Michele Law (Castlight Health, OpenDNS) + Mark Roberge (HBS, Hubspot): Sales Mistakes that Can Kill Your SaaS Business How to Avoid Them (Video + Transcript)
Building a well-oiled sales machine in SaaS is no easy feat. Mark Roberge, Senior Lecturer at Harvard Business School and former CRO at Hubspot, and Michele Law, former CRO at Castlight Health and former COO at OpenDNS, take the stage to talk about the top four sales mistakes that could ruin your SaaS business. But what’s more important than understanding what these mistakes are? Knowing how to rectify them, or even better, avoiding them altogether.
One of the mistakes that Mike and Michele made was growing too fast. We can all agree that growing too fast can potentially destroy a business, as ironic as it may be. It’s not just about hiring as many sales reps as possible so your revenue balloons uncontrollably, but understanding the stages going into growth, when and who to hire, and more.
Check out the video and full transcript to learn more about the other mistakes and what you can do make sure you don’t fall into their trap.
You can see the slide deck for this session here.
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Announcer: He’s the author of the bestselling, The Sales Acceleration Formula, and Senior Lecturer at Harvard Business School. She’s been the CRO at Castlight Health and COO of OpenDNS. Please welcome, Mark Roberge and Michele Law.
Mark Roberge: Awesome. What a turnout. Thanks for coming out. Michele and I are excited to tell everyone about the mistakes we’ve made over the years. Hopefully, you guys can avoid them.
I called her two weeks ago, and I said, “Let’s make a list of the 10 mistakes that we’ve made separately and compare notes.” Both of us had the same number one.
Quick survey for the audience, I’m going to give three options. It was either sales hiring, premature growth, or sales compensation.
How many people think it was sales hiring that was our number one? How many people think it was premature growth? How many people think it was sales compensation? I think we got you. It was number two, premature growth.
We’re going to actually hit all three today. We’re going to start with premature growth. Michele, why don’t you take us away? Why was that our number one?
Michele Law: That was our number one. One of the things that I’ve seen and I’ve actually experienced, is it’s a relatively classic mistake. It’s less so today, but I still see it happening.
That’s when you’re going into growth mode too quickly, which seems funny because the whole point of a startup is to go into growth.
What I mean by that…I’ll use an example. There’s a company that I’m very familiar with. It’s a great set of founders, developed a product that for a problem that they had experienced for a set of customers that they knew about.
They got really early revenue traction off that product. They went out, raised a nice round of funding, decided this is the time to really start scaling revenue.
They ended up hiring an executive VP of sales, built up the sales and marketing team. 12, 18 months later, revenue wasn’t really growing. The sales teams started turning over because they weren’t selling anything or making money.
That’s when the finger pointing starts happening in the company. If you were saying, “Salespeople don’t know how to sell the product.” Salespeople were saying, “The product’s not ready.” It’s actually no one’s fault.
It’s really a matter of not really understanding what stage they were in and jumping ahead too quickly into revenue growth when they actually weren’t ready.
One of the things that I look at when I’m in a company is where are we right now? There aren’t clear delineations between the different phases of a company.
It’s a little bit of a gut feel. It’s a little bit of metrics. It’s important to know where you are because it’s going to depend, you’re going to make a lot of decisions, depending on what phase you are. Everything from hiring to the amount of money you’re raising. Is it time to bring on a VP?
For me, there’s three phases when I think about growth. The first is really product market fit.
This is where you have a set of founders, a core team that’s developing a product to solve a problem in, ideally, a big market. You’re looking to see, is this problem really important?
When you initially think you found that, now it’s time to go into what I call preparing to scale. That’s a phase where you’re looking to see how am I going to acquire customers? What’s my sales playbook?
You’re really looking to find a repeatable and ideally predictable sales model before you go out and hire the sales team. Once you’ve found that, it’s really a good time then to say, “Need my VP of sales. Let’s go. We’re off to the races.”
One other thing that’s super important is that I’ve always said, depending on where you are in your company, there are two or three things that you need to focus on.
Everything else is important, but doesn’t really matter. There’s only two or three things that will make or break your company at that point in time.
When you think about where you are as a company, you need to hone in on what those things are to prove out the phase that you’re in, so that you can get to the next step.
Mark: I love it. Just to close it out with the metrics and how do you understand that. I love it when two people work on a problem separately and come up with the same conclusion. That’s what happened here.
