Unlock Success with the SAAS Inside Sales Model

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all right saster 2021 great to be back great to be back do you have this do you have this chart do you have this chart first pothole we're talking about here i'm seen as a big problem in the industry for some reason our customers are buying more than they're using from us we're all in this like subscription consumption economy we're selling seats we're selling uh we're selling gigs we're selling leads we're selling contacts we're selling features and for some reason our customers are only using 50 of what we're selling why when i'm in the board meetings and we're looking at this like it must be the the product it must be the user experience yeah but they're not even trying to use the license okay well it must be the onboarding process it must be the csm's no they're pitching it they're doing a great job why why are our customers only using 50 of what they bought and it's a big problem because it doesn't make for a very good retention conversation a year later in fact it leads to revenue contraction why is it happening we're using a comp plan from the 1980s 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 and so i i did a little innovation at hubspot and with a bunch of our portfolio companies at stage two that i'll show you has worked in a very scalable way to get this utilization up and get us back into revenue expansion so a lot of these comp plans since the 80s we have compensated our sales people more for the first revenue from a customer pretty logical hard to get in the door but easier to renew and expand once we have a relationship but look at what happens in today's a subscription economy consumption economy our customers like i love your product i could see our entire thousand employees using this but i would just like to start with 10 licenses for this team to get it set up and then we'll roll it out to the rest of the company and what does the seller say no no you need to buy licenses for the whole company why and they make up some bs thing it's really because that's how i get paid i get paid for the first revenue from the account and because of that we we're left with low license utilization and we're left with revenue contraction simple innovation try paying them more for the expansion revenue try paying them more for the expansion revenue so when the buyer says i want to start with 10 accounts and then we'll roll out to the whole thousand they're like perfect i'm gonna make more money and your utilization goes up and you get back into a revenue expansion mode the beauty the gold mine for for sas uh businesses when i rolled this out at hubspot when we're doing the crm i told the reps i said hey folks uh i'm gonna pay you 20 more for expansion seats than for new seats and the reps were like roberts you're so stupid they were like you know what i'm going to do i have 100 seat account right now in the pipeline i'm going to close five seats this quarter and i'm going to get the other 95 next quarter and i was like beautiful that's exactly what i want because when you sell those five accounts you're not gonna lie you're gonna tell the truth because you know the money's made on the other 95 you're going to set really good expectations i don't want you to turn into csm but you're going to watch that account you're going to make sure that thing on boards well and then you're gonna get the 95 and you're gonna get paid and guess what if you sell that thing ron i only lose five accounts as opposed to most sellers are getting the hundred counts and they churn and it crushes us okay now this is all connected the pricing model too this is the the pricing model has to feed this as well and then a lot of board meetings were like hey you hit hit sales and second quarter you hit sales again great we should raise prices let's raise the prices and the ceo is like yeah maybe we should raise prices and the vp of sales is psyched yes let's raise the prices my whole we're going to double our prices i need to close half the number of customers this is perfect and no one's paying attention to what this is doing to sales cycles close rates and most of most importantly our disruption risk we are misaligning our customers with our product because of the pricing model because we're raising the price and it takes them so long to equate that value the sales cycles go up the close rates go down and the one that we don't pick up on is our disruption risk goes way up our disruption risk goes way up because now you're charging twenty 20 000 a month for this thing fine it works for a couple quarters because you're the only player in the court in the in the category but you are a ripe target for a bunch of hot shot engineers hill and here in silicon valley to rebuild your product and charge half the price so be careful about raising your prices unless you have a sustainable moat and that's number three well what is a sustainable mow how do i know if i have a sustainable mow because i asked like 10 engineers you know founders we're talking about investing this sounds awesome it's a great market you're obviously very talented you've got some great traction can you tell me about your moat how are you going to defend against the competition and they're like well we built this awesome feature that everyone likes and i'm like okay well how long would it take the competition to build that feature and copy it because they're obviously going to find out about it and they'll say i don't know like three months and i'll be like well that's not a sustainable mode that's a temp remote so this begs the question what is a what is a sustainable moat and i can tell you like here's my little test here's my little test is great you're crushing it you're in the category you're the only person in the category fine you want to