HOW TO RUN О

SaaS BUSINESS
LESSONS LEARNED FROM A TRIO OF
BILLION DOLLAR COMPANIES
• •

BEN COTTON
How to Run a SaaS Business:
Lessons Learned from a Trio of
Billion Dollar Companies
About the Author

Ben is an experienced sales and marketing leader and has worked at category­

defining SaaS companies HubSpot, Indeed.com and Automation Anywhere

during periods of hypergrowth.

Ben is a problem solver at heart and is fascinated by the art and science of

sales and marketing. He’s passionate about helping revenue teams grow by

unleashing the power of sales enablement. Over the past decade Ben has

helped many SaaS businesses tackle some of their biggest challenges. Today,

he has a proven track record within the industry of leading and scaling

programmes that create predictable recurring revenue.

Ben regularly writes and speaks on the topics of sales enablement, sales and

marketing alignment and inbound marketing, and has spoken at events in

Amsterdam, Dublin, Helsinki, London and Oslo, as well as online events for

HubSpot, Selling Power, Sales Hacker, InsideSales.com, Sales for Life and
the Sales Management Association.

A global citizen, Ben currently lives in Seattle with his wife and daughter. He

enjoys sampling the occasional craft beer, watching his beloved QPR and

exploring the great outdoors.

You can find out more about Ben and his thoughts on the SaaS industry, sales

enablement and personal growth at ben-cotton.com.

Contents

Introduction

Essay 1 Rules to Run Your SaaS Business By

Essay 2 Understanding the SaaS Business Model
Essay 3 SaaS Companies Must Invest in Building
Their Brand

Essay 4 Building a Runway to $100M in Annual

Revenue

Essay 5 Why Your SaaS Business Must Publish its

Pricing

Essay 6 The Marketing Arbitrage Opportunity

Essay 7 Never Build a SaaS Sales Team with Just One
Rep
Essay 8 Building a SaaS Sales and Marketing Engine
Essay 9 Churn is the Quiet SaaS Killer
Final Thoughts

Introduction

I’ve been privileged to be a part of the software as a service (SaaS) industry

for the majority of my working life. It's an exciting, innovative and rapidly-

growing industry in which to forge a career.

During this time I’ve had the pleasure of working at HubSpot, Indeed.com

and Automation Anywhere - three industry leading companies that have

created, battled for and ultimately, won their respective categories. The

leaders of these companies, Brian Halligan, Dharmesh Shah, Hisayuki

Idekoba, Mihir Shuklar and Ankur Kothari are true visionaries and it was a

pleasure to play a part in what they built. They saw the potential of SaaS and

bet big on it.

So, why did I write a book on running a SaaS business?

Before I get to that, let’s back up a little. Over the past decade, the SaaS

industry has come to the fore - Marc Andreessen’s proclamation that

“software is eating the world” has been proved well and truly right.

The SaaS business model has certain characteristics that makes it extremely

attractive to founders, investors and customers. The key characteristic of

SaaS companies is that they operate on a subscription basis - this provides

predictable, recurring revenue and makes company performance easy to

understand and forecast.

The second characteristic of the SaaS model is rapidly lowering barriers to

entry - thanks to Amazon Web Services (AWS), Google Cloud and Microsoft

Azure it's easier, quicker and cheaper than ever before to run a SaaS

business.

The final characteristic is scale - mass internet accessibility and adoption

hastened the move to the cloud, which, in turn, has provided unprecedented

and low cost distribution to SaaS businesses. Software, unlike physical goods

has near infinite scale. For example, the labour and material costs required to

build and sell 10 software subscriptions is wildly different compared to what

it takes to build and sell 10 cars.

This trifecta of characteristics goes a long way to explaining the allure of the

SaaS industry, but what first drew me to SaaS, was that the customer is at the

heart of the business. It has to be. Indeed, a subscription-based model forces

companies to win, and more importantly, continually earn the loyalty of

customers. To do this they must put the customer first and provide an

outstanding product, service and support.

I also believe that the SaaS business model is more equitable and offers a

genuine win-win situation. If companies truly put the customer first, they'll be

richly rewarded and can dramatically increase the lifetime value (LTV) of

clients.

HubSpot, Indeed.com and Automation Anywhere are very different

businesses with different cultures, products and approaches, but what they

have in common is that they won by outfoxing the competition.

Working at these companies while they “blitzscaled” was an exciting,

challenging and thrilling journey, and with each passing year I learnt more

than I ever thought possible. It gave me a unique perspective that I want to

share - that’s why I felt compelled to write How to Run a SaaS Business:

Lessons Learned from a Trio of Billion Dollar Companies.

The book contains key lessons on running a SaaS business - it is made up of

nine essays which show you how to approach perennial SaaS challenges,

such as churn, pricing, sales, marketing, unit economics, NPS, strategy and

more.

Lastly, thank you for taking the time to read the book - whether you’re new

to the industry or a SaaS veteran, my hope is that you find the lessons

insightful and that it helps your company grow, succeed and achieve

hypergrowth.

Thanks,

Ben

Essay 1
Rules to Run Your SaaS Business By
I've been working within the software as a service (SaaS) industry for more
than five years now. During this period, I've learnt more than I ever thought
possible about the SaaS business, and my personal growth has accelerated
with each passing year.

Working with fast-growing technology companies HubSpot, Indeed.com, and

Automation Anywhere has taught me how two very different companies can
come to dominate their respective industries. Importantly, these experiences
have shown me what is required for a SaaS business to launch, grow, and
ultimately, succeed in new markets. I've also become well-acquainted with
many "rules" or truisms that SaaS businesses are run by - some of which are
well known within the industry, but others which have mainly been kept
under wraps, until now.

Before we dig into the rules, I want to say that in my mind, rules are made to
be broken, and should be thought of more as a guide, template, or guardrail.
My advice is to use them as a starting point of discussion at your business,
rather than follow them blindly.

Rules to Run Your SaaS Business By

Let's get down to it. Here are the key rules I've learnt to run a successful SaaS
business by:

1. Rule of 40 - finding the right blend of growth and profitability

Perhaps the most famed SaaS rule of all is the rule of 40. It’s a simple
calculation to help you quickly and easily understand the health of a SaaS
business. The rule states that a businesses annual revenue growth rate, plus its
profit should equal 40%.
For example, if a company's growth rate is 20%, then profit should be 20% or
if the growth rate is 40%, then breaking even is absolutely fine, or indeed any
other permutation, so long as the growth rate and profit equal 40%. The chart
below shows a number of industry-leading SaaS companies that have
achieved the rule of 40.

ч Nf wn-

“The Rule of
40%“ line

S100MM
S2.000MM

S4.000MM
S6.000MM

Й.000ММ
S10.000MM

2017t Revenue Growth

L TM data and Enterprise Value as of 10/6/17 EV / 201 ТЕ Revenue Multiple

2017E revenue based on consensus estimates as of 10/6/17

55x

Source: For Entrepreneurs

What I like about this rule is that it takes into consideration the twin
challenges of growth and profitability, and can be applied regardless of the
growth stage. Why does growth stage matter? Well, sometimes investing
heavily in the pursuit of growth is the right move for a company, especially in
a winner-takes-all market, but at other times, particularly in more mature
markets, monetization and profit will likely be the right call. The rule of 40
accounts for both scenarios and everything in between.
2. Rule of 3 and 10 - everything breaks when you grow
It's important to recognise (and plan for) that how you operate will
fundamentally change as your business grows. What works with 50
employees will creak heavily at 500 and come crashing down with 5,000. As
you grow, you're going to need new processes, people, playbooks, and
additional layers of management.

Put simply, the rule of 3 and 10 means that when a company trebles in size,
everything breaks. The number of employees when things get particularly
troublesome are three, 10, 30, 100, 300 and 1,000 - before company
headcount hits these milestones, you'll need to rethink how you operate. Just
think, the skills and attributes which are required of a marketing leader at a
ten-person company are much different, and indeed could be a potential
weakness at a 1,000 person company.

3. LTV: CAC needs to be 3:1 (or greater)

Throughout the SaaS world, there are two metrics that business leaders keep
a close eye on at all times - they are lifetime value (LTV) and customer
acquisition cost (CAC). These metrics immediately give insight into the
health and likely success of a SaaS business.

LTV: CAC is the lifetime value of a customer divided by the customer

acquisition cost. LTV, as its name suggests, is the total lifetime value to the
business of a customer and the CAC is the costs associated with maintaining
the product, as well as marketing and sales costs.

Looking at these numbers as a ratio helps you understand how effective a

business is at making money. You can clearly see what the return will be
from every dollar, euro, or pound invested. An LTV: CAC of 3:1 is desirable
within the SaaS industry (an even greater LTV is better).

4. Keep annual churn <7%

In my mind, churn is the most important of all SaaS metrics. There's no point
acquiring new clients if churn is out of control. Think of it like a leaky bucket
- you need to fix the hole, rather than continually filling the bucket with more
water. Churn matters and understanding how it's calculated and the causes
behind it is significant.

It may not be immediately apparent, but there are some essential differences
between monthly and annual churn. Allow me to explain. A 5% annual churn
rate means that monthly churn is 0.42%, whereas a 5% monthly churn
equates into a hugely troubling 46% annual churn rate. Or put another way, a
5% monthly churn rate means that if you started January with 100 customers,
you'd only have 54 customers left at the end of December. In order to record
any kind of growth, you'd have to acquire another 47 new customers.

While each industry and company is different, a 5% monthly churn rate isn't
a solid foundation for a SaaS business, and in all honesty, a business in that
situation should seek to ramp up retention and dial down acquisition.
Otherwise, it's literally burning through money. To avoid this situation you
obviously want churn to be as low as possible, but SaaS businesses which
require a 12 month, upfront commitment should aim to keep annual churn
under 7%.

Remember that churn is the silent SaaS killer - often, sales and marketing
receive all the attention and glory, but services are where the predictable
recurring revenue is made and kept. Retention trumps acquisition.

5. Track your NPS closely

One of the best ways to understand the success of your customer base is net
promoter score (NPS). It’s an index ranging from -100 to 100 that measures
the willingness of customers to recommend a company's products or services.