This is the way I’ve thought about it, but you can see the parallels with Michele. I walk into so many companies where they’re like, “This has been great. We’ve got eight engineers. We built our product. We now have 20 customers. We’re going to hire 47 salespeople next month.”
I’m like, “You’re going to lay off 47 salespeople next year.” That’s usually how it unfolds.
I challenge folks and I wish we thought about this at HubSpot in the early days to think about customer success, then unit economics, and then growth.
Customer success is not eight people paying for your software. That’s not customer success. Customer success is 20, 30, 40 customers who use your software. If I went and talked to them, they’d say, “Don’t you dare rip this away from me.”
I don’t care if it cost you $5,000 to acquire those customers that are worth $1,000 to you, who cares. I don’t care about the pricing model. I don’t care about hiring salespeople. I don’t care about your comp plan. I care about making people successful.
I’m looking at things like, we’ve got the usage, NPS of my folks, churn if you want to put them on monthly pricing models, etc. Once I have that, then we can talk about unit economics.
Then we can talk about all the things you’ll learn about this week, payback period, LTV to CAC ratios, etc. Once I have those two things, great, let’s start hiring two to three salespeople a month.
Customer success, then unit economics, then growth. Let’s move to hiring. Similar thing. I’ve seen this messed up so many times. I wrote a case about it that we teach at Harvard now.
I go out, and I put this in front of venture capitalists. I put it in front of founders. I put it up in front of the MBA students.
You’re eight people in a garage with a bunch of engineers building a product. It’s going well. You’ve got your 12 friends on it. It’s going well. It’s time to hire your first salesperson.
Who is it? Another survey for you folks. Option number one, the VP of sales at the big competitor you’re trying to disrupt. He’s doing 200 million a year. He’s got 500 reps. His company’s worth a billion dollars.
He’s like, “You know what, I want to do something cool. I want to come to your startup.”
Option two, his number one rep, the guy’s number one out of 500 reps, selling to the same types of businesses. He’s willing to come to your startup.
Option number three is your buddy who’s an entrepreneur. She grew up in Salesforce.com for five years, learned to sell. She started a company the last two years, and now she’s ready to jump in and help someone out.
Option number four is a woman, not in your industry, but on fire in sales. She’s been at this company for eight years. She got promoted to manager in the last year, but she’s not in your industry.
How many people want option number one, the big name?
Mark: There’s no VCs in the room.
Mark: How many people want option number two, best salesperson? How many people want option number three, the entrepreneur? How many want option number four, the recently promoted sales manager? Smart audience.
Michele, what’s your experience there?
Michele: Again, it depends on what phase you are in your company’s growth. When you’re doing product market fit, you as the entrepreneur, you as the technical founders, are the sales folks.
You know the product. You’re coding. You’re selling. You’re wearing multiple hats, but you are the face of the company. You are actually the company’s best salesperson.
Every time I meet an entrepreneur and they close a customer, I know it’s them. It’s the sheer force of will. It’s their charisma. It’s their belief that they’re really solving a problem. They are the best salespeople for them.
Once you establish your initial product market fit, that’s where, I would say, the controversy comes in. Certainly, I’ve been a victim of that, of saying, “We need a VP of sales.”
When you think about what your actual needs are, you don’t need a VP of sales in this phase. What you need are a couple of characteristics.
You need someone who knows how to sell, obviously, but equally important, knows how to listen because, remember, you’re still testing your product market fit.
You don’t really know how you’re going to market just yet. You don’t know what the sales playbook is.
You need someone who can wear multiple hats, is less of a sales specialist but more of a generalist who can sell. But also can help you and your company connect the dots both for the product and the customer, for the sales playbook, for the go to market, for everything that you’re looking to build in order to get to the next area.
For me, what I look for, I would choose between the entrepreneur with sales background and the number one sales rep, depending on the type of person. I’ve actually had both.
At OpenDNS, my first two sales reps were sales reps. I hired them from WebEx. They were young. They had spent about three or four years at WebEx, number one sales reps in their group.
That’s where they got the great training. They were young enough and cavalier enough to want to be part of a startup to help build what we needed to build.
At Castlight, we actually hired two McKinsey consultants because we were trying to develop a new category of products for the benefit leader that didn’t exist before. We’re talking long sale cycles, two to three years.
We needed someone who could go in, establish trust with a very conservative buyer, listen to their needs, and then be smart enough to translate that into what product needed to build in order to service those needs.
I’ve had both. It depends on the type of solution. If you’re an existing market with a better mousetrap, I’d probably tend to go with the sales reps.
