When successful, the SaaS business model is one of the best there is. It offers recurring, predictable revenue off high margins. What’s not to like?
The struggle for most SaaS companies is that it takes a long time to reach profitability. Customers take a lot of capital to acquire, and you need them to stay on long enough to pay back their initial acquisition costs & become a profitable customer.
To help get you on your way to a predictable revenue, Aaron Ross and Marylou Tyler wrote the book Predictable Revenue, which outlines the three stages SaaS companies go through and how to get your way to the third stage, predictable and scalable revenue.
Ross gave a talk, where he gave a brief outline of each step and outlined the mistakes to avoid during the second stage, known as Hot Coals. You’ll want to get out of this stage as quickly as possible.
The Hot Coals
This illustration is on the cover of Predictable Revenue. It shows the typical revenue growth stages for a company. In the first stage (A) we have what is known as organic growth. This is the relatively easy stage. You launch your company and you’ll get your first 10-50 customers. They’re the ones who heard about you from a TechCrunch article, word of mouth, your friends, etc.
After a while, growth will stall and you’ll need to grow your business. Now you enter the “hot coals” stage. Here, you need to go out and talk to people and get them to buy your product. You run a bunch of experiments, some work, but most of them don’t. What you don’t have is a repeatable system to drive growth. If you can get that repeatable system to generate leads and revenue, you jump over to the third stage.
Your goal is to get through the hot coals as fast as you can, with some peace of mind.
There are 5 mistakes companies routinely make in this stage that are absolutely killers (in a bad way) for their business. To help get you past hot coals and on your way to predictable revenue, we’ve outlined the Five Fatal Mistakes.
The Five Fatal Mistakes
1. Sales Team Churn at 10%+
Some sales teams lose more than 25% of their staff every year. This is way too high – it shouldn’t be above 10%. If more than 10% of your sales team is leaving every year, it’s because they have a problem with you and/or your company.
If you’re losing a lot of sales people, you need ask yourself how much of it is them vs. how much of it is you. Many companies don’t take responsibility for their own systems. Salespeople always get the blame when they don’t make quota. It’s not the product, the system, the leads, who hired them, or trained them. It’s always the salesperson’s fault.
They don’t have a system that works. So no matter how great your sales people are – if the system is bad, you’ll always have problems. Even great salespeople cannot overcome a bad system. If you put average people in a great sales system, you’ll get really good results. The system is what matters. Keep in mind that the system is also what hires these people.
A scalable sales team is integral to predictable revenue. And to build a scalable sales team, you need a great system that keeps turnover low and consistently generates results.
2. You Need a Niche
To be able to market and sell, you need to have a niche. The world is noisy and messy, and you’ll struggle if you don’t have a sharp, direct message. When you try to speak to everyone, no one can hear you.
Here’s an example of a clutter-filled message:
If your message looks like this, kill it and start over.
When you start to remove the clutter, it becomes a lot more obvious to people how you can help them. Find what you’re king/queen of. Who has been your ideal customer – and you can you create a message that reaches out to more like them?
It’s easy to get caught up in big ideas, and forget all the small details. Focus on the small details and clues that provide insight into where you should focus. Instead of calling yourself a “web services agency”, find the smaller things within that that you do well. Are you the best at SEO? Facebook marketing? AdWords? Find what it is, narrow in, and create your targeted message.
Look back at your company history and ask which customers you’ve created the most value for. Some customers will struggle, some won’t. Some will get value out of your product, others won’t. You want to create a business where you acquire customers that need you and can get value from you. It’s obvious, but easy to forget in the daily scramble to deliver signups.
3. Thinking Sales Team Size Drives Growth
More salespeople = more money, right? WRONG!
Today’s sales world is different than it was 30 years ago. These aren’t salesmen going out to pitch their tractor to the local farmer. In today’s SaaS world, more salespeople do not mean more growth.
The main growth lever is lead generation. Think about it this way: even if you have the perfect sales process, if your lead generation is crummy, you’re going to struggle. But, if you have great lead generation, you can get everything else wrong and still do pretty well. It absolves a lot of sins.