While NPS may lack detail and qualitative data, it does provide an effective
indicator of the health of a client and was widely used at both HubSpot,
Indeed.com, and Automation Anywhere. For those unfamiliar with NPS, its
scoring system means that you're penalised heavily for a poor rating (0-6 are
classified as detractors), receive nothing for mediocre ratings (7-8 are
classified as passives) and are only rewarded for high ratings (9-10 are
classified as promoters).

01 23456789 10

DETRACTORS PASSIVES PROMOTERS

9^6 — % = NET PROMOTER SCORE

Source: Wootric
What represents a "good" NPS changes between industry and product;
however, you should track your own NPS, as well as conduct research to
track and benchmark key competitors. To build upon my previous point -
churn is really important, and NPS is a metric SaaS business can and should
use to identify customers that are at risk of quitting.
6. Create a discounting process
Discounting tends to be a big challenge within the SaaS industry - it's literally
one of the quickest and easiest ways to maximise or damage revenue
potential. To manage discounting effectively, you need some guiding
principles and a process in place.

For starters, you should always sell on the basis of the value that your product
will create, rather than features or functionality. And if you do find yourself
in a negotiation, it is advisable to take a “give-to-get” approach and request a
greater commitment (more product, multi-year contract, payment upfront) in
return for a discount. You should also have predefined limits about who can
authorise what level of discount - for instance, a sales rep can sanction 5%, a
sales manager 10% and sales director 10%+.

While principles are valuable, you also need a process for sales reps to follow
when entering a negotiation - a clearly defined process ensures that sales reps
avoid discounting at every stage of a deal.

At HubSpot, we rolled out the following discount process. Sales reps explain
to prospects that the first four steps must be completed before a discount can
be discussed:

1. The prospect agrees that their challenge needs to be solved now.

2. The prospect agrees that HubSpot solves their challenge and not a
competitor.
3. The prospect shares the desired start date and the procurement process.
4. The key decision-maker is part of the sales process.
5. Only now can a discount be discussed.

7. Have a framework to evaluate investments

Over the next 12 months, should you build a new product line, open your first
international office, or acquire a competitor? Understanding what, when, and
where to place your bets is hugely important. You need a system to help
guide your investments, so you not only succeed today but in the future.

During my time at HubSpot, there were two frameworks which stood out as
strategic ways to make important decisions. The first is the idea of S Curves -
all products, markets, and business models follow a predictable cycle of
growth, maturity, and decline (the pattern often looks like an "S," hence its
name). After a period of growth, maturation strikes as price competition
emerges, the most attractive customers are acquired, and businesses see
diminishing returns.

To overcome this challenge, the best companies continually innovate and

create new products to offset the maturation and decline of existing ones. The
lesson here is to view your products in terms of S Curves and ensure you’re
investing in your next greatest hit.
Source: Accenture
The second model is the Horizons Framework developed by McKinsey. It
offers a way to focus on short, mid and long-term growth opportunities, and
the eagle-eyed among you will notice that (see chart below), visually, it
shares some similarities with the S Curve diagram.

The Horizons Framework is an effective way to categorise projects, which in

turn helps with assigning budget, headcount, and timelines. The framework
requires you to categorise work that is either a horizon one, two or three.
Horizon one represents core products and services readily identified with the
company and those that provide the greatest profits.

Horizon two covers emerging opportunities like new products and

acquisitions, moves that are likely to generate substantial profits in the future,
but that could require considerable investment. And Horizon three contains
ideas for profitable growth further down the road. For instance, this could be
research projects, pilot programmes, and investments in other businesses.
Three horizons

Horizon 3
Create viable
options

Horizon 2
Build emerging
businesses

Horizon 1
Extend and defend
core businesses

time (years}

Source: McKinsey
The key point is, you need to have a framework for categorising and
investing in future growth opportunities for your SaaS business.

8. Decrease your CAC with a freemium offering

While most SaaS companies focus on increasing the LTV of clients and
simply controlling CAC, they should not be afraid to disrupt their existing go
to market strategies in order to reduce CAC.

HubSpot applied its marketing product to the S Curve framework and saw it
was reaching maturation. The tool remains the company's greatest hit, and
what it's best known for, however, it is a high touch sale with a high CAC
and has an increasing number of competitors. In order to create another line
of business while reducing CAC, HubSpot launched sales, CRM, and more
recently, customer service tools.
Importantly, free, low touch versions are available for the marketing, sales
and CRM tools (see image below) - people can test a light version of the
product, see value and then graduate to the paid version.
HubSpot Software Pricing Resources ▼ Partners About

Your Inbound Platform for Growth

Tools you can start using for free, and upgrade as you grow.

HubSpot CRM Marketing Hub Sales Hub Service Hub

Free Forever Starting at €0/month Starting at €0/month Starting at €368/month

Free HubSpot CRM Get Free CRM

For growing companies of any size. Set the foundation for your business with a free system to build
deeper relationships with contacts, from first interaction to happy customer and beyond.

Source: HubSpot
The beauty of this freemium strategy is that HubSpot can use its free products
to acquire large numbers of users, a percentage of which will be converted
into paying customers at a later date. This approach means HubSpot has a
new source of highly qualified leads at a much lower CAC (in comparison to
other acquisition channels).

Adopting a freemium strategy lowers CAC for several reasons. First up,
while free products require development time and ongoing maintenance, the
potential reach is vast, and products are more scalable than other acquisition
channels, albeit less predictable. Secondly, free users often want to upgrade
"touchlessly" without speaking to a sales rep, and for those that do want to
speak with somebody, they often require fewer sales rep interaction than a
regular sale - both of which reduce CAC and time to sell.
9. Hire for stage fit, not experience
Let’s face it, when you boil it down, most problems are people problems.
Hiring matters. A lot. One of the biggest mistakes a fast-growing SaaS
company can make is hiring for experience over stage fit.

For example, it's not uncommon for a 100 person company fresh off a
funding round to go and hire a VP of Sales from a Fortune 500 company.
While this can work, you need to ensure that you're hiring somebody for their
ability to do the job today - as I said, it can work, but in all likelihood, it's
unlikely a VP at a Fortune 500 company will succeed at a 100 person
company. You need the right people for your company's growth stage.

Businesses need to make hires based on people’s ability to execute in the

short and mid-term, not on the fact that they worked at a publicly listed SaaS
company.

10. Avoid overeating - as your business grows to do more or less

At HubSpot, CEO Brian Halligan frequently reminded employees that
“companies are more likely to die of indigestion than starvation." What he
meant was, as SaaS companies grow, there's always the temptation to do
more, but if you're not strategic, you risk becoming slow, bloated, and losing
focus.

HubSpot communicates its goals in a document called MSPOT, which is

published on the company wiki for all to see. It stands for mission, strategy,
projects, omissions, and tracking:
• Mission: Rarely changes.
• Strategy: Annually changes.
• Projects: 4 or 5 big annual initiatives.
• Omissions: Projects we decided not to fund.
• Tracking: Numbers we are looking at to see if we are on track.

Halligan adds, "The most important part of the document is probably the
"Omissions" part. These are the projects we are not going to fund this year.
This is how the organisation limits my appetite, so I don't overstuff us." The
key learning here is that's important to have a simple document which spells
out the strategy for the year ahead, plus the initiatives that very deliberately
won't happen. That's how you create alignment and focus.

There you have it. These are the rules I've learnt from my time within the
SaaS industry. HubSpot, Indeed.com, and Automation Anywhere have not
only survived, but thrived during this period and recorded record growth. I'd
love to hear what rules, principles, and truisms you use to lead your SaaS
business. The SaaS industry is still very much in its first act - by sharing this
information, we will uncover new best practices, dispel myths, and define
what good looks like. It's my belief that the best is yet to come from the SaaS
industry, and I'm excited about the second act and beyond.
Essay 2
Understanding the SaaS Business Model

There’s been lots of discussion about the recent downturn in the valuation of
technology businesses and while it’s more helpful to. focus on creating value,
rather than fixating on valuations, how do you understand the health of
software as a service (SaaS) company?

It all starts with understanding the SaaS business model. Unit economics and
specifically, LTV: CAC remains the best indicator. But what are these
acronyms, and why are they important?

Understanding unit economics and LTV: CAV

Unit economics are the revenues and costs associated with a particular
business model and are expressed on a per-unit basis. For SaaS businesses,
the unit is a customer, and the key unit economics are LTV: CAC.

LTV: CAC is the lifetime value (LTV) of a customer divided by the customer
acquisition cost (CAC). LTV, as its name suggests, is the total lifetime value
to the business of a customer. Many SaaS businesses are subscription-based
so often the figure is the value of the monthly subscription multiplied by the
average number of months that a company retains a customer.

The customer acquisition cost (CAC) is the costs associated with maintaining
the product, as well as marketing and sales costs. Looking at these numbers
as a ratio helps you understand how effective a business is at making money.
It also helps distinguish the donkeys from the unicorns.
For example, if a subscription for a product costs €1,500 per month and the
average customer remains for 18 months before churning, the LTV of a
customer is €27,000. If the cost of maintaining the product is €300 per month
and the combined sales and marketing costs are €200 per month, CAC will be
€9,000. This would give the company an LTV: CAC of 3:1.

In short, the company generates three euros for every euro spent - this is often
given as an acceptable ratio (a greater one is even better) for a SaaS business.
Once new businesses understand how to attract, retain, and grow customers,
they often look to scale the business by investing in sales, marketing, and
support. This is effectively when businesses go from being a startup to a
scale-up.

Understanding LTV: CAC

SaaS businesses have unique characteristics, which means it makes sense for
them to be measured differently. They typically incur high up-front costs to
deliver their products and acquire customers, but they follow the path to
profitability by retaining and adding customers over time, many of whom
upgrade or buy more.

SaaS businesses typically operate on a subscription basis, so monthly

subscription value is low, but lifetime value is high. This makes retention
vital. Three levers which help reduce churn are accurately qualifying
prospects during the sales process, so sales reps are selling to the right types
of customers, as well as excellent account management and support.

The attraction of predictable recurring revenue

What makes SaaS businesses appealing to Wall Street is the subscription
model generates predictable recurring revenue. Being able to predict with a
high degree of accuracy, how much revenue a business will generate each
month, quarter, and year bring confidence to management and investors alike.

