This is now the third blog entry of Bessemer’s Cloud Computing Laws and in this I will be focused on sales and sales learning curve as Bessemer puts it in their blog entry. I have had the opportunity to personally sell software around the world for the past 20+ years, hire sales people (and yes, sometimes fire) and also dealt with a myriad of different issues that has to do with sales. However, in this blog post, I will be focusing on SaaS sales and issues related to it.
Software companies live and die based on the success of the sales. I learned very early in my career that technology by itself does not make the company fly, even if I as head of development at the time thought would be the case. Sales people did not have to know anything, they were just sales people. Little did I know, until I was put in the driver’s seat in sales, and it wasn’t in my native country, but here in the United States of America?
I did not have a rolodex, but I was appointed as CEO for a US-subsidiary of an European software company. That is when I was put into huge test and my view on sales and sales people has never been the same. I love the way good sales people run their business and I admire how they close the sales. It is not easy to hire good sales people, and it is even less easy to make them go when you have lost confidence. I got some advice from native US entrepreneurs how to look at sales people and their performance and I also learned how to build a compensation model that would make it beneficial for both the sales person as well as the company. Well, that is history now; let’s look at what we can learn from sales in the SaaS world.
We learned from my previous blog entry about Besssemer’s 6C’s Financial Laws that Committed Monthly Revenue (CMRR) is what drives the company. The question that you have to ask yourself is what type of recurring revenue can we expect from sales people in the SaaS world. In the more traditional enterprise software world, the measure that I used was that a sales person would have to sell for at least a million dollars to be called a real sales rep. Some did less, some more, but that was roughly the measurement. The sales quota has not changed since those days and the blog entry from Bessemer suggests that within the enterprise sales business model, the CMRR number should be around $80.000-$100.000 which is around $1-1.2 M in annualized revenue.
According to the Bessemer, telesales numbers can be lower, from $60,000 to $70,000 MRR ($720,000-900,000 annualized). Furthermore, Bessemer suggests that until at least 2 of 3 sales people hit these quotas, the SaaS company has hit some type of repeatable business model and are close to hitting $300,000 in CMRR. Also, the blog warns of scaling too quickly with new hires as the new ones might bog down the more senior ones and take down the sales numbers for the whole team. It is a chicken and egg and this is nothing new from the past. When you have a good sales rep, you have a temptation to give this person a promotion to be sales manager to manage the sales team. Sometimes this is the road for failure. I have seen it so many times. I have even seen sales tank completely by hiring incompetent leadership and get the sales team to quit. This is a certain path to destruction.
Bessemer also separate “hunters” from “farmers” and I will get to this topic in later blog entries, but the idea is that the company has a separate set of sales people for new sales from the account management roles with the objective to renew the contract year after year. The CMRR includes churn every year, so the net impact of your new sales will be impacted by existing clients that do not want to renew. This is why some SaaS companies have dedicated sales team that focuses solely on customer service, renewals and up-sells. Also, this of course drives the behavior of the sales people depending on what their focus and sales drivers are. The new account team should be paid on new CMRR with a standard deal structure and incentives if the customer pays with more favorable payment terms.
The final element of Bessemer’s advice is the internationalization of the solution that is a key element for making it big for the SaaS vendor. How big should the company be when entering international markets? The blog entry from Bessemer gives a US-based perspective with the framework of US business. The claim, which I believe is true, that US is much advanced as a market for SaaS solutions and the company can grow tremendously just in the US home market. Bessemer gives some idea of when to break it from the US market and it is when it hits $1M CMRR ($12M Annual Contract Value) which in European terms is a pretty sizable company already. I know much smaller companies that have been able to create international presence, but I am sure that Bessemer looks at this from an investor/venture capital perspective. If you asked entrepreneurs about this, the numbers would be very different.
Bessemer advices US-based SaaS companies to view European markets as a pre-IPO market and growth strategy and Asia as the company has IPO’d. I do disagree with this view or perspective, specifically now with software vendor having access to PaaS, IaaS platforms covering the entire world and having data centers in all major regions (EMEA, Asia, US, Latin Americas). I want to emphasize that Bessemer’s perspective and view is from a venture capital perspective and I am sure that when you want to make it big and have your investment come back sooner rather than later, their approach seems feasible.
When you are an entrepreneur, living with your own pace and agenda, the approach can be different as have been seen in many cases. You do not have to have huge CMRR to get international access and with current social media methods and viral marketing, you can build a growth story that creates users around the world. Bessemer has a good point in their blog entry about cultural and language related issues when deploying multi-language version of a SaaS solution. Large organizations are known to have issues with this, so smaller ISVs will run into same issues regardless from where you are.
So how can SaaS sales be viewed from Business Model Canvas perspective? In my previous blog entry about the financial models and the 6C’s, the CMRR impacts directly the Revenue Streams (RS), but I would be tempted to say that this Law impacts Customer Relationship (CR), Channel (C) and Key Resource (KR). The reasoning behind this is as follows:
- The SaaS company’s success is dependent on its ability to understand the DNA of SaaS business and the Key Resources will be the sales people that get this and are able to deliver the Value Proposition (VA) that the solution is claimed to have.
- The sales people are also key to the Customer Relationship (CR) at least initially until separate “Farmers” are hired to maintain the customer relationships. Regardless of this, a SaaS company will live or die with the customer relationship as there is a direct connection between CMRR, satisfaction of the use of the solution and the renewal rate (or churn).
- SaaS and Channels (C) is a concept that is causing the traditional VAR (value-added reseller) to wonder how they will play in the whole SaaS field. The margins for the SaaS are not what is expected in enterprise license sales and this will cause many VARs to reconsider their future.
- Satisfied customer impacts directly Revenue Streams (RS), unhappy customers impact both Revenue Streams (RS) and Cost Structure (CS) and CAC.
The combination of effective sales, effective product development with leadership team that understands the SaaS DNA is a key for success. One has to remember that venture capitalists are also expected to understand the SaaS business model, and if they don’t, I would not want to be the CEO of that SaaS company.