Guest post from MadKudu.
Overview: what is the most effective way to increase SaaS MRR?
Regular readers of SaaScribe know increasing monthly recurring revenue (MRR) is the #1 challenge faced by SaaS founders. But what is the fastest way? Get more leads? Close bigger deals? Convert more trial users? Close deals faster?
That’s the question we tried to answer in this study. We analyzed the sales velocity of 45,000 qualified leads for 9 representative SaaS companies. Based on these results, the most immediate way for SaaS companies to increase MRR is by closing mid-market deals (deers) faster. We finish with some advice for creating a high-velocity sales closing workflow that targets mid-market leads.
Rabbits, deers, and elephants – oh my!
A few weeks ago we were chatting in MadKudu HQ about the sales practices at a few of our SaaS customers – how they identified the best leads, when they contacted them, etc.
We noticed that most sales reps focus almost exclusively on closing “elephants” (largest deals) and invest little time in “deers” (medium-sized deals). Traditionally this is how software sales has worked: since a rep can only manage a finite number of leads most sales teams will focus the largest deals.
But there are 2 drawbacks to closing elephants.
- They take longer to close.
- There are fewer of them.
Our hypothesis was that closing mid-market (deers) deals faster was the most actionable way to accelerate SaaS sales.
Sales velocity is our reference
We needed a way to make an apples-to-apples comparison between deers and elephants based on deal size, deal volume, and time to close. We decided to use Sales velocity since the equation considers all 3 variables.
Sales velocity measures how fast your team is making money. If normal velocity is “miles per hour” you can think of sales velocity as “money per month”. Thomasz Tunguz provides a detailed explanation of sales velocity in this post, but here are the basics.
The sales velocity variables
# The number of leads a sales team can work over a period of time. Deers have a higher inventory of available leads than elephants.
$ The average deal size. We expect elephants deals to be bigger than deer deals.
% Conversion rate, the percentage of leads that convert to paying customers. The rate of conversion for elephants could be bigger or smaller than deers depending on the amount of qualification.
T The average time for conversion, usually measured in days. We expect elephants to convert slower than deers since larger deals require more negotiation and touch points.
Thus the larger $ for elephants comes at a cost of larger T, smaller # and possibly smaller %.
Methodology: how we calculated sales velocity for deers and elephants
We started by picking a representative sample of 9 SaaS companies. We then needed to categorize them into cohorts based on deal size.
Using number of employees as a proxy for deal size
Unfortunately we don’t often have the data we need to test our hypotheses. In this study we had no way of categorizing a lead based on deal size, so we used Clearbit to give us a best estimate.
We starting by identifying each company’s “good” leads based on domain, presence in Clearbit’s database, and behavior.
We broke each company’s good leads into 10 cohorts based on Clearbit’s employee_count data – this served as a basis for identifying elephants and deers. We ignored small deals – rabbits.
For each cohort we calculated the average time to convert, number of leads and conversions.
Example data for 1 company
Results: what we learned from 45,000 qualified SaaS leads
Here are the results for the 9 companies we studied.
Result 1: Deers are only closing 10% faster than elephants
We divided deer T by elephant T to see which is faster.
Surprisingly, deers are only closing 10% faster than elephants.
Result 2: The conversion rate of deers is 3x more than elephants
It isn’t obvious why deer % should be so much higher than elephant %. Since sales teams invest more time selecting and engaging elephants you could argue that elephant conversions should be higher.
But deers convert at a much higher rate on average. There is also a large variance among these 9 sample companies.
Deer conversion rates are also high on an absolute basis. 7 out of 9 we studied are converting > 8% of their deers. (if this seems like b.s. remember we filtered these for “good” leads based on their presence in Clearbit’s database).
Result 4: Deer deals can be 10x smaller and achieve the same Sales Velocity
Given these results for #, %, and T we can calculate the deer deal sizes needed to hit the same sales velocity. If you assume an equal SV for deers and elephants you can solve for relative $.
I’ll spare you the algebra – results are below.
Thus on average elephant deal sizes need to be 10x bigger than deer deal sizes to achieve the same sales velocity.
Of course I’m assuming all deer leads are # – even given our filtering assumptions this is a stretch since reps can only work so many leads.
Analysis: your practical options for quickly increasing sales velocity
So how can you increase sales velocity? Conventional wisdom says “it depends” because these variables are codependent.
In the long run this is certainly true – you can adjust pricing or increase qualified leads. But you have fewer options in the short run because your team is already optimizing most of these variables.
