SaaS Customer Metrics: Why is my SaaS Business Not Making Money?

David Skok’s valuable blog, SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters – discusses how Software as a Service (SaaS) businesses hone their SaaS customer metrics. The article includes easy-to-use spreadsheets to help these businesses define the cost to acquire their customers (CAC) and how to price effectively and expand intelligently to keep their books in the black.

In my experience, customer relationship management (CRM) activities are usually implemented after the money has been spent to acquire the customer. Moreover, much of CRM activity is limited and short-sighted — tracking leads, follow-up and interactions with each customer – without assigning a dollar value for each step of the customer lifetime. Skok’s exercises allow us to assign costs to each step of the process – from acquisition onward – and truly get a clear view of customer investments. I wish I had had some of these metrics when I was managing the communications projects for a sales force—I could have really put some useful metrics in the representatives’ pockets!

Why is SaaS Different? How is Your Business the Same?

The SaaS business model often requires a high investment in acquiring customers based on its monthly, subscription payment structure. In fact, it often takes up to 13 months after the client signs the contract to experience profit. This causes cash flow problems if it’s not accurately planned for and it’s often unclear as to when to start spending again on new customer acquisitions.

In addition, SaaS companies, in this increasingly commoditized marketplace, need to “grab market share fast” in a “winner takes all” game. You must have solid numbers and know how much it costs to acquire and keep customers to assure investors of the value of your business.

Skok’s in-depth paper also suggests other opportunities for delineating customer value:

  • Skok discusses why sales models with a long sales cycle (consultative sales for extremely complicated offerings) require more resources and better planning to identify CAC and the “profit-point” when that investment pays off. For SaaS, he’s come up with a 3 x CAC ratio to identify the lifetime value of a customer (LTV). Skok also suggests looking at the value of current lead generation activities; customer segmentation for the “quickest return and highest LTV”; and finding out when to push the button to expand.
  • If you haven’t recouped your CAC fast enough, Skok offers some good suggestions. For example, he suggests “variable axis” pricing, up-selling and cross-selling to create more revenue with existing customers. Another way to protect cash flow is to offer discounts for clients who pay in advance or getting paid more up front.
  • A word about customer churn: You need to know when it’s happening, why it’s happening and how to stop or mitigate it. Skok provides excellent, step-by-step instructions to discover why customers are leaving and what it means to your business. Will the expansion revenue from new customers cancel out or exceed lost revenue from churning customers? Skok’s got some excellent SaaS customer metrics and graphs to show you how to find out.

David Skok started his first business when he was 17 and today, he’s one of the most sought-after consultants in the business world. Reading this paper is like having “the smartest guy in the room” deliver all of his hard-earned secrets for free. Find out how much your customers are costing you – and create more value from each and every one.

sales marketing plan alignment

Sales and Marketing Plans Need to be Aligned

As a B2B marketing outsource provider, my team and I usually work very closely with the sales department at our client companies. Marketing and Sales PlansThe goal is to achieve effective alignment between what the marketing and sales teams are doing: driving to a common goal and reaching agreed-upon revenue targets. In the best-case scenario, we get to review and provide input for the sales plan. At the least, we want to understand the sales model so that we can formulate a marketing plan of attack that best supports the sales plan.

As an example of why this is important, imagine two very different sales models: In the first example, awareness is created and generated leads are fed to a business development function. In this scenario, direct sales reps will only see leads that have been pre-qualified, usually by a business development rep (BDR) who has personally qualified inquirers by asking a series of questions about budget, authority, timing and so forth. To best support this type of sales model, we want to drive as much activity into the top of the funnel as possible, creating the critical mass of inquiries needed to achieve the target number of qualified leads that have passed through the qualification process.

Let’s now look at the second sales model and how we align it with the marketing plan. If an organization utilizes a direct sales force, but provides no pre-qualification function (e.g. no BDRs), our focus in the marketing plan will be more on quality than quantity. This is true because we know that in most B2B scenarios, somewhere between 10 and 15 percent of all inquiries will pass the qualification filter. This means that sales reps will talk to 8.5 to 9 suspects before reaching one qualified prospect. This imbalance leads to two negative consequences. First, the reps fail to call all the suspects, finding reasons to disqualify them before making the calls. Second, reps get busy chasing their hot prospects and neglect to make the qualification calls in a timely manner. At some point, slow follow-up is almost as bad as no follow-up. If you want to see the impact of slow lead response, read my blog post on this subject.