It's this accuracy and confidence, which explains why many SaaS businesses
focus on growth and sales, rather than immediate profitability. If a business
has a healthy LTV: CAC and operates in a largely untapped market, the right
play is to pour fuel on the fire and acquire customers quickly, rather than
building slow and posting steady profits.

In Marc Benioff’s book. Behind the Cloud: The Untold Story of How
Salesforce.com Went from Idea to Billion-Dollar Company - and
Revolutionized an Industry, he advises measuring a fast-growing company on
revenue, not profitability. "It's just not appropriate to stress profits over
revenue in the beginning when you are starting out and building a company,"
says Benioff. The fact is many SaaS businesses are selling new products and
creating new markets - getting to market first is important.

For all this talk of ratios and recurring revenue, the real strength of LTV:
CAC is its customer-centricity. It forces companies to focus on the long-term
success of its customers. The leading. SaaS businesses have figured out that
having a product which solves for the customer and provides compounding
value remains the best SaaS growth play.

Essay 3
SaaS Companies Must Invest in Building
Their Brand

In today’s world of data-driven marketing, it’s easy to get fixated on what’s

measurable. While leveraging data is both important and smart, I increasingly
find myself wondering if we, as SaaS marketers are overlooking the human
dimension of marketing in favour of what’s easy to track, analyse and
optimise.

Undoubtedly, brand building falls into the “hard to measure” category, but as
we see within the business to consumer (B2C) world, brand is hugely
important. By almost any measure, Coca-Cola, Apple, and Nike, three well-
known and loved companies have crafted successful brands. They’re
extremely valuable too, and research shows meaningful brands outperform
the stock market by 206%.

While the brand is rightly a key focus for B2C marketers, it's often a much
different story when looking at things through a business to business (B2B)
lense. Indeed, B2B marketers risk becoming fixated on what can be measured
at the expense of something that may be the better option. The lesson here is,
just because something is difficult to measure, it doesn't mean that we
shouldn't.

This challenge is particularly acute among software as a service (SaaS)

businesses that are proudly “product-first companies," and while this means
they have a great product and first-rate engineering team, it often results in
marketing efforts that are more akin to "moneyball” marketing. With few
exceptions, these companies focus exclusively on marketing activity that can
be tracked, analysed, and optimised - or put another way, marketing that can
be engineered. That approach means, inherently less-trackable activity, such
as brand building will be bypassed.

To be clear, I count myself as a data-driven marketer and use data each and
every day to make better decisions. However, I do believe there’s room for
activity that is easily trackable, as well as activity that is hard to quantify. It’s
easy to overlook the fact marketing is both an art and science, and humans,
the very people we’re targeting, are complex, messy and irrational - this is
seldom captured in an analytics dashboard.

That being said, the engineered approach to marketing is on the right path,
but it's too black and white - too binary. I recommend companies take a
blended approach to their marketing bets, so around 80% of marketing
activity and budget is completely trackable, and the other 20% less so. This
provides a spread of activity, and more accurately reflects the realities,
challenges, and nuances of marketing.

What is a brand?
This is a question I ask colleagues, clients, and partners all the time. And, in
truth, it's a philosophical question that reveals a lot when someone answers it.
Is a brand what organisations say, or is it made up of what people think, feel,
and experience? I firmly believe it's the latter.

In short, a brand is people's experience with your company. This could be an

ebook, TV advert, social media post, billboard, event, email, or even a phone
call with support. The way I think about it, marketing makes a brand promise,
and then every other touchpoint, whether it be sales, support, account
management or marketing (to name a few), either reinforces or chips away at
that brand promise.

Someone's view of your brand is the sum of their interactions with your
company at every step. This includes before and during their time as a client,
as well as afterward when this is no longer the case. A brand is a combination
of how you make people feel and what they think of your organisation - and
this all depends on whether or not you stay true to your brand promise.

A strong brand grows your moat

Companies invest in building their brand as it creates familiarity, credibility,
and trust, which further down the line leads to increased brand recognition, so
people are more likely to buy a product or service. That's the bet - get your
brand right, and it helps differentiate you from the competition, builds brand
recognition and ultimately, brand preference.

To borrow a line from Warren Buffet, "A good business is like a castle, and
you've got to think every day, is the management growing the size of the
moat? Or is the moat shrinking?" Building a brand helps create a deeper moat
that can protect your business and capture mindshare.

Here's some free advice. If people have not heard of your brand, they're
unlikely to buy from you immediately. In fact,. 70% of consumers click on a
retailer they know. Instead, you need to create familiarity, credibility, and
trust. It takes time, focus, and money, but when executed well, it results in
people searching for your brand or product online. This is true of all brands,
regardless of industry.
Let’s look at how branding works:

How Branding Works

5.
Brand Remarkable
Preference Experience

4.
2.
Delivering
Brand
on the
Recognition
Promise

3.
Moment of
Truth

1. Remarkable experience
Branding starts when a company provides a remarkable experience. It’s easy
to focus too heavily on channels and tactics, but to be successful, the
experience you provide, whether it be an event, social media post, online
advert or ebook, must be remarkable. Indeed, it must be so remarkable that it
creates an emotional connection. This stage is all about building familiarity,
credibility, and trust, but honestly, most brands never get past this stage.
They provide an unremarkable experience that generates unremarkable
results.
2. Brand recognition
If your marketing activity resonates and you manage to establish an
emotional connection, people will be receptive to learning more about your
products or services. This means they will either go directly to your website
having recalled your brand name, or they will use a search engine and search
for an answer to the challenge your product or service solves. The person is
thinking rationally when searching, but when they recognise your brand,
that's when the emotional sparks begin to fly.

3. Moment of truth
The real moment of truth for any marketer is when you persuade somebody
that your products or services are right for them. When somebody makes the
journey from prospect to the customer, it validates that your marketing efforts
are working. When the moment of truth occurs, it is both a left and right brain
decision - people are making a decision based on what they need, plus what
they feel about your brand. Many good businesses get to this stage, build a
repeatable model and are content, but to build a great company and brand,
you need to do more.

4. Delivering on the promise

This stage is crucial and often where things can unravel. Marketing is
essentially a brand promise, and if a company fails to deliver on that promise
in terms of product, support, and service, they will fail their customers. Just
think of a company that makes a big deal of its customer support in a TV
advertising campaign, but redirects you to a call centre in a foreign country
when you have a query. How does that disconnect make you feel? It's a prime
example of a company failing to deliver on its brand promise.
On the flip side, if you deliver or exceed the promise you've made, you stand
to build a deeper, more meaningful emotional connection. Branding is only
one piece of the jigsaw though - it sets the scene, but the rest of the company
has to play its part and bring the promised marketing makes to life. Brand
experience is everyone's job.

5. Brand preference
If a company successfully delivers on all previous steps, especially its brand
promise, it will then earn brand preference from clients. Brand preference is
hard-earned and easily lost, but it is what all marketers aspire to achieve.
Becoming the go-to brand and occupying top spot in a potential client's mind
is what matters. Not many companies reach this stage, but when they do their
brand truly becomes a competitive advantage.

SaaS Companies Need a Brand

Now let’s hone in on the SaaS industry. The best way to build a brand in
today’s increasingly cluttered world of SaaS is by having a philosophy.
Preferably a disruptive or contrarian philosophy that pitches an upstart
against a dominant player. Old versus new, heroes versus villains, right
versus wrong. You get the idea.

Having a philosophy is easier said than done, but when you have a
philosophy, it becomes easier to articulate a clear point of view that people
can understand and organise themselves around. This is what piques people's
interest and gains attention.

Within the SaaS space, many of the industry’s most successful companies
have had notable and easily understood philosophies, such as
when Salesforce declared war on Siebel Systems and the antiquated world of
on-premise software, as well as HubSpot’s evangelism of inbound marketing
versus the old world of outbound marketing. More recently, Drift’s
#NoForms campaign, which aims at the marketing industry's reliance on
forms is worthy of note too. These disruptive, contrarian philosophies and
easily understood worldviews are how you become memorable and build
brand preference today. You need to stand for something, and it needs to be
remarkable. Being disruptive and contrarian gives people a reason to care and
has the potential to foster a community or movement (which is often bigger
than the company), leading to that all-important emotional connection
between customer and brand.

Many people obsess over being the first to market, but in terms of branding,
this is the wrong approach. While the. first-mover advantage is important, the
real battle is being first in the mind of the customer. It doesn't matter if you're
fifth, fifteenth or fiftieth to market if you're first in the mind of the customer.
That's the coveted, winning spot. But for SaaS companies to earn a place in
the mind of the customer, they need to provide a winning experience.

The consumerization of marketing

Few SaaS companies have truly great brands. I won’t go as far to say it’s
a marketing arbitrage opportunity. Instead, I think it's more helpful to frame
the brand as a necessity. Its importance is only going to grow.

Over the last decade, we've seen the. consumerization of IT come to the fore,
with enterprise IT products becoming more like consumer ones. Following
the spread of this trend, I believe we're now entering a new period that will
see the consumerization of marketing - where people expect B2B marketing
experiences to be more like B2C ones. The growth of mobile, bots, and
messaging are just three examples of this trend in action.

Another outcome of the consumerization of IT is that product differentiation

within SaaS products is gradually disappearing - new features can be
replicated, and they are now quicker and easier than ever before to ship. And
even when competing products have different features, they’re often still
being purchased, to do the same job. In a world of limited product
differentiation, a strong brand fills this gap. It puts your brand top of mind,
and oftentimes means you have a foot in the door before you even speak with
the prospect.

Where brand fits in today’s marketing playbook

Data-driven marketers, by their very nature, are drawn to predictable,
repeatable, and consistent lead generation activities. In the first instance, for
SaaS companies, this means a playbook that leverages channels like Google
AdWords, pay-per-click (PPC) advertising, and social ads.

Once these channels are cranking the next wave of activity will likely focus
on tactics, such as search engine optimization (SEO) and inbound marketing.
This is time-consuming and increasingly competitive work, and will likely
mean doubling down on authority building and content creation. These
activities can be tracked, measured and optimised; which is good, however, it
also means they're now highly efficient tactics, so the opportunity to benefit
from them is diminishing (which is bad, obviously).