consider raising prices you want to have a good answer to mo tell me this imagine if five rock star engineers from right around the corner maybe they're at google or something quit their jobs raise 10 million dollars from sequoia which is happening all the time right now and they reverse engineer your product and sell it for half the price do you still win do you still win if so you have a sustainable mo well that sounds really hard that sounds really hard and i'll tell you it's not because of product features it's not because of your support hotline it's not because of how much you raised 20 million bucks it's not because of the integrations you built and the best work that i've seen in this space was decades ago with porter's five forces michael porter anyone know porter's five forces a couple mbas in the realm okay so let me try to translate because he did this decades ago and i'll translate his work which i think is the best he's an hps professor translated to today's modern software and sas businesses so network effect the more people that use the product the more valuable it is to all the users the first phone sucked like who do you call right but as we built and you know it got better and better it's the same thing with the stuff that's happening in in social networks and marketplaces with amazon et cetera that's a true network effect in sustainable mode brand why do we spend so much money money on our armani shirt right we build a brand and today if you've read play bigger then you know category creation is a way to build a sustainable mode it worked beautifully for us at hubspot we were like listen we're going to invent a word called inbound marketing and if it fails the company will fail but if it works we'll have a sustainable moat because we'll own the first 10 pages of google the conference the book the linkedin network everything and it worked and the competition copied us and it just fed our demand everybody can build a category read play bigger and that's a sustainable mo economies of scale if we're buying bulk then we can buy it cheaper aws does this right they buy servers cheaper than anyone else and the big one right now is ai there's an economies of scale in terms of more volume so let's let's pretend we're selling gone.i o all right so let's say the five you know google engineers quit and copy gan's product and they go and try to sell it why do i still win it's very simple it's like yeah fine you can you can buy that one for half the price but you know they've only processed 100 000 sales calls their algorithm is only that good we have been in business for six years we've processed five billion sales calls so what do you want how important is the software to you do you want the one that process a hundred thousand or the one that processed five billion it's hard to catch that that's a sustainable moat switching costs i don't love but it's out there you know obviously i don't know if does anyone think they're paying too little for salesforce you know they really crush it here no offense they're rock stars they're good friends they're investors but they crush the switching costs and hey toast congrats ipo last year they have a little hardware software hybrid beautiful the only time they had churn was march of 2020 because of that craziness and ever since then and every time before then they had no churn because of that hybrid hardwood software combination so that that's a true sustainable i don't love it because it doesn't help you to win evergreen deals it helps you keep people and you can raise the price through expansion but it doesn't help you win evergreen deals in fact it could work against you if it gets out that you're gonna take advantage of your customers on that the other two are slightly less well distribution huge and i know the women before uh talked about plg that was fantastic i'm a huge plg fan in terms of sustainable money we kind of talked about the last piece with the pricing like calendly how do you how do you disrupt calendly like it starts for free imagine if they charge 10 000 a month like we'd just be attacking it but you start free slack zoom all these folks it's beautiful right now the other two like government policy and capital requirements those are just in in porter's work they're probably less applicable to us but i mean it would probably be hard to go after elon musk and spacex right now like you're not going to raise 20 million bucks and take them on but hopefully that gives you an example of sustainable mo and this is our job as founder ceo is we need to define that for the company and sometimes as you grow don't work on sustainable mode in my opinion it's series a but around series b and series c build the moat know what it is build the mo and sometimes it comes at the expense of growth and that's okay if i had to choose between this year building a great moat and only growing 80 percent or not building a moat and growing 120 i'd choose the former i want to build that mo okay jesus more charts roberge i had a beer at lunch it's like i can't handle this what's going on in this one pothole four pothole four what is going on here switch gears from the first three what this means the chart on the left it shows that the better the sales person is at hitting quota and their their percentile on the team the more likely they are to get promoted to manager promote your promote your top reps but it also shows that the better they are on the team the higher rank they are as a sales rep the worst manager they are we've known this forever your top rep does not make your top manager it does not always make a good manager in fact the stats show it mostly fails but so many founders are like yeah tommy's been with us forever tommy's our top rep tommy does amazing why don't we just promote tommy the manager and he'll hire eight other people and teach