You’re reading this because you’re not looking for a long-term theoretical plan – you’re looking for fast actionable, wins. Let’s consider your options in the context of this data.
Increase $? Not easily.
Most SaaS companies have already tested pricing and are reasonably close to optimizing conversions and pricing. Unless your product is new there are probably no quick wins from price increases.
Increase elephant %? No way.
Your sales team is already calling every elephant – again … and again … and again. If there was an easy way to close more deals they would be doing it.
Increase deer %? Unlikely.
Based on this data the deers already have a high conversion rate. Increasing it dramatically is probably unrealistic.
Marketing automation and product are already doing a pretty good job at getting deers converted. The qualified deers who don’t convert are already pursued by sales after the trial ends.
Increase #? Yeah…right.
How about increasing your qualified leads? Maybe waive a magic wand so more wonderful customers suddenly show up?
Every SaaS company we know is already working hard to prospect for more leads. Any increases won’t come easily (or cheaply).
Decrease elephant T? Nope.
Elephants take multiple touch points to activate. They have customized workflows and often require purchase orders. Your sales team is already trying to close them yesterday.
Decrease deer T? Yes!!
The only remaining option is to close deers faster.
The 9 companies we studied have roughly the same average time to close for deers and elephants. The only logical conclusion is that these companies are not trying to close deers faster.
This is the key insight from this data.
Insight: The fastest way to increase your SaaS revenue is to close deers faster
Deers should close faster than elephants. Fewer people in the decision loop. Fewer meetings. Less negotiation. Deers also pay with credit cards – not purchase orders.
But according to this analysis deers are closing about as fast as elephants – too slow.
Why? Because SaaS companies are relying on the free trial conversion to close deers
These results are consistent with results from our previous study because most SaaS companies rely on trial expiration as the primary buying incentive.
From this previous study you can see how most SaaS trial conversions occur around the end of the trial period – 30 days in the graph below:
IOW, deers sign up for your product, self-serve and you don’t try to get them to pay until the trial is about to expire.
Action: how you can close deers faster and accelerate sales velocity
You may be tempted to use marketing automation or product workflow to close deers faster – in our experience your inside sales team will be much more effective.
Here are few tips based on what we have implemented with our customers.
Don’t chase the whole herd – qualify your deers
Flooding your sales reps with a pile of mid-market leads won’t work – you’ll probably decrease your sales velocity. If your sales reps start converting less than 15% of their leads they will become frustrated and less effective.
You need to identify the most qualified deers, engage them the moment they are ready to buy and developer a higher-velocity closing process.
Some tips for qualifying leads:
- Leads that are in Clearbit’s database are a good initial filter. You can also disqualify any free email accounts (gmail, hotmail, qq, etc.).
- Segment deers and elephants with simple rules – for instance, start with employee_count or plan.
Start with 1 dedicated “Deer Hunter” sales rep
We suggest starting with 1 dedicated sales rep to close deers. Let’s call her the “Deer Hunter”.
Start small and begin tracking the sales velocity of the Deer Hunter.
Build a higher-velocity engagement workflow
The Deer Hunter can’t simply manage list of deer leads and systematically work through them – this takes too much time. Instead, work with marketing to develop a sales automation workflow that gets a deer to take the first engagement step.
For example, an email campaign that asks a deer to reply to a question or schedule a call based on qualifying demographics or behavior.
Create a 1-touch deer closing script
The Deer Hunter needs a script that gets a deer to convert on a single call. The script should include any conversion incentives (i.e. discount, free feature) and minimize product education. Sales should be credit card only.
Target deers who are ready to buy now
Your customers can take specific steps that indicate a high likelihood of buying – invite a friend, add 5 projects, etc.
We call these “Acceleration” or “Delight” events and showed you how to find them in our series on Behavior-based Conversions.
These events are highly correlated with conversions and indicate a customer who is ready to buy now.
In this example hired_accountant is Acceleration event:
Notify the Deer Hunter when a deer is ready to buy
Deers who complete Acceleration events are ready to buy now – these are the ones you want your Deer Hunter to target.
Send your sales teams notifications through Slack, email, or Salesforce when deers complete Acceleration events.
Include information about the customer, actions completed, and anything else the sale rep needs for the deal-closing script. Here is an example of what we send to our customers:
MadKudu helps B2B SaaS apps accelerate revenue by qualifying leads based on demographics and in-app behavior.
Photo credits: the_boglin