In this type of sales model, we purposefully back off the quantity goal and align our marketing plan to deliver leads that are more qualified. Reps that discover that one out of every three or four suspects are qualified. They are then more likely to make the qualification calls and optimize their time. One of the easiest ways to produce quality is to require suspects to provide more data about themselves on the web form, thus pre-qualifying themselves. Each additional piece of data you ask for will reduce the number of responses, but will also drive up average lead quality.

These are just two sales model examples. When you include hybrids, there are dozens of possibilities. And every sales model will require a marketing plan that is tightly aligned. If you have a gap between sales and marketing, it’s best to address this quickly, especially by creating a service level agreement between the two departments. You can read more about Bridging the Gap here.

The above article by Christopher Ryan is republished here
from his blog Great B2B Marketing.

strategic-business-plan

Strategic Planning Basics – Part 2

Strategic Business Planning

By failing to prepare, you are preparing to fail.

Benjamin Franklin

Let’s plan! Planning is an art and science so you need to convert your ideas into an actionable plan.

The conceptual planning or the art of planning is where experience and knowledge of your environment are combined to develop solutions, objectives and assumptions. Understanding the competitive environment, the capabilities of your team and maintaining relationships with customers and partners will help you plan to achieve your goals.

The science of planning involves using measurements and analysis. How long does it take to build your product? How long does shipping take? What are your organization’s procedures and policies? This data will provide you with limitations and help you build your schedule based on measured performance.

I will focus on a blend of conceptual and detailed planning. The following are my steps for strategic planning:

  • Define your goals

    This is the first and the most important step. What are you trying to accomplish? What is your company’s goal? Clearly define your goals. If your goal has been assigned to you or to your department, ensure that you completely understand the goal.

  • Analyze the environment

    What will it take to accomplish your goals? What are your barriers to success–both internal and external to your organization? Who are the stakeholders? Who will you collaborate with? Determine the interdependencies that you will rely on to accomplish the goal.What resources might be required? Have you done a SWOT analysis? If so, how will you react to threats and opportunities? Maximize your strengths and minimize your weaknesses? Finally, uncover all of the assumptions about your environment that your planning is based on and make sure they’re valid.

  • Develop objectives

    What are your long-term objectives? What are your short-term objectives? Do you have milestones? Deliverables? What resources are required? As you develop your objectives, create small executable steps, so progress can be easily measured and those executing the objectives are not overwhelmed by the enormity of the task.

  • Create road maps, general strategies

    This is where the plan comes together; here we create the map or schedule to be followed.How do we accomplish our objectives? Who accomplishes them? When will they be complete? What are the risks associated with the schedule? Explain the strategy here.

  • Execute the plan

    Finally, time to execute! You’ve gone through all of that effort to create the plan– now use it. The planning process should have prepared you and your team to meet your goals.

  • Review, fix the plan if broken

    What worked in the plan? What objectives were not met? Planning is both a continuous and a cyclical activity of the operations process. Regular reviews of your plan should be established and assessments of the plan accomplished.

During the planning process, be careful not to forecast events too far into the future. Too much detail or using too formal of a planning method will delay the plan and complicate the process—and itwon’t improve the end results since planning can never exactly predict future results. The most important aspect about the planning process is what you learn about yourself while you’re planning. Planning helps anticipate future action and will help you adapt to changes.

Strategic Planning Basics – Part 1

Strategic Business Planning

A goal without a plan is just a wish.

Antoine de Saint-Exupery
How do I achieve my goals? Where will we be in a year? If my sales goal is two million dollars, how do I reach that number? How do I allocate resources? Planning is the answer.

As a consultant, I have visited struggling organizations only to find that they struggled because they had no direction and absolutely no plan. I have seen other organizations that have forgotten the basics of a plan. A goal and a plan to achieve the goal are a must!