If you’re in a brand new category and you’re doing some missionary sales, that’s the time when you need to start thinking out of the box.
You need someone who is more a consultative sale and who can both sell, but also be that great listener and be the guiding light for your product development team.
Mark: Michele was in a little bit of an advantage there in hiring that second option, the salesperson, because she had sales experience.
When you’re two engineering-based founders, putting in that first salesperson, geez, that guy showed up at Oracle, or Salesforce, whatever it was.
He went through a month of training how to handle the top 20 objections. That process is not built. If you don’t have the background in sales, he’s going to do 50 calls and be like, “It’s not working.”
Michele: I know that’s definitely true. If I weren’t there, the model and just the initial call scripts, the initial approach, the initial deck, they would be on their own. I’m not sure that they would have been able to do that themselves.
You definitely need someone who can help guide the initial sales reps team. If that’s not you and that’s not something you want, I would highly recommend hiring somebody who can eventually do that.
To Mark’s point, when you have an entrepreneur who’s got a sales background, what you’re looking for is someone not only to listen and be able to sell for you, but ideally, can actually take on some of that sales management responsibility.
One example was I played that role at OpenDNS. Yes, I had multiple hats since I was a COO. One of the mistakes that we made there was not hiring a sales manager or director underneath me fast enough.
We fell into this classic mistake of we needed a VP of Sales from the get go. We weren’t ready for one, nor could we attract the ones that we wanted. We held out for that.
I interviewed a director of sales, who I thought was a rock star. I knew he could get the operations done. He could do the day-to-day management, the forecasting, pipeline review. I could focus on other things with the business.
We held out for the VP of Sales for two years, 40 interviews later. That was painful for me because I became the default. I was doing that, and I should have been doing other things.
When you think about it, you want to make sure you’re leveraging your talent and where you should spend your time.
When you hire, you’re looking for the ability to either find someone who can rise up into that position or if none of the ones that you hired have that leadership position, you don’t have that leadership management ability to coach them there, then I would highly recommend getting a sales manager or director of sales in there because they’re easier to find, they’re cheaper, and they’re going to take a lot of the day to day work off your plate.
Mark: One of the big takeaways for me, too, is think about in the early phases of your business, what is more valuable from those first hundred dollars you do? Is it the customers and revenue, or is it the feedback?
What is the salesperson that’s going to enable that learning and feedback?
Let’s switch to customer success and churn. As we develop our SaaS businesses, we start to recognize that churn is probably the most important metric we’ve got to obsess over, highly related to customer success.
Let me tell you about how we totally screwed that up at HubSpot in the early days and how we used the comp plan to address it.
This was the comp plan. If I take you back to the summer of 2007, there were eight people at the company. I had two salespeople.
We were doing a couple hundred thousand in revenue. Halligan was like, “Hire one rep a month.” I did, for eight months.
Eight months later, it was looking good. We probably were doing two and a half million at that point. We had 10, 12 reps, but churn was eight percent a month. Eight percent a month.
If we’re going to drop an F bomb, we should drop it right now. That is not a business.
What I did was I looked at the customer success reps. We had a couple of them. I was like, “Some of them must be doing something right. Some of them must be doing it wrong. Let’s look at the churn rate by customer success rep.”
It turned out the churn rate was really similar. Then I redid the analysis by salesperson. Gosh, that was where the difference was. Some of the reps had really good churn. Others, it was bad.
Let’s look at the comp plan. At the time, I paid the reps $500 per customer. We kept this super simple. There’s only one product. It’s 250 bucks a month. We paid them 500 bucks a customer.
We had an accelerator. When you got over your quota, we paid you twice as much. Each customer is a thousand.
They better stick around for four months. Otherwise, we’re going to take your commission back. A really great plan for hunting, for getting from a hundred to a thousand customers.
Here’s what happened. As we looked at it, in the first month of every customer, their churn was nothing. Second month, third month, fourth, nothing, and then boom, month five.
Sales reps work their comp plan. That could be a good thing, as long as we appreciate that.
What I did was I analyzed their churn rate. I showed this analysis to the reps. You can see down the bottom, the green, that was the average number of customers they brought in per month.
The number one person there from an LTV standpoint was 10.8, the first person. Their churn is 1.6. If you do the lifetime value analysis on that, of what they were bringing in per month, that’s on the Y axis, it’s a little under 180,000 that she was bringing in every month.
Now, these folks down here, they were actually outselling that rep from the legacy ways we looked at sales efficiency, 11.7, 12.0, 11.1 customers per month. But churn rate was horrendous.
