As we get closer to the end of 2022, conversations are flying about the present and future of the SaaS market. Once upon a time, like back in 2021, entrepreneurs, business leaders, and even investors emphasized revenue metrics like AAR over gross margins. But that’s not the case anymore.
Does that mean growth is slowing down for SaaS startups? In the first session of our new CRO Confidential series focused on CROs and sales, Founders Fund Partner and one of the top sales leaders in the world for the past decade and a half, Sam Blond interviews SaaStr CEO and Founder, Jason Lemkin about the macro impact of these evolving conditions in 2022 and what that means for 2023.
The Times They Are A’Changing
To answer the biggest question right out of the gate: Is growth slowing for SaaS startups? The simple answer is no. SaaS is still growing like a weed, but how it is growing has shifted.
In 2021, it was all about how to deploy $100M in six months. This year? Not so much. The 2022 climate has sharply steered investors in the opposite direction. Blond shares, “Unit economics broadly matter much more today. In 2021, there was a lot of emphasis on top-line revenue growth, what percentage year-over-year was the business growing, and less emphasis on things like gross margins and revenue quality.”
There’s less capital in today’s world, meaning strategies must evolve to survive. Does that mean companies are struggling to grow? No, it doesn’t. It just means companies need to focus on a different measurement of growth.
The New SaaS Playbook Gross Profit > Top-Line Revenue
Historically, businesses have focused on top-line revenue, typically its ARR number. But in 2022, investors are much more interested in a company’s efficiency, so Blond recommends that founders make a tactical change — focus on gross profit and improve their margins. Investors will take notice, and you are more likely to win in a competitive environment.
For years, the general playbook for software companies assumed 100% gross margins. Back in the old days, you chipped the CD-ROM, and there were no direct costs. Now there are server costs and support, and then the world changed with fintech, payments, and communications, which all have lower margins but ran the same playbook until recently.
This shift to margins and efficiency forces Saas companies to adjust to an outdated playbook, which isn’t a bad thing. Companies have the power to use levers to improve their efficiency metrics.
“There is the ability to control that gross margin on the expense side,” says Blond. And at the same time, you can adjust your sales strategy to boost top-line revenue while still keeping gross profit front and center.
“If you are hyper-focused on some form of gross profit or gross margin dollars versus top-line, it can manifest in driving behavior in the company, such that you improve gross margins and, ultimately, improve the value of the business.”
Leadership must communicate this objective to the entire company and ensure everyone works toward improving efficiency instead of simply bringing in more dollars. However, this doesn’t mean your sales teams shouldn’t bring in more revenue –– quite the opposite. Blond says, “You are going to need to figure out how to drive more revenue per sales rep if you are a lower-margin business.”
And always remember, an incentivized sales rep equals a more productive sales rep.
The 2022 Economic Climate, Barriers to Growth, and Recruiting a Killer Sales Team
In 2021, there was so much organic growth within a customer base. If your business depends on things like hiring, you may feel the 2022 economic climate impact more than other businesses, particularly in the B2B space.
Companies are indeed hiring less today; that is what’s slowing, which means net dollar retention is slowly decreasing since organic usage in a company has also decreased. Organizations are simply growing less quickly, so you have to be thoughtful about NRR assumptions as you move into 2023, with an expected reduction in top-line growth for most companies.
So how can you prepare your sales team for 2023?
As a founder advisor, Blond always has his ear to the ground. He isn’t hearing people say that customers are cutting budget or unable to acquire new customers. It’s simply not the issue at hand. The budget is there; it’s just harder to access. The messaging in 2021 may not resonate in 2022 for the exact same product, so your benefits need to adapt to the conditions.
To help strengthen your sales strategy for the future, you must dig deeper beyond the buyer or the decision-making stakeholder. You must understand your client’s entire company objectives to effectively make sales.
“I think today, more than ever, understand the business priorities of the companies you are selling to, not just your buyer.” Blond continues, “The messaging that resonated in 2021 may not be the messaging that resonates in 2022.”
Recruiting excellent sales leaders is critical this year, so be sure to pay attention to two essential qualities:
- The Profile: Don’t get caught up in seeking candidates with domain experience as your top qualifying attribute. Talented leaders are hard to find, so focus on performance and career trajectory instead of industry. Any intelligent person can learn a business. Gravitate towards someone who has seen what great looks like and has progressed their career quickly within a great company.
- Priorities: Understand what your sales leader will focus on during their tenure. Firstly, they must be able to hire an excellent team, and then their plans to reach your company’s goals must align with how your business intends to achieve its goals.
Ultimately, entrepreneurs and business leaders need to remember that efficiency and smart strategy will win in 2023. The right investor will notice significant margins, gross profit, and high efficiency, so make those your priority for the year.
Key Takeaways
- Shift the focus to gross profit, not just ARR.
- Re-center your sales strategy to align with an entire organization’s goals, not just the individual buyer.
- Recruit sales leaders who share your vision and can hire a great sales team.