There are three types of leads:
- Seeds: These are the word of mouth leads. Happy customers telling others about your product. The best way to systematize word of mouth is with a customer success team. This team sits at the bottom of the funnel, and their job is to keep customers and retain them. Happy customers spread the word to others, and this is where the return on investment comes in. In some cases, a customer success team can bring better returns than some marketing programs. Below lists three customer success metrics that Ross outlines.
- Nets: This is inbound marketing. You’re casting a wide net and seeing what you get back.
- Spears: This is prospecting and business development. It’s a human involved in this and they’re going through a targeted list.
No one type of lead is better than the other. They are complementary. But they all have different funnels, and the way you generate and receive them is different. You need to understand how each of them works for your business so you can make the best decision on which one, if any, you should focus on. Don’t treat them all the same.
Use metrics to track customer success. Ross lays out three metrics:
- Logo attrition should be 15% or less.
- Revenue churn should be zero. Negative is even better. The lower you can get revenue churn, the better.
- You should have one customer success manager for every $2 million in revenue. They should be hired before you get to $2 million, not after.
4. Speaking Jargon
Customers don’t care what you do. They care about what you can do for them.
Now, at some point they do want to know a little about you. But it all ties back to them and what result you can create for them.
Ross gives a few tips on improving your messaging:
When someone asks what you do, pretend they ask, “How do you help customers?” This reframes the question and forces you to think about what result you deliver.
When crafting copy for your website, creating your sales pitch, forming your messaging, writing an email pitch, or doing anything with your company, ask yourself “so what?”
You have 1000 customers. So what?
You have the leading social platform. So what?
You have 200 employees. So what?
You run on AWS. So what?
You can also ask, “what’s so great about that?” An example:
Claim: You have 15 reports customers can run.
Question: What’s great about that?
Answer: Well, you can get the exact report you need without having to spend time on it.
You ask these questions and continue to probe to help get to the root of the results you create. This helps you focus on talk in the language that they care about. This is an important part of transitioning out of the burning coals stage. In the first stage (Organic Growth) people are buying from you because they know you. When you enter burning coals and the third stage, you have to market to people you don’t know. You have zero slack, so you need to be very clear in your messaging.
Sell Ideas, Not Stuff
When forming your marketing strategy, realize that you need to sell ideas, not features or benefits.
An idea is something that is important or useful to someone, regardless of whether they buy your stuff or not. A feature and benefit is tied to something you sell; an idea is universal.
To help you find your ideas, head over to predictablerevenue.com/matrix. The general idea is that if you provide a useful idea or insight to prospects or leads, they are more likely to be interested in your stuff.
5. Not Specializing Your Sales Roles (enough)
When you specialize your sales people, you allow them to focus, which creates greater output form your sales team.
Salespeople shouldn’t prospect. They’re not good at it, they don’t like doing it, and it’s not sustainable or repeatable. You need your salespeople to focus on their pipeline.
Here’s the structure Ross lays out:
The idea of specialized sales roles is that you have certain people focusing on certain, important skills. When you specialize, you create predictability. It also allows you to see what’s working and what’s not because it’s all broken up into pieces. When everyone is doing everything, it becomes much more difficult to tell. It’s like a hairball.
It’s also more scalable. Just like Lego blocks – if you need more of something, add more people to help. Need more pipeline? Add prospectors. Need more salespeople? Add closers.
This also makes it a lot easier to hire and train, because you create a farm team. You hire junior people and move them up through the ranks and you’ll get a very high success rate for your salespeople. Hiring people form the outside is riskier – you may have a 50% success rate. But if you bring someone in as an inbound rep and promote them to prospecting then to closing, you pretty much know 95% of the time if they’re going to succeed or not. And they’re already trained – they know the product, the people, the market, etc.
Reviewing The Main Points
Whenever you’re struggling, ask yourself if it’s your system or your people. And what is it that’s causing the problem? Ross believes that it is usually the systems, not the people. And part of the system is picking and training good people, so if you get people that aren’t working, it usually links back to some flaws in your system.
Ross lists out his other main points from the talk – #2 is related to picking a niche.
For more tips on how to create predictable revenue, pick up the book.
Video & Slides
Q & A starts at the 37 minute mark.
About the Author: Zach Bulygo (Twitter) is a Content Writer for Kissmetrics.