When these initial activities are up and running, the regular playbook is for a
SaaS business to start building their brand. This is the third wave of
marketing activity, but it risks brand being merely an afterthought. It's never
too early to start building a brand as it acts as an insurance policy of sorts. To
share a brief example, Indeed.com, my former employer is heavily reliant on
website traffic from both Google AdWords and its search engine.

However, since the launch of Google Jobs, Google has become both a
competitor, as well as an important vendor of Indeed.com. If Google were to
stop accepting AdWords from Indeed.com or update its search algorithm in a
way that negatively impacted Indeed.com, the company would lose a
significant level of website traffic. Thankfully, Indeed.com has been
investing heavily in its brand since 2014 with several campaigns that
increased brand recognition and preference, resulting in more candidates and
employers going directly to its website. A strong brand doesn't just help you
win; it protects you too.

Three smart ways SaaS companies are building their brand

Without a doubt, one of the most exciting parts of being a marketer is the
perpetual challenge of finding new channels and tactics to leverage. Below I
have identified three ways leading SaaS companies are providing a
remarkable experience, which creates an emotional connection, and
ultimately builds their brand:

1. Podcasts
Today, podcasting is a genuine marketing arbitrage opportunity. There's
limited competition, and the barriers to entry remain high (you can't
outsource a podcast in the same way as a blog post). While this tactic is
becoming more common among SaaS companies, it remains a tremendous
opportunity for smart marketers to get ahead of their competitors, and
increase the reach of their brand. Podcasts may score high on emotional
connection, but low on tracking, however, they remain a highly effective
tactic to highlight your philosophy and share your point of view with the
world.

2. Books
Despite living in an era of seemingly endless content, we’re now seeing some
SaaS businesses take the unusual step of publishing (physical) books. The act
of reading a book is completely immersive and has the potential to provide a
remarkable experience that creates an emotional connection more easily than
other channels or tactics. From a branding perspective, books are once again
a great way to articulate your philosophy and point of view, although
understanding their impact and exact attribution is tough (however, you
should be comfortable with that reality).

3. Events
Many SaaS companies are turning their back on industry events in favour of
creating their own - this gives them full control over the experience attendees
have. There’s much research to. show just how important experiences are to
today’s consumers, and events, when executed flawlessly, are in my mind the
best way to let people truly experience a brand. Events help build a
community around a brand as they bring together like-minded people to share
an experience.

Measuring the strength of your brand

It's tough trying to measure the strength of a brand, and much of this post has
focussed on how a brand is inherently hard to quantify. Unsurprisingly,
there's no standardised measurement. Many companies commission surveys
to understand brand recognition and brand preference. This is anecdotal and
enables companies to benchmark and track performance and how it compares
to competitors.

It's also possible to track online sentiment, mentions, and content

consumption as an indicator of brand strength. But for me, branded search
traffic, people typing your brand name into a search engine is the leading
indicator of brand strength. While measuring a brand is a perennial challenge,
this doesn't mean it shouldn't be a priority. My advice is to create a balanced
scorecard of brand metrics - made up of leading and lagging indicators, as
well as qualitative and quantitative data. This will help you identify where
you want to go, and if you're successful on your brand journey.

The brand opportunity for SaaS companies

By investing in their brand, SaaS companies can steal a march on their
competitors. However, this window is getting smaller each day as others wise
up to the value of a strong brand, and the consumerization of marketing
becomes a reality. Indeed, branding is becoming less of an opportunity and
more of a necessity. The question marketing leaders must ask is whether they
want to seize the branding opportunity now or play catch up later.
Essay 4
Building a Runway to $100M in Annual
Revenue

Every software as a service (SaaS) business that wants to make its mark on

the world must have a plan to hit $100M in annual revenue. Creating a

runway to this target is difficult, but businesses will dramatically increase

their chances of success by planning for it.

In reality, there are only three ways to hit this milestone. Businesses can
reach $100M in annual revenue by having:

1. 100K customers worth $1K each per year

2. 10K customers worth $10K each per year
3. 1K customers worth $100K each per year
Most SaaS businesses fit into one of these categories, and they are essentially
a proxy for the segment being targeted, namely small business, mid-sized,
and enterprise clients.

The segment you target has many important implications. Each has a
different total addressable market (TAM), which subsequently impacts
everything from how much you charge to product functionality to levels of
support you can provide. A customer paying $1K per year will have vastly
different expectations to one that is paying $100K.

Businesses don’t necessarily need to be billing customers at these levels

today, especially if they’re still finding product/market fit, but it is important
to look at and plan for how many customers they want to acquire and the
revenue that those customers are expected to generate each year.

Building a Runway to $100M in Annual Revenue

Take a look at the descriptions below and decide which best describes
the. SaaS business you have today or want for tomorrow. There’s naturally
some overlap between segments, but focussing on serving just one is the best
way to make your revenue aspirations a reality:

100K customers worth $1K each per year

This is the small business segment and is characterised by a large TAM, low
touch or self-serve sales process and low sale price. The customer acquisition
cost for the business is low, but they need to sell a high number of products to
be profitable. Customer support and onboarding is limited or self-serve, and
product customisation is rarely available (although third-party integrations
are often available).

Examples of businesses that serve this segment include MailChimp, Intuit,

and Shopify.

10K customers worth $10K each per year

The mid-sized business segment has a large TAM (although smaller than
small business), a higher-touch sales process and mid-level pricing. The cost
to acquire customers is typically moderate, and they must to sell a mid to
high range number of products to be profitable. Customer support and
onboarding are often provided, and some product customisation is expected.

Businesses that sell into the mid-market segment include HubSpot, Zendesk,
and Yesware.

1K customers worth $100K each per year

Companies selling at this price point focus on the enterprise business
segment, which is characterised by a small TAM, very high touch sales
process, and high sale price. The customer acquisition cost is high, but the
business often only needs to sell a small number of products to be profitable.
Dedicated one-to-one customer support and onboarding are provided, and full
product customisation is expected.

Companies selling into the enterprise segment include Eloqua, Marketo, and
Workday.

The outliers
There’s also businesses that have one million customers that are worth $100
each per year and some with 100 customers worth $1M each per year, but
these are the outliers. Creating a successful business aimed at these segments
is difficult. With one million customers you’re likely to be dealing with the
consumer segment, such as Netflix and Spotify and at the other end, creating,
launching and marketing a product that is worth $1M is likely to have high
entry costs and barriers to entry.

One more important point to clarify. While it’s important to have a clear
focus, you also want to make it easy for people to buy more from you and
upgrade. You can and should do this (most SaaS companies offer two or
three versions of their product), but it should not detract from your core
focus. Many of the smartest businesses offer free or freemium versions of
products with reduced functionality. This helps create a flow of future
customers, which upgrade once they have outgrown the free or freemium
solution.

Mapping out how you can see your business attracting $100M in annual
revenue is a simple, but valuable exercise that will impact how you think
about best-fit customers, sales process, product positioning, and customer
service. Completing it will help you understand which segment, whether it be
small, medium, or enterprise-sized businesses you need to target in order to
realise your growth ambitions.

Hitting $100M in annual revenue starts with having a clear focus on the right
segment to target.
Essay 5
Why Your SaaS Business Must Publish its
Pricing

Developing the right pricing strategy for your software as a service (SaaS)

business is absolutely crucial, as it’s the one lever businesses leaders can pull

that immediately and directly impacts revenue.

SaaS pricing a complex and ongoing process which requires businesses to

strike the fine balance between simplicity, while maximising revenue
potential. The good news is that if you get your pricing strategy right, you
can create growth that rockets your business to the next level.

Given the huge impact pricing strategy can have on a SaaS business, it is
perhaps surprising, alarming even, that 80% of leading SaaS businesses do
not publish their pricing. While that particular study looked at the Montclare
SaaS 250, a list of established SaaS businesses, the same trend appeared
among 386 companies on the AngelList SaaS startups list, which Dharmesh
Shah, HubSpot co-founder, analysed while an improvement and welcome
step in the right direction, just 39% of companies on the AngelList SaaS
startups list have publicly available pricing.

Why are SaaS businesses reluctant to publish pricing?

In my mind, two forces are at play here. First up, there appears to be
something akin to Groupthink among the SaaS community - the prevailing
wisdom is that keeping pricing information private is a best practice. In fact,
the opposite is true, and keeping this information hidden has no place in the
world of modern SaaS sales. It is a hangover from the old, closed world of
hardware.

Secondly, and somewhat related to my first point is that SaaS businesses are
fearful of publishing their pricing information. They fear by publishing this
information they are giving up an important edge that a competitor may
leverage against them. But this fear is misplaced - business leaders are often
basing their decision on emotion and fear of the unknown, and defaulting to a
defensive position, rather than considering the advantages of taking the
proactive step to publish pricing.

In the interests of balance, I appreciate there are some legitimate reasons why
a small number of SaaS businesses would not want to make pricing
information available, such as if the product is genuinely bespoke or the types
of deals are long and convoluted and don't lend themselves to clear pricing.
But these are the exception, rather than the rule and not typical of the
majority.

In addition, the perception that discounting becomes difficult when you

publish pricing and that enterprise clients are less price-sensitive is not
necessarily accurate, and far less a valid reason to keep pricing information
under wraps. If you're selling to the enterprise and by that I mean, deals
which are over $100K per year, there may be reasons to keep the information
unpublished, especially if deals are bespoke. But if you’re selling to SMBs or
mid-market and your product requires little customisation, then the excuses
we typically hear don’t pass muster.

A thoughtful pricing strategy can have a transformational impact on a

business, but it's important to recognise that it's a gradual process which
requires continual fine-tuning. It typically starts as art and evolves into a
science. The process of refining your pricing strategy can turn pricing into a
competitive advantage for your organisation. And in the increasingly
competitive world of SaaS, you can and should leverage every available
strategy to your advantage.

SaaS Pricing for Success

Here are five reasons SaaS businesses must publish their pricing:

1. Quicker qualification of leads

By showing prospects your pricing, they can quickly and easily understand if
they can afford your product. Prospects can literally do this in seconds.
Making pricing information available leads to quicker self-qualification, and
while it may not increase the speed of the sale, understanding who isn't a
good fit early on and disqualifying them from your sales pipeline is
extremely valuable. It frees up time to focus on the best-fit prospects.

