3 key sales metrics for enterprise saas sales managers
Today I listened to a talk from the founder of a business analytics company and the discussion centered around the development of a value proposition that worked and that he could sell. The process of creating a simple and compelling value proposition was interesting to hear about, but what was most interesting was what he revealed on key metrics for starting a SaaS business, particularly enterprise SAAS.
Here they are:
1. Average length of sales cycle: in a saas business, your capital intensity is naturally higher because your development costs are front-loaded and your sales and marketing costs are front-loaded and they are NOT offset by a large up front licensing fee. Instead, you accrue higher subscription revenues over the life of the customer which are higher than maintenance fees in perpetual license models. Thus, the longer your sales cycle, the more uneconomic your business becomes. Particularly if you are venture-backed, this is a problem because you’re living on borrrowed time. SAAS businesses should target a sales cycle of less than 60 days from lead to close. If they don’t close that soon, then you might want to consider dismissing the lead for the time being.
2. ASP: Knowing how your ASP (average selling price) is trending over time gives you an indication as to whether or not you are conveying real value to the customer up front or increasing value with additional features and consummables over the life of the subscription.
3. Win-rate: Of those leads that you receive that you get into a sales process with, what % are you actually closing? This is a measure of sales efficiency that indicates your level of differentiation, the quality of your leads from marketing, and the effectiveness of your sales force.
While there are many metrics that organizations and CEOs should look at to determine business performance, keeping it simple is incredibly valuable when determining how to motivate a sales team. If there are more than 3 metrics that they are judged on, it becomes too confusing for them to keep their behavior optimized and your sales organization will likely lose traction.
What’s missing from this? CHURN. Subscription models live and die based largely on the amount of churn that they experience. Ideally, enterprise saas companies should seek renewal rates in excess of 90% annually. Some will inevitably cancel the service, and others will go out of business, so it’s very important that you distinguish between “churn” and “effective churn”. Effective churn focuses on businesses where your product value proposition didn’t deliver or measure up and the saas model allowed them to cancel on you.
If you unitize the economics of the SaaS business, you’ll see why churn is the most important measure for the CEO in many cases. Assume you sell a product with an ASP of $5000 annually. Now, assume that you spend 1000 bucks to acquire the lead (fully loaded costs) and another 1000 bucks on the sales closure of the lead. That leaves $3000 for the remaining aspects of running a business: development costs, support costs, and general overhead (rent, benefits, utilities, travel). If the customer stays with you for one year, you do NOT have an economic business model. If, however, the customer stays with you for several years, your economic model improves rapidly.
As tons of others have written about before, in the saas world, capital efficiency is key, and the best places to create are in marketing and general business overhead. If your marketing teams creates and qualifies super hot leads, your sales force is constantly productive. If your engineers are banging out great product and updating the quality and performance of the site several times a year, then you can minimize churn. The model works, but it takes great management and constant focus on execution.
I am just getting started with my blog, but a great site for those of you interested in sales and enterprise saas is “build a sales machine“.
Introducing ‘Riskprone’ // Why mobile is accelerating
I waited too long to start a blog, but now I am finally underway. The name of the blog is ‘riskprone’ — I plan to focus my writings on those people and industries in this life which are undertaken by those of us who are considered ‘risk-prone’ as opposed to ‘risk-averse’. This will therefore focus on entrepreneurship, venture capital investing, and other miscellaneous subjects and topics that I think also fit into this category and which are interesting to learn or participate in (motorcycles, adventure travel, glider aviation, etc.).
I further hope that this blog will be a place where I can share my favorite links, favorite books, blogs, and articles, noteworthy quotes or truisms, as well as my distilled (and hopefully articulate and interesting) thoughts and ideas on technology, the future of the internet, investing, and other mostly risk-prone things which I love and think about every day.
I am unsure how frequently I will write here, but I do intend to try to keep it updated.
I thought I would touch on mobile as my first post.
One useful way in which to approximate when a market has really tipped from the ‘innovators and early adopters’ stage to being mainstream is when what was formerly considered a revolutionary product that was incredible to use in spite of its flaws and bugs becomes perceived as a utility and creates frustration among its users when it does not work perfectly. Let me explain….
When the internet first arrived and the search engines began to develop, end users like me were amazed with the basic search power and how incredibly efficient and valuable the internet search tool was. As time wore on, search became more and more important and more and more relied upon. Now, in 2008, if Google does not serve up exactly what you are looking for on the first page, you get frustrated with the algorithm, right? I call the curve which models this change in behavior the ‘product expectations curve’.
To connect this to the mobile/wireless world, I believe that that same user experience trajectory is just now beginning to hit the ‘knee of the curve’ in mobile web search, mobile application development, and mobile browsing. In other words, if users are not able to search google and pull up basic news and information on their mobile browsers, they are beginning to get frustrated. I might be still a bit early on this one, but it’s fast-moving market….
As I see it, the three enabling technologies have been the arrival (finally) of truly web-connected and web-navigable smartphones (iPhone especially but others are not bad — I can get to a lot of stuff on my blackberry 8800), the inflection point in wireless computing bandwidth for basic consumer needs (google searches and basic information retrieval on companies, services, contact information, etc.), and the notion of platform and carrier agnostic application development.