him what he knows how to do it sounds logical but it doesn't work like the best athletes and the best musicians and the best actors don't always make the best coach and that's what's true in sales as well is sales management is about hiring talent and coaching talent it doesn't have a lot to do with sales so what do you do promote your worst rep you can't do that so what do you do so robert is saying you can't promote my top rep to manager i need a manager well you got to put him through a process right so it's like okay fine you want to be manager here's what we're going to do um you just hit your quota for six months in a row hit your quarter for two quarters in a row you don't need to be number one you just need to hit your quota no one's going to respect you if you can't hit a quota so just hit your quota then i'm going to put you through a leadership development course you know this i built this when we were only like 5 million in revenue it's like it it sounds like a lot but it's just like i picked out i picked out like a bunch of subjects like managing conflict and building team spirit and and delivering negative feedback these are the things that a manager needs now i built this 12 years ago there's better readings out there but this will give you like the sense of what you need to do and i had them just read this 10 page ebook and then we did a role play for half an hour of like hey imagine one of your reps is furious because some other rep just sold a deal that they've been working on for three months how do you handle it thank gosh we role played all those scenarios because all of those happen the first week on the job and i just want to see how they do it and then the last thing i'm going to do is i'm like great you've been hitting your quota you uh you've gone through this and it seems like you like to do this stuff what i wanted you to do now is hire the next salesperson we have a higher coming up next month you're going to make the hire you're still going to carry your quota not forever i hate the team lead hybrid carry you know carry your own personal quota and run a team that doesn't work but just for like two or three months you're gonna make the hire you're gonna tell me what you think after the interview so i know how how you interview and they're gonna coach them for two or three months to see if you're good at it you're probably going to mess up but it's a lot it's a lot better to just mess up with one person than eight people right so if you like it and you do well then we'll promote you and so we had a a a pipeline of people vying for management i would tell you that less than half the people that got into the program became a manager and most of the time because they opted out themselves like i don't really want to do this i just want to stay salesperson and we had a huge success rate through that model with our management layer which is so critical during scale now the other complement to this i don't know why more folks don't use this compensation plan what about the people that do want to stay as manager i mean as a salesperson they should be able to get promoted even though they're not going to manager so we just set up a uh like uh a way to do that you know you come in you're making 80k a year as a junior sales person with 5 000 stock options and you're going to get promoted when you sell a certain amount of monthly recurring revenue base was probably going to take you anywhere between seven months and 18 months to do it and you need to average your quota above your quarter for three months in a row and then i'll promote you and i'll give you a bump in your variable and i'll give you more stock options and there's the next goal it's crazy that we do these annual reviews for sales people for such a a metrics driven success or failure function this is like we can just use a promotion path and sales people love this they obsess with this and you can you can alter the right hand side to be aligned with your strategy this is an example for an sdr team that's the hardest job sdr 12 day month 18 months a cold calling if you're lucky you get one appointment a day holy cow what a hard job but this is six tiers that they go through every two or three months graduating up to a county executive school and it's very motivating for that 22 year old sdr okay i'll post these slides i'll tell you at the end and so if you didn't get it you can take a look at it all right now five and six five and six i think are causing more failure in sas than any of the other ones and number five is scaling before we're ready when are we ready to scale when are we ready to scale i ask a hundred founders when are you ready to scale they all say when we have product market fit great thanks to eric reese and lean startup beautiful answer the problem is you ask them what is product market fit you get 100 different answers and half the answers are about revenue i have product market fit when i have a million in revenue i could not disagree more that's market message fit congratulations you know how to sell it doesn't mean your product works so it's like we gotta work on this product market fit definition and know when to scale and so i know like um some some people say it's like well you just know there's a lot of pull on the market like it just feels too squishy for me for such an important strategic question i do like sean ellis's model he says if you survey your customers and 40 say they'd be very disappointed if your product didn't exist then you're a product market fit i actually really like that it's about the product experience and whether it's you know it's delivering on the value but i do i don't like surveys they're just riddled with uh soft false positives so for me the metrics customer attention you know if someone used your product and buys it again i feel like we have product market