2. Reduces friction in the buying process

Conversely, asking everyone who wants to discover your pricing to speak
with a sales rep, will increase the number of touches a rep has with a prospect
and likely increase your customer acquisition cost (CAC). Asking people to
get in touch in this way is hopelessly inefficient. It adds a step to the sales
process that does not to be there. Publishing your pricing removes a layer of
friction, and with it, a bunch of inefficiencies from the qualification process.

3. It’s more customer-centric

Fundamentally, publishing your pricing feels like the right the thing to do for
your prospective clients. Not being able to find something on a website is
frustrating. It’s even more frustrating when you cannot find something as
critical to the buying process as price. If someone doesn’t know the price,
how do they know the product is right for them? Rather than frustrating
people and forcing them to speculate, you should make things easy by
publishing your pricing. It’s not an unreasonable expectation.

4. Helps align personas to pricing

At HubSpot, we published our pricing, and you'll notice we had distinct
personas that are aligned to each package (Basic, Pro, and Enterprise). By
aligning prospects to a persona and package, we make it easier for sales to
quality and tailor their discussions. Aligning personas to pricing in this way is
helpful for sales reps - they immediately understand the type of prospect
they're selling to.

5. Only a veneer of advantage by not publishing a price

By keeping your pricing information secret, there’s only a veneer of (rather
than actual) advantage to be gained. Importantly, this perceived advantage is
diminishing thanks to software review websites like TrustRadius and G2
Crowd, as well as question and answer websites like Quora - in a matter of
minutes prospects can find out pricing information about a company.

I’m a firm believer that publishing your pricing information will help you sell
more. In the age of mass media and easily available information, there’s little
advantage to be gleaned from hoarding information like price. While that’s
noteworthy, the most pertinent point remains that if you don’t publish your
pricing, you’re leaving money on the table, and no sales organisation wants
that.
Essay 6
The Marketing Arbitrage Opportunity

Without doubt, one of the most exciting parts of being a marketer today is the
perpetual challenge of finding new channels and tactics to leverage. There’s
a whole host of marketing arbitrage opportunities out there - if you know
where to look and spend your time.
Identifying opportunities that we think will create business value is not only a
lot of fun; it's key to driving future growth. For that reason, organisations
need to invest in the discovery and cultivation of such opportunities.

Why is this important? As marketers, we're well acquainted with the standard
playbook of inbound marketing, search engine optimization (SEO), Google
AdWords, pay-per-click (PPC) advertising, email marketing, social media,
and online ads. While these channels and tactics remain effective and help
companies all over the globe to grow, they're in many cases becoming less
impactful. They're working for now, but eventually, they won't. It may not be
next month, year or decade, but eventually, decay will set in. When you
recognise this truth, it becomes clear that marketing leaders need to empower
their teams to explore new channels and tactics. Organisations can either
create a team with this responsibility or structure their business so everyone
feels ownership (something like Google's 20% time, albeit for marketers is an
example of what the latter could look like).

Figuring this out isn't easy - it takes speed, investment, and autonomy, but the
marketing landscape is scattered with examples of businesses moving quickly
when they spy an opportunity with much potential and little competition. We
call this situation, "marketing arbitrage." A marketing arbitrage opportunity is
when marketers identify a channel or tactic with low saturation that they
think will have an oversized impact if they leverage it quickly.

The difference between channels and tactics

Before we go any further, it's important to recognise the key difference
between channels and tactics when discussing marketing arbitrage, as people
often use them interchangeably. When I mention channels, these are external
to your website and crucially, are owned by someone else. For instance,
Google AdWords, Facebook, and PPC are all channels - marketers are
essentially paying to access an audience. Channels can be highly effective,
but ultimately, marketers are using someone else's service, and they could
change the rules at any stage.. Dwindling organic reach on Facebook and the
subsequent move towards pay to play is one such example.

Whereas tactics are fully owned by you. Examples of marketing tactics

would be SEO, email marketing, marketing automation, and bots. Marketers
are in full control of tactics, but results are typically slower in comparison to
channels. The best practice is for marketers to take a blended approach and
leverage a range of channels and tactics. The key takeaway is to avoid being
overly reliant on a channel in case the environment changes.

A recent example of this happening would be the launch of Google Jobs,

as Google seeks to take on Indeed.com, my former employer and the world's
largest jobs website. Indeed.com now finds itself in the unenviable position
of competing directly with Google but also being heavily reliant on website
traffic from Google AdWords and its search engine.
Every channel and tactic decays eventually
It's important to recognise that every marketing channel and tactic has a
lifecycle that fatigues over time. To ensure that organisations are equipped to
take advantage of emerging opportunities, they need to make it someone's
responsibility. A person or team needs to be charged with identifying new
opportunities where the potential rewards disproportionately outweigh the
investment and risk.

Within the software, as a service (SaaS) industry, it's increasingly common to

have a growth team that seeks out marketing arbitrage opportunities. Growth
from new channels and tactics for SaaS businesses is particularly important -
they operate in an environment where organisations have two options; they
can either grow fast or die slow. In short, seeking out marketing arbitrage
helps businesses hedge their bets for future growth.

This isn't a new concept, and the world's leading companies are acutely aware
of what happens once a business stops growing. Amazon's Jeff Bezos best
sums it up when he talks about the concept of Day 2:

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful

decline. Followed by death. And that is why it is always Day 1. To be sure,
this kind of decline would happen in extreme slow motion. An established
company might harvest Day 2 for decades, but the final result would still
come.”

While Bezos is talking about halting decline at Amazon, the lesson and
warning are applicable to any channel or tactic. Eventually, they all decay.
A brief history of marketing arbitrage
There have been some notable waves of marketing arbitrage over the past 25
years. The very first online ads were served in 1994 by HotWired, and the
clickthrough-rate (CTR) was an incredible 78%. Today, the average CTR on
Facebook ads is 0.9%. Online ads have been through a huge transformation -
they were once a highly effective tactic, but after some initial traction, came
increased competition and in some cases, dubious practices. That started the
decline of online ads, and while the level of sophistication and targeting has
improved, their effectiveness is on the wane and the days of double-digit
CTRs are long gone.

With more competition and diminishing returns, the future of online ads is
uncertain - there's a big question mark over the accuracy of advertising
numbers due to. ad fraud, plus the emergence of ad blocking software.
However, it must be said there are some outstanding companies in this space
that are continually innovating. After all, a well-targeted online ad at exactly
the right moment is to be welcomed, but the reality is there's often a large
gulf between what the marketer and person being served the ad wants.

Marketing in the 2000s

A decade ago, content marketing represented a big opportunity for marketers.
Few businesses were creating quality content, and those who invested in
blogging, webinars, and ebooks saw impressive gains. Nowadays, everyone
seems to be publishing content, and mediocre content is the scourge of the
internet. It's a massively oversaturated tactic, and companies just starting out
in their content marketing journey often find themselves competing against
organisations that have had a ten-year head start.
Good content can still rise to the top, but wading through subpar content is a
challenge. Attention spans have not increased, but the volume of content has.
Exponentially. Content marketing works as a tactic, but it’s increasingly
competitive.

During this period, we also witnessed the golden era of email marketing.
While a highly tailored email that's based on a behavioural trigger will likely
deliver the best results, it too is becoming less effective as a tactic. Doing
more of something that is having less impact is never an effective strategy -
indeed, it should serve as a wake-up call to organisations to explore
marketing arbitrage opportunities. However, the death of email is overplayed
and is unlikely to be replaced any time soon. There's lots of progress being
made in terms of marketing automation which may herald a second golden
era of email marketing.

Around the same time as content and email marketing came to the fore, we
also saw the rise of AdWords, which enabled companies to buy highly
qualified search traffic. Others soon wised up to the benefits of this channel,
and the average cost of AdWords traffic increased. AdWords is still highly
effective, and many companies have built great businesses off the back of it.
However, it's an increasingly competitive channel - as more people start
buying AdWords, it pushes the price up for everyone. This is especially
worrying if the search volume for your product or service does not increase
accordingly.

For a period of time, mobile websites offered a marketing arbitrage

opportunity, but now they're simply a prerequisite for good SEO. This change
was less about a channel or tactic becoming oversaturated or more
competitive, but technology evolving. It became much easier to have a
mobile website, and. Google began taking this into consideration in its search
results.

The rise and fall of social channels

There was once a time where social media platforms offered a big, untapped
opportunity for businesses. It's unhelpful to cluster all social media together
as they have unique characteristics, but MySpace represented a sizable
opportunity in the mid-2000s, then Facebook, LinkedIn, and Twitter came
along. Facebook and LinkedIn are still valuable to marketers, but the cost is
rising as competition increases.

It's a different story for Twitter, however. After years of anaemic growth and
an unclear monetisation strategy, it's becoming a less effective channel. Its
audience numbers are falling, and with it, the value it offers brands. The next
wave of social media platforms like Snapchat, plus messaging services, such
as WhatsApp and Facebook Messenger are the current marketing arbitrage
opportunities. Some businesses are making notable progress, but there's no
clear winner yet.

Should you invest in something that is decaying?

That's a tough question, and the answer is, it depends. If a channel or tactic is
delivering for you, I would absolutely continue investing in it. But you
should also be aware of how it is trending in terms of impact, saturation, and
cost. You should create a model to see how each channel and tactic is
expected to change over two or three years. This will give you an
understanding of what the mid-term future looks like (this is imperfect, but it
gives you a data-driven indication of future performance).
Once a channel or tactic becomes more expensive, less impactful or
oversaturated, it’s time to explore others. This doesn’t mean abandoning it
(not by a long stretch), but it’s important to recognise that you need to
innovate in order to continue growing. Marketers should view each channel
and tactic through an S-Curve, so they keep experimenting as older channels
and tactics become less effective. The chart below illustrates how some
channels and tactics have decayed, while others are still on an upward
trajectory.
Channel and Tactic Decay

Channels
and Tactics

^—Online Ads

^—Content Marketing

Email Marketing

AdWords

^—MySpace

—Face book

—Twitter

^“Linkedln

—-Hots

^—Messaging

YEAR
Today’s marketing arbitrage opportunities
More recently, podcasting has been a big marketing arbitrage opportunity -
there was limited competition, and the barriers to entry remain high (you can't
outsource a podcast in the same way as a blog post). While this tactic is
becoming somewhat busy, it remains a tremendous opportunity for smart
marketers to steal a march on their competitors and increase the reach of their
brand.
There's also much discussion around messaging and bots, and the intersection
between these technologies. In my mind, they represent the greatest untapped
opportunity today. There's a number of companies investing in both
technologies, and they will likely achieve significant results before decay
starts to sets in. Conversion rate optimization (CRO) is also a big marketing
arbitrage opportunity. This tactic seeks to get more conversions from existing
website traffic or to increase website traffic to high converting parts of a
website.