The lifetime value they were creating was less than a third of that top rep, a totally different way of looking at this.
I was like, “Folks, we’re going to start comping you on this stuff.” That’s what I did. Sure enough, the next quarter, I said, “Those of you who are in the top quartile, I’m now going to pay you a thousand dollars a customer, twice as much.
If you’re in the second quartile, I’ll give you a 50 percent raise, 750. If you’re in the third quartile, no change. If you’re in the fourth quartile, you’re going to make half as much.
If you want to leave, there’s the door. We’re going to train you like rock stars to try to bring in really successful customers.” Churn dropped by 70 percent in six months. Sales reps work their comp plan.
Now, it got the point where the churn that was happening after that was for things outside of the control of the salesperson. The product was buggy here and there. A company went out of business.
I had to redo the plan again to something of like, “What does the rep control fully, 100 percent in their control, that is aligned with churn?”
For our business, it happened to be payment period. I put together a plan that comped them, based on getting annual contracts upfront, which helped people to be committed to inbound marketing.
We didn’t have a very low time and effort to value type, value prop. These folks need to be committed upfront. For our context, it worked really well.
Now, should I have just jumped to the 2012 plan? I don’t know. We needed a bolder plan than that. Regardless, my takeaway here is just…You want to close it out here, Michele?
Michele: Sales compensation is a powerful vehicle to drive customer success. Your comp plan, no kidding, salespeople are smart. They will analyze their comp plan. They know exactly how to make money.
It’s your job to ensure that the comp plan is aligned with what you’re trying to drive for the business. If you put it out there and it’s fair, you will see success, both for the business and both for your sales reps.
Mark: I wrote a couple of articles about it. This one is in “Harvard Business Review,” if you want to check that out. This deck is up on my Twitter feed five minutes ago.
Let’s close it out on org structure. Now, I’m going to forward fast the clock another two years. We had probably 250 people at the company.
We got large enough that…a lot of you are probably at that stage. You start ending up on two floors. It starts to be like a big company.
We organized ourselves like most organizations. We had, those are the marketing people over there and back there is the whole sales team. There’s our customer success team over there.
As we grew to this stage, I found that the definition of an ideal customer was changing, depending on the group that you were in.
The marketing team is like, “Oh, yeah. The people we love to sell to, they are the people that are easy to get to fill out a landing page.”
The sales, they were like, “Oh, yeah. The people that are best for us are the folks that’s it’s easy to get their credit card.”
The customer success folks were like, “Oh, yeah. It’s the people who we can make really successful on our product.”
Now obviously, the customer success folks were most right, but how were we going to create this alignment in this new world of SaaS where there needs to be a nice hand off from demand gen to sales to customer success?
What we essentially did was reorganize the company by our buyer persona. We destroyed the marketing team, sales team, services team seating and sat people by small businesses, mid market, and enterprise.
Within those groups, we had representation from marketing. We had a couple dozen salespeople. We had half a dozen of our customer success folks.
They all were marching to the same order that we, as a company, were marching to for our business. It’s no longer like churn’s blowing up. It must be the leads, or it must be expectation setting. It’s like, no. You have everything right there amongst you folks.
There was relationships between the sales people and the customer success folks. They grab beers together. The last thing that sales person was going to do was arm twist some really bad customer into the business to hand it off to their friend to have fun with.
Their friend and customer success saw their buddies struggling all quarter to get to their number, and it was the last hour of the quarter.
They knew that this customer may or may not be a good fit, but they jumped on the phone with their sales friend and said, “You know what? We can make this work.” They felt each other’s pain.
We destroyed that kind of marketing meeting, sales meeting, customer success meeting, and we started having small business meetings and mid market meetings, and enterprise meetings. We measured each one of those groups in the same way the board measured us.
It wasn’t just about leads from the marketing team, and revenue from the sales team, and churn from the customer success team because this was a cohesive unit. Each one of these teams were responsible for their own unit economics and churn.
We were able to pass the education of how a SaaS business works down to our mid level managers which is really critical for that next wave of growth.
The point there that I love to take away is churn customer success is so important to our businesses. Are we really doing ourselves justice by organizing ourselves by function, or are we better off organizing ourselves by our buyers?
Those are our four critical mistakes. We’re going to be around a little bit after for questions. I’ll actually be on one of the stages in half an hour or so for an “Ask me anything.”
Hopefully, you can avoid these mistakes going forward. Thanks so much for your time.
View the slides here.