to find out what’s wrong through the numbers. But if you stay in the office, nothing will change.” and “…its better to have no explanation for success than a lot of explanations for failure."
This stands in nice contrast to the deluge of metrics matter material hitting startups. Some readers may know that I am not a big fan of this approach. But instead of digging further into why I think its wrong, let me ask a different question.
Why on earth do startups want to measure and manage everything they possibly can? For a start, I seem to remember that being an entrepreneur is about freedom. Fire your boss. Get out while you can. Do more of what you love. And so on. Where is the fun in becoming a slave to numbers and data instead of wages? And if you think that’s fine for founders but you need a system to control the rest of your business? Well I suggest you go back and reread Animal Farm. So next time you feel the need to grab hold of another set of metrics. And manage the hell out of some abstract concept. Think about these three things. Incentives
Both management and leadership are about human behaviour. The task is to get people to do what you would like them to do. Or to inspire them to fulfil their potential. This applies to customers, investors and teams.
The best way to influence human behaviour is through incentives of all kinds. Measurement creates incentives. So metrics can be an effective agent of change. But they are not the only way. And they can have unintended consequences. There is a famous example from India in the days of the Raj. Colonial officials were worried about the growing number of poisonous snakes, mainly cobras. They offered a reward for each dead cobra brought to officials. Locals soon started breeding snakes and then killing them for the reward. Before long there were more snakes than ever. Your challenge is to change things. That is the point of a startup. So the right place to start is how you create a system of incentives that encourage the change you would like to see. Choose each with care and learn from the effects that result. Place any metrics you choose to use squarely in this context. Try to keep the reptile count down. Learning
Startups make an impact when they understand real world problems and build solutions that make a difference. This does not happen in a bijou loft converted into a cool co-working space. You need to leave the startup bubble and go listen to customers.
After change, the next order task is to learn. Data can be an excellent way of learning about customers and markets. But just because you have data doesn’t mean you should use it. One of the greatest errors in management is relying on numbers just because they are there. What about the things you can’t measure? Sometimes the stuff which can’t be reduced to numbers is the only stuff that matters. Don’t use your metrics as a crutch and miss the big picture. It is rubbish to say that you can’t manage what you can’t measure. Good leaders do it all the time. They sense problems in the team. They interpret customer feedback. They listen to advice and weigh the options. Don’t allow metrics to be a substitute for management or leadership skill. Time
Metrics eat time. There is the delay between measuring and reporting. Shorter than it used to be but longer than you think. Then there is the time taken to analyse. discuss and decide. Often productive but the more you do it the fuller your diary looks.
And there is a philosophical paradox. No matter how much someone tells you that their pet metric will predict the future, it is still based on the past. The growth. The change you would like to happen. The success of your business. All this lies in the future. The past speaks in a foreign tongue. How good are you at translating into the language of today? Startups need speed. Almost the only advantage you have over incumbents is agility. The ability to respond faster and better to emerging market needs. Numbers can help. Or clog up your business thoughts and actions. Use the good stuff and don’t let too much data get in the way. Balance
There is a place for numbers. Metrics can provide a valuable indicator of performance. And an early warning flag for problems. But the goal of business is to create wealth. Not to generate good numbers. Focus on the things that matter.
Use your numbers to help you. Aim for a balance. Good management and great leadership requires thinking and action that is both analogue and digital. |
Categories
All
AuthorKenny Fraser is the Director of Sunstone Communication and a personal investor in startups. Archives
September 2020
|