Identifying marketing arbitrage

To identify marketing arbitrage opportunities, you need to keep a close eye
on the big trends occurring. Where are people now spending their time
online? What captures their attention? How is people's behaviour changing?
And at a team level, you must be structured to move quickly and comfortable
operating without an established playbook.

To understand if a channel or tactic is worth investing in, use the marketing

arbitrage matrix below. It helps you easily identify what will be most
valuable.
 Marketing Arbitrage Matrix
HIGH

High Impact High Impact

Low Saturation High Saturation
(J

2
Low Impact Low Impact
Low Saturation High Saturation

LOW HIGH
SATURATION
Marketers should focus primarily on channels and tactics, which have low
saturation and high impact. This is where marketing arbitrage opportunities
will be found. However, it's important to recognise that this matrix is
dynamic and fluid - the channels and tactics may be recategorised as they
grow or decay. This makes speed crucial to leveraging marketing arbitrage
opportunities.

Next up, you should also keep a close eye on channels and tactics which are
characterised as low saturation and low impact. You read that right. This may
seem counterintuitive at first, but allow me to explain. Firstly, if anything
changes and these channels or tactics become more impactful, you want to be
able to respond quickly to take advantage of the emerging opportunity.

Secondly, it’s highly likely you’ll already be well acquainted with the high
impact and high saturation opportunities. The majority of marketers follow
the same playbook and leverage the same channels and tactics. They work
and are highly effective, and that’s why it gets saturated, but you don’t want
to invest extra time here. Lastly, marketers should always avoid channels and
tactics with high saturation and low impact. These are time wasters and will
not provide significant returns.

Remember, there's always an advantage to being an early adopter of new

trends. It gives you the opportunity to get, and importantly stay ahead of the
competition. But as more companies leverage new channels and tactics, they
inevitably become more competitive and often over time, they deliver less
value (this malaise could take many years). To combat decay, marketers must
continually be investing in ways to steal a march on competitors.

While channels and tactics evolve, the continual challenge for marketing
teams is to strike a balance between investing in an activity that generates
great results today but also investing in the new and emerging activity, that
will drive future growth.
Essay 7
Never Build a SaaS Sales Team with Just
One Rep

If business leaders want to generate the growth that rockets their software as
a service (SaaS) business to the next level, then at some point, they will need
to build a SaaS sales team. This is true whether they're a new startup, have
recently closed a Series A round or are about to go public.

While some companies have famously generated tens of millions of dollars in

revenue without a sales team, those companies are the exception, rather than
the rule. They're the outliers, and in truth, many of them now have a sales
process that is far from "touchless." To increase revenue and accelerate
growth, businesses need to build a sales team, and when the time comes,
never hire just one sales rep.

Building a SaaS Sales Team

Here are five compelling reasons why hiring two sales reps is always better
than one:

1. More data to benchmark performance

Having one sales rep gives you no meaningful data on which to benchmark
performance. If you hire someone and they fail to hit quota, you don't know if
this is because they're not up to the job or if there's a lack of. product/market
fit. Similarly, if your one sales hire succeeds, you still don't know how much
better they could be doing. With two (or more) sales reps, you will learn
more about your business, product, and positioning in less time.

2. A/B test to optimise your sales process

With additional sales headcount, you can run A/B tests to target new
segments and markets or different trial versions of your product. These tests
will help you understand what does and does not work more quickly, and
armed with this insight; you can optimise your qualifying and sales process.
Speed is essential - refining your ideal customer and sales process quickly
will help you get and stay ahead of your competitors.

3. Increase sales revenue

All things being equal, hiring more sales reps will lead to increased revenue
for your organisation. While not all revenue is created equal (you don't want
to acquire customers that are a poor fit and likely to churn), getting revenue
on the board does help to grow your business, validate your product and
understand your best-fit customers.

4. Your sales reps can buddy up

Having two sales reps join at the same time means they can buddy up and
share best practice. Regular knowledge sharing should be actively
encouraged, so sales reps can discuss challenges and how they overcame
them, training requirements, and success stories. As long as sales rep
territories and segments are carved up clearly and intelligently, you can create
an environment where a buddy system thrives.

5. Foster friendly competition

Ideally, when you hire two sales reps, you will also ignite a friendly
competition between them. Sales attract people with a competitive nature that
want to win, and as long as the competition remains friendly and to the
benefit of the organisation, then it can and should be fostered. The best ways
to develop friendly competition is via sales reps’ compensation plan and by
creating opportunities for public recognition within the business.

Hiring two sales reps to build out your sales organisation may seem
expensive, but it will more quickly help you understand your Product/Market
fit, positioning, and best-fit customers. With this information, you can double
down on what works and build repeatable processes to achieve
consistent sales at your startup.

In short, more sales reps help you more quickly understand what works for
your business. Gaining this insight truly is a wise investment that will pay
you back quickly and for a long time.
Essay 8
Building a SaaS Sales and Marketing
Engine

The inherent predictability of the. software as a service (SaaS) business model

makes it attractive to business leaders, customers, and investors alike.
Predictable costs and revenue can and should lead to predictable growth. But
to ensure this happens, and to be clear, it's easier said than done, you must
execute flawlessly. You also need to build a sales and marketing engine that
generates enough high quality leads for your sales team to close each month.

Thankfully, there are a number of marketing strategies available that are both
effective and scalable - meaning they will continue to require the same level
of resources regardless of whether you're delivering 100 or 100,000 leads
each month. Inbound marketing, content marketing, and search engine
optimization (SEO) are three proven approaches to lead generation that you
should consider. After some experimentation, analysis, and optimisation it's
possible to build programmes with these strategies that consistently generate
leads for your business.

However, each are long-term plays and can take time to see results. If
required, you should invest in Google AdWords to top up any shortfall in
leads as a short-term measure. I often see businesses take this blended
approach, to begin with, and then lessen their AdWords spend over time,
while their marketing engine starts to crank to full speed.
Software continues to eat the world
It is several years since Marc Andreessen announced in a seminal WSJ essay
that "software is eating the world," and his thesis has been comprehensively
proved right. Technology, specifically Amazon Web Services, Google Cloud,
Microsoft Azure, and the like have made all this possible. It is now easier and
cheaper to build software than ever before (which has helped create
an efficient market for SaaS products - in fact, too efficient for some
businesses), and with more than 3.5 billion internet users, the potential
market for SaaS products is vast.

Building and launching a product is one thing, but creating something that
people want to use is quite another. A distinct characteristic of SaaS
businesses is they continually provide value by frequently updating their
product and releasing new features, so we, the customers are in effect, always
paying to have the latest version of the software. This is in contrast to how
software used to be purchased and delivered. In the past, most software
products were paid for up-front, often at significant cost, and the customer
used the product until a new one was released. Given this rapidly changing
landscape, it is perhaps unsurprising we've seen software displace hardware
at many companies.

The subscription model favoured by most SaaS businesses acts as a forcing

function of sorts - it compels organisations to be(come) customer-centric.
Essentially, they clawback customer acquisition costs (CAC) and aim to
increase lifetime value (LTV) over a period of time, so their success is
intertwined with that of their customers. The leading SaaS businesses have
figured out that having a product which solves for the customer and provides
compounding value remains the best SaaS growth play.
Repeatable systems create predictable growth
To generate predictable recurring revenue for your SaaS business, you need
robust processes in place that consistently deliver high quality leads for your
sales team to close. You need to build a sales and marketing engine.

At HubSpot, we coined the term "smarketing" to describe sales and

marketing alignment. It's the foundation of our sales and marketing engine
and spells out clearly which team is responsible for each stage of the sales
and marketing lifecycle. Crucially, within each stage, there is a service level
agreement (SLA), which details what should happen. It keeps both teams
accountable and shows how they need to work together. The SLA is
essential. I liken it to a baton race - both teams are runners, they're reliant on
each other, and they need to understand what's going to happen to be
successful.

SLAs are critical, but so too are definitions, and you must get everyone in
sales and marketing using a common language quickly. Too many businesses
do not have a clear or well-understood definition of a lead. For example, is a
lead someone who visits your website, completes a form, or speaks with a
sales rep? Definitions matter and without them, confusion seeps in.

Grey areas inevitably lead to misunderstandings between sales and

marketing, and when this happens, it's not uncommon to have sales
complaining about the quality of leads and marketing bemoaning sales for not
working leads effectively. But it doesn't have to be this way. Clearly set
definitions, expectations, and responsibilities help to rid businesses of this
misalignment, especially at the crucial point where leads are handed over
from marketing to sales.

What stages should your sales and marketing funnel include? I've already
covered the danger of not defining a lead; however, I often speak with
marketers that have a half-baked process which looks like:

1. Prospect/Visitor
2. Lead
3. Customer
While this is clearly an improvement on having no process or definition, it is
basic and potentially means the marketing team will generate poor fit leads,
and sales will waste time following up with the wrong ones. The above
process fails to provide the detail or nuance sales teams require to be
successful.

To build an effective sales and marketing engine at your SaaS business, you
need a funnel consisting of the following stages:

1. Prospect/Visitor
2. Lead
3. MQL
4. SQL
5. Opportunity
6. Customer
Now let’s dig into what each stage means, who should own it at your
business and metrics to track.

1. Prospect/Visitor
A prospect is someone that visits your website but has not given you any of
their contact details. Despite them not handing over any information, it's easy
to begin tracking the actions a prospect takes on your website using a
marketing software. This information is stored and remains anonymous until
the person becomes a lead by giving you their contact details (often in return
for content or a product). Responsibility for driving prospects and website
visitors is owned by marketing, and they typically have a monthly website
traffic goal.

2. Lead
As mentioned, a person becomes a lead when they complete a form on your
website (at a bare minimum this means they have given you their email
address). Once this happens, a contact record will be created, which contains
contact details, actions they have taken on your website and company
information. Businesses often generate leads by creating offers, such as an
ebook, whitepaper, or webinar, that people must complete a form to access or
by releasing free products. Marketing owns all lead generation efforts and
will have a monthly lead goal.