fit the problem is it takes like a year to figure that out and so i love customer attention as a proxy to product market fit but it's a lagging indicator so what we encourage is to create a leading indicator of retention that is the key metric for you in the scale up mode to know when you're going to scale what can you see in your customers behavior in the first month that if it happens they'll be with you forever and if it doesn't happen they're going to churn all right so the way i think about it is in this format if p percent of customers do e-event and t-time then you have product market fit okay so slack right if two if seventy percent of our customers send two thousand team messages in the first month then we have product market fit it's beautiful online i don't talk to the slack people i think it's pretty close to what actually happened i mean imagine if the founder of slack stood up and say our first north star metric is a million in revenue which happens a lot or imagine if they stood up and said our first north store metric northstar metric is to get 70 of our customers to send 2000 t messages in the first month that's beautiful that's a beautiful company i'd love to build a sales team on that company okay dropbox back up your device in one hour hubspot we we've we caught this late at like 10 million in revenue our churn was not good and we ran 50 permutations and found out that if if um if our customers use five or more features in the platform in the first two months the retention rate is like 97 and if they don't the retention rate is like 50 wow we found something beautiful about our business okay so i'll post this here's a couple of guidelines on how to think about defining that as you can see it differs with each per with each company but it's definitely something that's factual like not not a csm saying they're in good shape that's too subjective but it has to be a very measurable instrumentable event because we're gonna we're gonna measure this forever we're gonna measure this forever because it's gonna break okay so you can check that out and i like to have them occur in about the first month if possible you know if you're doing a big enterprise workday type thing it'll take a couple months and if you're doing a real plg dropbox then it'll take hours but something at least in the first month and then finally on this piece here's how i like to measure it is i like to measure it in customer acquisition cohorts so i can pick up on product market fit as early as possible so what this shows is let's say let's use the slack example this isn't their data but let's just use it so this company let's say slack acquired 24 customers in the early days in january after one month only three percent had hit the lead indicator retention had said 2000 t messages after two months 27 after six months only 39 had sent 2000 team messages in a month that is not good if you're a collaboration software so they made a bunch of changes to how they sell to their product to their onboarding and look at how that improved just look down the month two column in january only 27 percent of those customers they signed up had hit the leading kid of retention and sent to 2000 t messages but by september 68 had done it they have product market fit and it's not because some subjective thing or some random arr number it's because of their data and the success of their customers so that's how i think about product market fit now are you ready to scale yeah i don't think so because notice that i didn't really mention anything about uni economics and scale yet i believe that we have to tackle our customer attention and success first then focus on unit economics not do them at the same time david cancel the founder of drift they just had their exit two weeks ago sold only for a billion dollars these days oh my gosh um so so he did this beautifully in the early days like he was literally on an airplane flying to onboard customers that were paying him 50 a month that is beautiful behavior at the product market fit stage it is so hard to get your customers to realize the value of product and he was doing that as founder doesn't scale but throw everything in the kitchen sink at making this happen and don't talk we don't need to talk about scalable demand gender pricing models or compensation we're just trying to get 80 of our customers to do this event so are we ready to scale when that happens no we have to prove all we've shown now is that if we're gonna sign up a hundred customers in this quarter or 10 or 20 customers in this quarter we know that most of them are going to see the value of our product but we don't know if we can sell them at a cac low enough to offset the ltv so we have to think about scalability uh and and profitability and we usually talk about that in sas of uni economics right so pick your pick your poison the magic number payback period ltv to cac i'm going to use ltv to cac okay so fine we want our ltv to cac to be greater than three all right so but like what does that mean like i can't tell a 26 year old account executive hey uh your job is to make an ltv the cat greater than three like they don't know what to do so we have to extract this back to actionable activities that they understand like the price per customer or the close rate on a lead it's not that hard to do i mean we can take lifetime value and it's just how much they pay us times the gross margin divided by the churn rate so there you go what is our average sale and the cac that's just the marketing cac plus the sales cac and the marketing cac is just our cost per lead divided by the close rate and our sales cap is just how much we pay our reps divided by the number of customers they sell and the number of customers they sell is just the number of leads we give each rep and what the close rate is so now i've extracted this