Testing Potential Demand By Being an SDR

Over the past few years I’ve seen several startups implement a Sales Development Rep (SDR) function in their business with great success. Because of this, I’ve become a big proponent of the SDR role (see Sales Development as the Most Important Sales Innovation in 10 Years and 7 Quick SDR Tips for Startups), recommending it many times. Only, it struck me recently that the activities of an SDR are perfect for an entrepreneur to test potential demand for a new product or service.

Here’s how the SDR role would test potential demand:

  • Build a list of potential prospects that could use the product or service
  • Develop a cadence or flow of steps to use in a product like SalesLoft
  • Call potential prospects and get appointments to do a discovery call around the product or service idea
  • Email potential prospects to find latent demand and assess market worthiness
  • Rinse and repeat until it’s clear that there is, or isn’t, demand

Sound familiar? That’s because customer discovery is very similar — reaching out and assessing the need in the market by talking to hundreds of people. The benefit of thinking about it as an SDR role is that there’s great SDR content online, and entrepreneurs should use that to do customer discovery more efficiently.

What else? What are some more thoughts on testing potential demand by being an SDR?

The Case for Not Setting Goals

Jason Fried, co-founder and CEO of Basecamp, lays out the case for not setting goals in his post I’ve Never Had a Goal. Here are a few choice quotes from the article:

  • I want to make progress, I want to make things better…But I’ve never set a goal.
  • A goal is something that goes away when you hit it. Once you’ve reached it, it’s gone.
  • I consider Basecamp, my current business, as one continuous line back from when I sold the first thing I ever remember making.
  • I just worked at whatever I was working on and ended up wherever I am.
  • Jim Coudal said about goals:

    “The reason that most of us are unhappy most of the time is that we set our goals not for the person we’re going to be when we reach them, but we set our goals for the person we are when we set them.

Personally, I enjoy the clarity and focus of working towards a target and knowing whether or not it was achieved, especially in the team or company context. On an individual level, I don’t use goals very much, but I do care that I’m always learning and growing, as that’s important to me.

What else? What are some more thoughts on the case for not setting goals?

SaaS Leaky Bucket

One of the bigger challenges for SaaS startups that start to scale is the leaky bucket. Of course, a leaky bucket is one where whatever goes in the top comes out the bottom (not much of a bucket). With SaaS, leaky bucket is a reference to high churn rates such that it’s hard to fill up the bucket (grow the customer base) because existing customers are leaking out the bottom (churning or not renewing).

Four years ago, Josh James, founder of Omniture, which was acquired by Adobe for $1.8 billion, tweeted that before they sold Omniture, they’d sign 1,200 new customers and lose 800 customers every month, making it really hard, and costly, to grow:

A critical component of successful SaaS companies is low churn rates and high existing account expansion such that even if the company didn’t sign any new customers in a year, the business would still grow as the up-sells would be larger than the lost customers. Entrepreneurs would do well to ensure that they don’t have a leaky bucket.

What else? What are some more thoughts on the SaaS Leaky Bucket?

More Entrepreneurs Need to be Told to not Raise Money

Seth Godin has a great post up titled The Struggle to Raise Money where he outlines a number of entrepreneur issues around raising money, including:

  • When things aren’t working, raising money seems like the answer
  • Raising money is a huge distraction and takes away from the core business
  • Most people won’t tell an entrepreneur to stop trying to raise money and instead help with executive summaries, pitches, and introductions
  • Investors want to invest in the company that can be worth billions, yet most won’t ever be worth millions
  • Investors want to see a working, scalable business where investing X will lead to 10X, and X is proven with hard data

My take: more entrepreneurs need to be told to not raise money. Now, that doesn’t mean they should never raise money. Rather, the majority of entrepreneurs that are trying to raise money don’t have their business to the point that it’s investable, thus it isn’t a good use of time.

Every entrepreneur should read The Struggle to Raise Money.

What else? What are some more thoughts on the idea that more entrepreneurs should be told to not raise money?

Customer Cohort Analysis for SaaS

One of the terms I had never heard before getting into the SaaS business is cohort analysis. As you might expect, a cohort is a set of customers grouped together by common characteristics. The most common types of customer cohorts are by time (e.g. customers that signed up in a given month) and size (e.g. customers based on how much they spend). Cohort analysis is primary used to understand patterns and trends of customer groups over time with the most important metrics being renewal rates and account expansion.

Here are a few thoughts on customer cohort analysis in SaaS:

  • Keep cohorts simple while there’s limited data and add complexity as the customer base grows
  • Remember that not all customers are equal and the cohorts should reflect a reasonable level of segmentation (e.g. customers by month by size divided into small, medium, and large)
  • Consider cohorts on longer tail metrics to see if any insights emerge (e.g. # of logins, module usage, NPS, etc.)
  • Look for the “smile” where the revenue expansion of a cohort is expanding (turning up like a smile) vs shrinking (turning down like a frown)

Cohort analysis takes a fair amount of time to initially put together but it’s well worth it — every SaaS company should track their customer cohorts.

What else? What are some more thoughts on customer cohort analysis for SaaS?

Faster SaaS Growth Equals Greater Losses

Continuing with yesterday’s post on Gross Margin as Part of Lifetime Customer ValueDavid Skok has a important post up titled SaaS Metrics 2.0. In the article, he touches on a critical topic that isn’t well understood: faster SaaS growth equals greater losses. Here’s how he visualizes it:saas_growth

The idea is that when you sign a new customer, there’s a payback period, which is why gross margin is an important consideration. New SaaS customers are money losers for an extended period of time — often one year — but then are very profitable after that. Intuitively, this makes sense as payments are spread out over time. So, if you lose $X for a new customer until they’re profitable, it only follows that if you sign five times the number of customers, you’re going to lose $5x until they’re profitable (more customer onboarding help, more servers, more infrastructure, etc.).

Entrepreneurs would do well to understand that faster SaaS growth equals greater losses, and that it should be planned for accordingly.

What else? What are some more thoughts on faster SaaS growth equaling greater losses?

Gross Margin as Part of Lifetime Customer Value

Continuing with yesterday’s post on SaaS CAC to LTV Metric, there’s another important element that needs to be addressed: gross margin. Gross margin is the percent of revenue left over after taking out the costs required to serve the customer (SaaS cost of goods sold). So, a company having gross margins of 70%+ (as SaaS companies should have), will have more money, as a percent of revenue, to dedicate to acquiring new customers.

In the context of the lifetime value (LTV) of a customer, a company with 90% gross margins has a much more valuable customer than a company with 70% gross margin (or a lower gross margin, as is often the case).

When talking about SaaS CAC to LTV, it’s actually better stated as CAC to the LTV gross margin. The idea for the ratio is how efficiently customers are acquired. Well, companies with very different gross margins shouldn’t be comparing their CAC to LTV ratios. Rather, CAC to LTV gross margin ratio would be a better comparison.

The next time you’re talking about the lifetime value of a customer, talk about the gross margin of the lifetime value of a customer.

What else? What are some more thoughts on incorporating gross margin into the lifetime value of a customer?