3. Marketing qualified lead (MQL)

MQLs are leads that the marketing team deem worthy of handing over to
sales. Frequently a lead becomes an MQL if they are both high fit and high
intent. The fit would include factors, such as company size, industry, and
location, while intent would be actions the lead has taken like visiting the
pricing page on your website, watching a webinar or requesting a trial (the
process of prioritising leads is often done using, automated lead scoring).

This stage is essential as it's focussed on providing quality leads to sales,

rather than volume. It's where the handover between sales and marketing
begins, and marketing will be held accountable to a set number of MQLs
each month.

4. Sales qualified lead (SQL)

SQLs are where the sales organisation becomes involved. Typically, a
business development representative (BDR) will begin prioritising leads and
will set up a short connect call with the lead. From this call, they will seek to
learn about the lead's challenges quickly, and if they have a budget for the
product. If the lead is a good fit, it will be passed to a sales reps rep to work.

BDRs are responsible for creating SQLs each month and will be measured on
a number of SQLs they create which are accepted by a sales rep; meetings set
up between a sales rep and lead, as well as total revenue generated.

5. Opportunity
If a sales rep chooses to accept a lead and begin working it, the lead will
become an opportunity (sales reps are often assigned leads based on the
territory, industry or segment they own and are then given a time to work the
lead before it is recycled for other sales reps to work). Sales are responsible
for working opportunities and will have to commit to working a set number
of leads within an agreed timeframe, such as working 100% of leads within
48 hours.

6. Customer
The sixth and final stage is when a lead closes, and they become a customer.
This is what sales teams aspire to do, and what marketing activity helps drive.
The sales organisation will be responsible for hitting a revenue goal each
month - most SaaS businesses focus on revenue, rather than several deals that
a rep closes. Some organisations also have a sales enablement function,
which can be part of sales or marketing that helps sales reps to close deals
through content, deal support, and training.

Defining your sales and marketing SLA

To make all this happen, you need to create a sales and marketing SLA. As
mentioned earlier, an SLA is a contract between a service provider and end­
user that defines the level of service expected from the service provider. But
when sales and marketing are involved, we need a commitment from both
sides.

For this to work at your business, it has to be bi-directional. Marketing must

commit to providing a set number of leads of a certain quality each month,
and sales must play its part by following up with an agreed number of leads,
to a defined depth within a set timeframe. This is best practice, but
unfortunately, it is uncommon - many companies only have marketing
commit with sales making no promise in return.

The first step to righting this wrong is for marketing to get more data-driven
and scientific. You can do this by having a firm grasp of the business metrics
and partnering with business leaders to define the new revenue goal for each
year. Once the new revenue goal is defined, marketing can calculate how
many leads they will need to generate for sales to close to hit (and exceed)
that revenue goal.

Here are two formulas all marketing leaders need to know:

1. New revenue goal + average sales price = # of new customers

2. # of new customers + lead to customer close rate % = lead goal
Now let’s put these formulas into action. If your company's new revenue goal
is €1 million and the average sales price is €10,000, it’s clear 100 new
customers will need to be acquired. Using this information marketing knows
it can take the number of new customers required and divide it by the lead to
customer close rate.

If your lead to customer close rate says, 10%, marketing will need to generate
1,000 leads in order to hit 100 customers. In short, understanding these
metrics and how they impact the business is how marketing will truly earn
trust, respect, and credibility of sales and the broader organisation.

The best SaaS businesses figure out their sales and marketing machine early
on. They realise that sales and marketing can be engineered, and the starting
point is clearly articulating each point within the process, who owns it and at
what moment it is handed over. Once you have this foundation in place, it's
time to set goals and optimise different parts of the process. That being said,
the tactics and levers which can impact each stage are in a perpetual state of
evolution, and the most successful SaaS companies continually innovate at
each stage. That's the most effective way for you to build a sales and
marketing engine that gets you ahead of the competition.
Essay 9
Churn is the Quiet SaaS Killer

Retention truly is the foundation of growth for software as a service (SaaS)

companies, but oftentimes, it is overlooked and undervalued. This is always a
huge mistake. High SaaS churn is a corollary of poor retention - but it can
creep up unannounced, and rather than deal a single fatal blow, it causes
death by a thousand small cuts.

A high churn rate is highly undesirable as it shackles growth, is a source of

friction and (rightly) raises tough questions about, product/market fit. You
need to understand retention and optimise for it.

So just why is retention so vital to the wellbeing, growth, and success of a

SaaS company? Well, it all comes down to basic economics. Put simply, in
most cases; it is considerably cheaper to retain customers than acquire new
ones. There's little point in acquiring new customers if churn is out of control.
Think of it like a leaky bucket - you need to fix the hole, rather than
continually filling the bucket with more water.

Understanding SaaS Churn

The image below shows how high churn can quickly derail the growth of a
SaaS company. If businesses with high churn continue to acquire new
customers, they're going to waste time and resource, and have little to show
for it.
 Your acquisition math doesn't work
When your customers start to churn, you can hire more salespeople to fill the gap - at
first. But without a long-term investment in customer service, you won't be able to
lower your churn rate. Eventually, you simply won't be able to make up the difference.
Here's how that math works.

Need 1 salesperson to grow Need 4 salespeople to grow Need 7 salespeople to grow Need 65 salespeople to grow

11X1111 11111*111tlllll
1111 11111*111111111
111111111111111
111111111*11111
11111X11111
TIME

can sell 5 new cuslomers/month Existing customers И Churned customers New customers
HubSp>6t Research

Source: HubSpot
Retention trumps acquisition
While new client acquisition often captures the attention of business leaders,
in my experience, many companies are taking the wrong approach. They
overestimate the importance of the initial sale and underestimate the
importance of a client’s lifetime value (LTV). Now don’t get me wrong - the
sales organisation plays a vital, absolutely vital role acquiring customers, but
when you have a services organisation that typically retains clients for several
years, you begin to realise that services are where the. recurring revenue and
big money is made.

In my mind, retention trumps acquisition and Tom Tunguz, venture capitalist

(VC) at Redpoint shared five reasons why fixing churn is a better bet than
chasing growth. Despite this, most SaaS leaders rank acquisition over
retention. While they care about retention, the chart below shows that it’s
clearly less of a priority.

What's most important?

C-Level/Founder Growth Preferences
100%

More logos Making more money Keeping customers

per customer around longer
N = 1432 SaaS companies, +/- 219% MoE at 95% level

PrteeintoaigaMly (aPncelntel

Source: ProfitWell
We've covered why high churn is undesirable, but let's turn our attention to
why low churn is important and what it means for a SaaS business.
Essentially, if you're acquiring customers, and the rate at which they buy
more is greater than the revenue lost from the churn, then you've built a
highly desirable business. A business that doesn't have to sell anything new,
but still grows is the holy grail of SaaS.

The key takeaway is to. make tackling churn a priority early on, rather than
reacting after the event.

Calculating churn
As I hope you'll agree by now, churn matters and understanding how it's
calculated is really important. It may not be immediately apparent, but there
are some important differences between monthly and annual churn. Allow me
to explain. A 5% annual churn rate means that monthly churn is 0.42%,
whereas a 5% monthly churn equates into a hugely troubling 46% annual
churn rate. Or put another way, a 5% monthly churn rate means that if you
started January with 100 customers, you'd only have 54 customers left at the
end of December. In order to record any kind of growth, you'd have to
acquire another 47 new customers. Just think back to the leaky bucket again.

While each industry and company is different, a 5% monthly churn rate isn't
a solid foundation for a SaaS business, and in all honesty, a business in that
situation should seek to ramp up retention and dial down acquisition.
Otherwise, it’s burning through money. High churn becomes even more
troublesome if you have a limited total addressable market (TAM) and you’re
capturing it quickly - when businesses acquire customers and then lose them,
it’s very difficult to re-win their trust and business at a later date.

LTV: CAC for SaaS businesses

LTV: CAC is perhaps the most important of all SaaS metrics, so it's
invaluable to know how churn impacts it. LTV: CAC is the lifetime value of
a customer divided by the customer acquisition cost. Looking at these
numbers as a ratio helps you understand how effective a business is at
making money. You can clearly see what the return will be from every dollar,
euro, or pound invested. An LTV: CAC of 3:1 is widely regarded within the
SaaS industry as the foundation of a solid business (an even greater LTV is
better).

SaaS businesses have unique characteristics, which means it makes sense for
them to be measured differently. They typically incur high up-front costs to
deliver products and acquire customers but follow the path to profitability by
retaining and adding customers over time, many of whom upgrade or buy
more. SaaS businesses often operate on a subscription basis, so monthly or
yearly subscription value is low, but lifetime value is high. This makes
retention and keeping a handle on churn absolutely vital.

SaaS growth levers

At a high level, retention matters as there are only ever three levers to grow a
SaaS business:

1. Increase number of customers

2. Increase average revenue per user (ARPU)
3. Reduce customer churn
Let's take a look at the results businesses can achieve by optimising each
lever. Although the scenarios below are completely theoretical, the table
shows how each growth lever acts as a multiplier and that incremental
improvements can have a transformational impact on the performance of a
SaaS business.

Seemingly small improvements can have a dramatic impact on the health and
success of a SaaS company.

Metric Scenario A Scenario B Difference

ARPU $100K $120K +20%
Number of
1K 1.2K +20%
customers
Annual churn rate 10% 5% -50%
ARR $90M $136.8M +52%
Where SaaS businesses choose to invest their time, energy, and money is
hugely important. They need to strike the fine balance between customer
acquisition, retention, and account growth. The best companies understand
how to retain customers, all the while increasing ARPU, and once these
metrics have created a flywheel effect, they then (and only then) double down
on customer acquisition with sales and marketing. That’s the winning growth
playbook followed by the leading SaaS businesses.

The importance of customer success

I'm sure it's abundantly clear by now, but SaaS companies need to invest in
some form of customer success. But what should "customer success"
include? While it's hard to generalise, for lower-cost products, customer
success will likely include self-guided education, such as videos, forums and
FAQs pages and at the higher end, it will mean dedicated staff, such as a
customer success manager or professional services, while the middle will
take a blended approach.