like very hard to conceptualize unit economics thing of ltv to cat greater than three and extracted it back to stuff that's meaningful and we have a business model we can actually put that together and say hey if we're average sales twenty thousand dollars and our cost per lease a thousand we close five percent of them we have a business and i can operations this into our dashboards as long as the blue line stays above the red we're we're able to scale our unit economics are going to spit out great and this particular framework gives us direction about what we we should work on now now we do need to build the sales playbook we didn't need it during the product market fit stage we do need to get our compensation model right and our pricing model right we didn't need it during the product market fit phase for the fit stage so we can figure out what in sequence we should be working on whether you're starting a new company or rolling a new product out in a bigger company okay now now we know when we can scale we can scale when we have product market fit and go to market fit attacked in sequence and we have data on our business to know if we're able to scale okay now the other one the biggest one the biggest killer and the last one is how fast to scale pothole number six how fast should we scale because i hear this all the time these are real stories every quarter i hear another one you know hey mark yeah it's uh it's september 27th you know this summer we had a good summer we have 20 people in the company i think there's like 12 there's 12 engineers there's a couple product managers there's three sales people there's a marketer there's a customer success manager and we crushed it and we just raised a series a 15 million bucks great and so what'd you do we hired 20 sales people oh god what is that bad yeah you're gonna fire 20 sales people in like a year like are you kidding me do you know what it takes to hire 20 sales people in a month do you know how many interviews that is and how are you going to feed them with demand and who's going to manage them the average rep to manage ratio inside sales is eight to one now you would need overnight you need three managers are you kidding me why'd you do that now you know the answer it's because they negotiated this huge round like the huge valuation and they showed the vc investor the triple triple double double and they actually bought it and gave them the 70 million valuation and now they're like oh my gosh now we have to do it let's hire a bunch of sales people all at once it's not good it kills company it's it's the number one killer so how fast should we scale all right let's not think about hiring as this lump sum hiring at the beginning of a fiscal year at the at the right after funny round let's establish a pace we are now ready to scale because we have product market and go to market fit let's establish a pace let's hire two reps every other month let's do that for six months and let's watch what this becomes which is our speedometer this is our speedometer it's going to break i guarantee you from zero to a billion this will break and when it does you know very early because most companies out there deciding if we're scaling too fast or too slow are looking at the quarterly p l at the board meeting and the quarterly p l is what happened nine months ago this is what's happening today so you know more than your peer you know about your business nine months faster than your peers so good hire two reps every other month and watch the speedometer if it stays green hire two reps every month do it for six months if it stays green hire four reps a month for six months if it stays green hire eight reps a month for six months congrats to your unicorn and you did it in a very scientific way okay that's the final pothole there um and you can use uh you know not only does this framework help you understand the sequence of bringing a new product to market whether it's in a big company or small but it helps you understand what to focus on a couple of things here so yeah i started a vc firm three three years ago called state shoe capital my my co-founder jpo formerly from bessemer is out there it's the first vc firm running back by sales marketing and customer success leaders so you can see there the cro cmo co of atlassian zoom snowflake octa santa tula we have 250 of them that have backed us we look for companies that are around a million in revenue we don't really care how fast you're growing we care more about your customer attention and your customer engagement i love to help a company that's having trouble scaling sales but has amazing customer success okay so probably a little different than most of the investors out there if you want to download some of the stuff here a lot of this stuff is in this 45-8 page ebook i wrote on the website these slides i just posted on my linkedin profile so if you want to go to my linkedin profile you can click through download these slides and get these links and i know a lot of you have sent me notes of like the book i wrote a couple years back thank you for the support there just note that a hundred percent of the proceeds are donated to build.org anyone involved in build oh it's an awesome organization they start out here they basically team up with the worst performing high schools in every major city kids that probably didn't have the beginnings that we had and they teach them entrepreneurship in their freshman year and they put them through a four-year program to try to get them through high school and into college and 99 of the kids graduate which is way higher than regular heist their regular graduation rate i think 85 percent go into uh college so if you support the book you're supporting them thank you for that jason thank you for an amazing platform enjoy the show stay safe everyone [Music] [Music] you