I also spent some time in the military where developing a plan for an operation might take weeks or months. Despite all of this planning, “No battle plan survives contact with the enemy,” as Prussian Army Field Marshal Helmuth von Moltkof said in the 1800s. The plan changes with the first contact with the enemy because the plan is based upon assumptions and expectations on how the enemy will react to the action. Planning is about the journey not necessarily the battle. The planning journey prepares the army, by allowing the army to anticipate hurdles, allocate resources and reduce risk.

Most for-profit organizations do not have months or weeks to devote to planning, especially if the plan only survives the first contact with the “customers.” That’s okay but the planning process is essential because it allows you to determine obstacles you will encounter; pinpoint the help you’ll need from other departments; set a timeline; and, most importantly, define the goal. A plan should not be blindly followed nor should it be put on a shelf when complete: Planning is a continuous process, so the plan should be altered and updated based on feedback and assessments.

The US Army Field Manual 5.0 defines planning as follows:

Planning is the art and science of understanding a situation, envisioning a desired future and laying out effective ways of bringing that future about. Planning is both conceptual and detailed. Conceptual planning includes developing an understanding of the operational environment, framing the problem, defining a desired end state, and developing an operational approach to achieve the desired end state. In contrast, detailed planning translates the broad concept into a complete and practical plan. Detailed planning generally corresponds to the science of operations and detailed planning works out the scheduling, coordination or technical issues involved with moving, sustaining, administering, and directing forces.

The military planning process is scalable, from the soldier in the field using his or her planning skills all the way up to headquarters and its large planning department. At your business, someone should be responsible for championing the plan and senior leadership should support the planning process. To develop the plan, time will need to be set aside for the plan.

Remember the fundamentals of a plan:

  • Define a goal
  • Planning is a continuous process
  • Plans are time-sensitive
  • Keep plans simple
  • Keep them flexible
  • Be bold!

Keys to Success in Business Planning

You can find many sources of good information about the elements you need to include in your business plan. While these quantitative elements are important, you also need to make sure you are engaging in business planning with a thorough understanding of your mission and the best way to approach the business plan from an attitudinal or qualitative perspective.

If you have decided to bypass the planning process, you might want to reconsider. Business planning has many benefits in addition to what is contained in the plan itself. The planning process forces you to think through many issues that you might otherwise avoid. As the saying goes, “you can’t hit a target you don’t see.” The business plan provides the target.

From my many experiences creating my own business plans, as well as working with our clients on their plans, I’ve identified 10 things you can do to make your business planning much more successful.

  1. Start early – be proactive, not reactive. By early, I mean that you should plan well before you are ready to implement the plan.
  2. Start small and iterate often. Today, I urge entrepreneurs to launch their ventures with a minimum viable product (MVP) or service (MVS). Even though you have major dreams for your business, you are usually better off starting small and iterating over time. In other words, practice the principle of “fail fast and move on”.
  3. Don’t spend major time on minor issues. I’ve seen business owners spend countless hours trying to calculate trivial matters like what titles to give the founding team or how many people they will need in their 47th month in business. As an entrepreneur, your time is precious – invest it wisely.
  4. Focus on your differentiation. If you are using the business plan to attract investors, partners, or employees, you should ensure that it is not a “me too” type plan. State how you are different from the competition in terms of products, expertise, target audience, etc.
  5. Make sure your numbers are realistic and defensible. I understand that entrepreneurs are supposed to be optimists but resist the temptation to wildly exaggerate your financial projections. Many of the potential investors you share the plan with have started companies themselves and they know the difference between a pipe dream and what is achievable.
  6. Spend time on your SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It is imperative that you understand how you rate against your competition in each of these four areas. We have a paper on this subject in the member resources area.
  7. Define your mission, vision and objectives. Don’t neglect to talk about these important subjects early in the business plan. Everything you write and every action you recommend should be based on supporting these.
  8. Specify the necessary actions to achieve objectives. A business plan is for more than outcomes – it is a specific roadmap to success.
  9. Focus on critical metrics. Every business plan should showcase the specific measurements that will be used to evaluate ongoing performance as well as the means to track and monitor results.
  10. Identify assumptions, risks and contingencies. One of the entrepreneurial attributes that investors most like to see is flexibility. Business owners realize that the marketplace and buyer preferences are continually changing so it is wise to identify the potential barriers early and plan accordingly.

Visit the CBM website often for more information about each of these important planning attributes.