Businesses need to remember the “services” part of SaaS - too often

they, forget they’re not just selling software. After all, the act of purchasing
software never makes a customer successful. They need education, training,
and support to leverage it effectively. Once they've acquired this knowledge
(or hired a third party with it), then and only then, are they on the way to
achieving success.

Calculating customer success

One of the best ways to understand the success of your customer base is net
promoter score (NPS). It’s an index ranging from -100 to 100 that measures
the willingness of customers to recommend a company's products or services.

While NPS may lack detail and qualitative data, it does provide an effective
indicator of the health of a client and if they’re a churn risk. For those
unfamiliar with NPS, its scoring system means that you’re penalised heavily
for a poor rating (0-6 are classified as detractors), receive nothing for
mediocre ratings (7-8 are classified as passives) and are only rewarded for
high ratings (9-10 are classified as promoters).

01 23456789 10

DETRACTORS PASSIVES PROMOTERS

©%-©%= NET PROMOTER SCORE

Source: Wootric
What represents a "good" NPS changes between industry and product;
however, you should track your own NPS, as well as conduct research to
track and benchmark key competitors.

For SaaS businesses to turn a profit, they need clients to succeed and
continue paying for their products over a long period of time. This is what
increases LTV, retention, and recurring revenue. By investing in customer
success teams to provide strategic guidance, account management, and
support, businesses are well placed to reduce churn and increase spend per
client. Customer success is a vital cog in the SaaS sales engine - it has the
potential to generate considerably more recurring revenue than the original
sale.
Strategies to help SaaS companies reduce churn
Based on my experiences at HubSpot, Indeed.com, and Automation
Anywhere, I've identified five high impact strategies to lower churn:

1. Develop an integration ecosystem

There’s much data to suggest that, integrations with other products help SaaS
businesses to reduce churn. This makes perfect sense - integrations often
provide customers with more value, which in turn increases usage and gives
them more reasons to engage with your product. It’s a virtuous circle, and
you should consider building or enabling other companies to build products
that integrate with yours.

The graph below shows that customer retention is closely tied to the number
of integrations they have - in fact, just one integration has a significant impact
on retention.

IMPACT OF INTEGRATIONS ON YOUR BUSINESS

Customer retention with # of integrations

Those customers with more integrations within their product appear to be willing between 10 and 30%
more than those without integrations, cascading into more expansion revenue and better retention.

Source: ProfitWell
Integrations are an important weapon in your armour as they give your clients
more ways and reasons to use your product - this typically leads to higher
usage, which creates more value and often equates to greater retention.

2. Optimise your qualification process

There's a school of thought which states that only poor fit customers churn. I
don't quite see things as clear cut as that; however, the fact remains - by
optimising your qualification process you can screen out poor fit clients early
on and defend against churn down the line.

You can get started with optimising your qualification process by looking at
the profile of successful customers and unsuccessful ones. Depending on
what you uncover it could lead you to take action such as, focussing on
targeted accounts like the Fortune 1000, or refining your value proposition.
This could mean moving away from being perceived as a money-saving
product to one that helps companies make money or increases productivity. It
could also lead you to target people in specific job roles or moving from mid­
market to enterprise-sized companies.

The key learning here is to recognise that your qualification process needs to
be in a continual state of optimisation. There’s no guarantee what worked
yesterday will continue to work in the future. You need to understand who
wins (and loses) with your product.

3. Increase ARPU with up and cross-selling

There’s a large body of research which shows that higher ARPU leads to less
churn. Perhaps understandably, if a client is continuing to spend a high
amount of money, it stands to reason they’re deriving value and therefore less
likely to churn.

Source: ProfitWell
SaaS businesses have two options when it comes to increasing ARPU - they
can either upsell, meaning to sell more of the same product, a higher value
plan or add-ons. The second way to increase ARPU is by cross-selling, which
is to sell a suite of different products to the customer.

Up and cross-selling is important as you’re more likely to be successful

selling to existing customers than new ones - the bookMarketing Metrics:
The Definitive Guide to Measuring Marketing Performance states that the
probability of a successful sale with a new prospect is 5%-20%, whereas
the. probability of a successful sale with an existing customer is a lofty
60%-70%. Again, this makes a lot of sense - you’ve already established trust
and credibility with existing customers, so it stands to reason they’d buy from
you once more.
 Probability of selling
to a new prospect

Probability of selling
to an existing customer

Source: Marketing Metrics

In the interests of fairness, it’s important to understand that higher ARPU
deals often have inherent characteristics which help mitigate churn. For
instance, it’s not uncommon for larger value deals to have minimum contract
lengths, such as 12 months, and in some cases, multi-year. This is often less
to do with churn and more typically a reflection of how long it takes for the
customer to see value.

By way of example, there are many differences between MailChimp and

Oracle Eloqua, and this is reflected in their respective go-to-market (GTM)
strategies:

GTM Strategy MailChimp Oracle Eloqua

Ideal persona Small business Enterprise
Buying process Touchless Field sales rep
Price Low High
Onboarding Self-serve In-person training
Contract terms Contractless Minimum 12-month
contract
Before implementing a strategy to increase ARPU, it's important to consider
your growth stage. If you have 100 customers and your ACV is low, it's
likely a better investment to focus on acquisition, but if you have 100K
customers and ACV is low or moderate, then increasing ARPU should be
explored.

4. Build a customer success early warning system

As the name suggests, most SaaS companies have a customer success team
whose role is to ensure clients succeed and therefore mitigate churn. To
achieve this goal, customer success teams need to identify, track and defend
against red flag metrics - the numbers which indicate if a client is likely to
churn (usage rates, last login date, and customer satisfaction are potential
examples).

By tracking user behaviour, it becomes easier to predict when someone is at

risk of churning. Casey Armstrong, chief marketing officer (CMO) at
ShipBob, sums it up well, "Before cancellation ever happens, there are clear
signals that a customer is in danger of churning." He adds, "Engagement lags
and your product or service goes from an everyday occurrence to being used
once a week, then once a month. Finally, they decide it's a waste of money
altogether."

Intercom’s Des Traynor shares a similar outlook, “ Typically customers

gradually stop using products, from using it every morning to every week to
once a month...At some point down the road you’ll remember you’re paying
for something you don’t need and don’t use, and then you ‘churn,' even
though the decision was made months ago.

It’s hard to prescribe exactly what the right red flag metrics will be, (although
ZOKRI lists 16 in this blog post) - instead, you should look at customers that
have churned and identify trends between them. Then it’s time to act. You
need to invest time in both the discovery and then running programmes to
defend against red flag metrics.

5. Request an annual or multi-year commitment

One foolproof way to lower churn is by reducing the frequency of renewals -
this can best be achieved by requesting an annual or multi-year commitment
from clients. The chart below shows that SaaS companies with annual
contracts report lower churn than those with monthly contracts - by
requesting an annual or multi-year deal over monthly (or contractless), you’re
reducing the number of purchasing decisions per year and therefore,
opportunities to churn.

CHURN BENCHMARKS • QJ ’ 7STH PERCENTILE

Annual Contracts Greatly Reduce Churn О Ql * 5OTH PERCENTILE (MEDIAN)

Companies with a higher percentage of annual contracts lends to see much lower churn than their • Q4 = 25TH PERCENTILE

monthly counterparts, because these customers have 1 purchasing decision per year, as opposed to 12. у = -0 0152X * 01JM

20%

18%
* 16*

=
и
£ 12%
| Ю% 6 10.40%

S
> 8* ( ) 8 .064 6 a.ts%

5 6% S£J%
О
5 4%
1S9%
2%

0%
0% .01%TOX)% 1001% TO 2S% 2 SO'% TO 50% 50.01% TO 7S% 7S 01% TO 100%

PERCENTAGE OF ANNUAL CONTRACTS

CLICK TO SHARE m

Brought li
Source: ProfitWell
While this is an effective approach, it obviously needs to be acceptable within
your market. The good news is that as SaaS companies grow, there's often a
move towards enterprise clients, which typically means larger ACV, as well
as switching from monthly billing to annual or multi-year. The chart below
shows that products with smaller ACV tend to be on monthly contracts, and
larger ACV products have multi-year deals.

Source: SaaS Capital

Once more, you also need to consider your company’s growth stage - if
you’re still finding product/market fit, giving customers the option to up
sticks and leave each month can provide you with invaluable feedback much
more quickly than an annual contract.

It’s also important to understand when is the appropriate time to request a

longer commitment. Discounting is a big challenge within the SaaS industry,
so companies typically request a longer contract in exchange for giving a
discount. Subsequently, understanding how and when to discount is literally
one of the quickest and easiest ways to maximise or damage revenue
potential. If you do find yourself in a negotiation, it is advisable to take a
“give-to-get” approach and request a greater commitment (more product,
multi-year contract, payment upfront) in return for a discount.

Although, customer success teams speak with clients day in, day out,
increasing retention really is a team sport - each and every employee has an
important part to play. The best and indeed, the only way to retain clients for
the long term is to provide value continually. Like a lot of important lessons,
it's easier said than done, but the leading SaaS companies of today and
tomorrow understand that retention is the new frontier of growth. How is
your business tackling the twin challenges of reducing churn and increasing
the value it provides? The time to act was yesterday.

Final Thoughts

I hope that you found How to Run a SaaS Business: Lessons Learned from a

Trio of Billion Dollar Companies a valuable use of your time, and that it

helped spark a new idea, led to an interesting conversation or changed your

thinking on running a SaaS business.

I’ve worked at SaaS companies for the majority of my career, and while this

book contains the key lessons I’ve learnt, the most important lesson is to

consider advice as a starting point to make decisions - or put another way, it

should be used as a handrail, rather than a handcuff. Each company is unique,

has its own dynamics and is heavily nuanced - there’s no silver bullet, “hack”

or one-size-fits-all approach. You need to be discerning, curious and let the

data inform your approach.

While tactics, strategies and approaches are in a constant state of flux, the

leading SaaS businesses understand a timeless and simple rule - having a

product which solves for the customer and provides compounding value

remains the best SaaS growth play. It always will.

The SaaS industry is still very much in its first act and it’s my belief that the

best is yet to come - I’m truly excited about the second act and beyond.

Now let’s get to work.