The SaaS sales model seems so well-established, as hundreds of founders build their businesses and raise funding. However, even the savviest entrepreneurs might be unaware of some of the blind spots that could be costing revenue.
Mark Roberge, Founder of Stage 2 Capital and Senior Lecturer at Harvard Business School, shares insights from his years of experience into common SaaS sales missteps and how you can avoid them.
Pothole #1 – Legacy Sales Commission Plans May Yield Low License Utilization
It’s 2021, but surprisingly, a significant number of SaaS companies still use outdated sales compensation plans. Says Roberge, “We’re using a sales comp plan that was invented in the 1980s, and it’s causing our customers to utilize their licenses at a lower rate, and it’s causing revenue contraction.”
Salespeople are often compensated at the highest rate when they win brand new business, but that might not be good for revenue expansion and might contribute to churn. So instead, Roberge suggests updating sales comp plans to pay higher for expansion revenue wins over brand new wins.
Pothole #2 – Increasing Pricing Rate Without a Sustainable Moat
Raising prices might seem like a quick win to grow your revenue, but it’s critical to bear in mind the effect increased prices will have on your sales cycle, close rates, and disruption risk. It is probably a more effective strategy to keep your opening price low and increase your ACV through expansion. “We are misaligning our customers with our product because of the pricing model because we’re raising the price. And it can take so long to equate that value. The sales cycles go up; the close rates go down, and…our disruption risk goes way up.”
Pothole #3 – Confusing a Temporary Moat with a Sustainable Moat
If you ask any SaaS founder what differentiates their product, they would likely rattle off answers they have at the ready. But are those factors really going to carry the company long-term, or could another competitor outstrip them?
Roberge suggests trying the “Sustainable Moat Test.” Consider the scenario: There are a handful of skilled engineers in Silicon Valley. If they chose to:
- Raise a round from Sequoia
- Copy your entire product
- Sell it to your market for half the price
Why would your buyers still choose you?
To get a few ideas of what sustainable moats might look like, Roberge lists a few, including the Network Effect (example: social networks, marketplaces), Branding (example: category creation, like HubSpot’s Inbound Marketing), Economies of Scale (example: cloud infrastructure like AWS, AI), and Distribution Channels (example: product-led growth, direct-to-consumer).
Pothole #4 – Promoting Your Best Salesperson to Manager
It’s a common occurrence in SaaS –– the highest-performing sales rep gets promoted to manage a team. It might make sense on the surface since they can theoretically teach other reps how to replicate their success, and you want to reward hard work.
But this move can actually be counter-productive, as Roberge points out, “Your top rep does not make your top manager. They do not always make a good manager. In fact, the stats show it’s mostly false.” He further comments, “Sales management is about hiring talent and coaching talent –– it doesn’t have a lot to do with sales.”
However, Roberge doesn’t recommend you automatically disqualify your top reps. Instead, he recommends putting them through a rigorous process to get promoted, with opportunities to opt-out along the way if they wish. It includes leadership development courses, and responsibilities of managing and hiring one or two reps to get experience.
Pothole #5 – Prioritizing Revenue Acquisition Ahead of Customer Value Creation
When should you scale? It can be tough to know the answer to that question, but the indicators should be focused more on the retention side over the acquisition side.
Roberge recommends starting with product-market fit. Your customer retention is the best quantifiable measure of product-market fit; however, retention is a lagging indicator. Therefore, you need a way to identify product-market fit as early as possible.
This is where you can get strategic and creative. Choose your leading indicator that reveals product-market fit for your business, and establish a time frame. Consider Slack’s example: If 70% of their customers sent 2,000+ team messages within 30 days, that indicated a product-market fit.
Once you find your product-market fit, you figure out your GTM fit, and you are ready to ramp up growth and begin to scale.
Pothole #6 – Massive Hiring of Salespeople Immediately After a Financing Round
It can be tempting to rapidly hire more salespeople after fundraising, but that could be a huge mistake. Instead, establish a scaling pace. Roberge suggests hiring about two new reps per month for six months to keep tabs on your speed and see the velocity of growth. Then, you’ll get a more accurate gauge on where to allocate funds and resources.
- Update sales comp plans to pay higher for expansion revenue wins over brand new wins.
- Don’t automatically promote your top sales rep to manager. Instead, consider putting them through a promotion path that includes education and practical experience.
- You need a way to identify product-market fit as early as possible. Choose your leading indicator that reveals product-market fit for your business, and establish a time frame.