SaaS Enemy #1: Churn

At time we sold Pardot several years ago, our monthly gross churn was 1.4%. On an annualized basis, it was roughly an 80% renewal rate. Back then, we had next to no upselling of customers due to a poor pricing model (it was subsequently changed), resulting in a net renewal rate (upsells less downgrades and cancels) that was essentially the same as the gross renewal rate.

With a growth rate of 100% year over year, we weren’t concerned with plateauing where new customer signings are negated by customer churn resulting in a no-growth business (general ballpark, depending on a number of factors, is that the growth rate goes down 20% per year e.g. 100% year one, 80% year two, 60% year three, etc.). Only, without a much better net renewal rate, ideally over 100%, it was clear that in the next few years the customer base would get so large, and the new customer signings larger, but not large enough, that the business would no longer grow.

Customer churn is the #1 enemy of SaaS startups.

So much shine wears off a startup when it isn’t growing fast, and the fastest way to ensure that it keeps growing, is to not have any churn (nearly impossible save for software to large, enterprise customers), or low churn plus upsell, resulting in growth even if no new customers are signed. Everything from custom professional services to great customer support to heavy qualification of the potential customer before they’ve signed should be employed to ensure the highest probability of customer success, and thus the greatest chance of being a customer for life.

Churn is part of the SaaS experience, but everything possible should be done to minimize it and maximize the chance for net negative churn.

What else? What are some more thoughts on churn as the #1 enemy of SaaS startups?

How an Employee Stole $50,000 from Pardot

One of the more challenging stories I haven’t told is how an employee stole $50,000 from us at Pardot back in 2012. At the time, we had this great receptionist that was thoughtful, attentive, and a great culture fit. We were running a program where if a customer referred a prospect to us that did a demo, we rewarded the customer with a $100 Amazon.com gift card. To make it more personal, we’d physically mail the gift card to the customer with a handwritten thank you note.

The program had been running a couple months and was growing in success. To take some load off the sales reps that were doing it, we had everything go through the receptionist. Now, things were humming and the receptionist was ordering a number of Amazon.com gift cards on a regular basis, yet we weren’t tracking who requested what and how much was being spent on these gift cards (mistake #1).

The receptionist, being nefarious, tried adding a couple extra gift cards to an order to see if anyone would notice. Nope, no one noticed.

Next, the receptionist figured out that because we were constantly exceeding our Amex credit limit (fast growing company!) we were now paying the credit card bill twice a month such that there was a two week window from when you could put items on the Amex and someone would check the online statement (mistake #2).

Finally, it was time for the big move by the receptionist: max out the credit card with gift cards right before it was about to paid off, wait until he heard accounting made a payment on it, and then go for the kill. Being the receptionist, he took delivery of all the Amazon.com packages daily, so he decided to order a number of expensive personal items, and more gift cards with next day deliver. The very next day, several packages arrived for him and he promptly took them to his car and left calling in with a fake family emergency. We never saw him again.

After putting the pieces together, including analyzing the Amazon.com purchases, the receptionist had stolen $50,000 from Pardot. Naturally, we called the police to report him but there was no interest in pursuing a non-violent white collar crime. He got away free and clear.

As an entrepreneur, this is one of those bummer moments that’s a good learning experience. We didn’t see it coming and we made sure it wouldn’t happen again. In the end, we moved on and it turned out to be a small event in the overall story.

When it comes to money and situations like this, put in some basic processes and controls — don’t make the same mistake we did.

Excellent Meetings and Communications Recommendations from Tesla

An internal Tesla memo from Elon Musk on Tesla Model 3 Production was just leaked to the public. In it, there’s an excellent section on productivity, specifically around meetings and communications. From the memo:

– Excessive meetings are the blight of big companies and almost always get worse over time. Please get of all large meetings, unless you’re certain they are providing value to the whole audience, in which case keep them very short.

– Also get rid of frequent meetings, unless you are dealing with an extremely urgent matter. Meeting frequency should drop rapidly once the urgent matter is resolved.

– Walk out of a meeting or drop off a call as soon as it is obvious you aren’t adding value. It is not rude to leave, it is rude to make someone stay and waste their time.

– Don’t use acronyms or nonsense words for objects, software or processes at Tesla. In general, anything that requires an explanation inhibits communication. We don’t want people to have to memorize a glossary just to function at Tesla.

– Communication should travel via the shortest path necessary to get the job done, not through the “chain of command”. Any manager who attempts to enforce chain of command communication will soon find themselves working elsewhere.

– A major source of issues is poor communication between depts. The way to solve this is allow free flow of information between all levels. If, in order to get something done between depts, an individual contributor has to talk to their manager, who talks to a director, who talks to a VP, who talks to another VP, who talks to a director, who talks to a manager, who talks to someone doing the actual work, then super dumb things will happen. It must be ok for people to talk directly and just make the right thing happen.

– In general, always pick common sense as your guide. If following a “company rule” is obviously ridiculous in a particular situation, such that it would make for a great Dilbert cartoon, then the rule should change.

When Customer Expansion Outpaces Churn

One of the holy grails of successful SaaS businesses is having the expansion of existing customers outweigh customer churn. Meaning, if the business didn’t sign any new customers in a year, the upgrades from existing customers would be more money than the lost revenue from customers that leave, resulting in growth for the company. A business that doesn’t have to sell anything new, but still grows, is in an enviable position.

Here are a few benefits when customer expansion outpaces churn:

  • More Money to Acquire Customers – When customers regularly grow their account, more money can be spent to acquire the initial account, providing additional options for customer acquisition.
  • Faster Growth Rates – The law of large numbers starts to kick in making it hard to grow fast at greater scale. When customer expansion is more than churn, it makes it easier to grow faster as there’s a built-in growth engine.
  • Raising Money – Investors look for unit economics that show the fundamentals of the business are strong, and excellent customer expansion, along with customer renewals, and gross margins are three of the most important metrics making it easier to raise money.

Customer expansion outpacing customer churn is the hallmark of a successful SaaS company.

What else? What are some more thoughts on the importance of customer expansion being larger than customer churn?

Talkative Tuesdays – Tuesdays as the Meeting Day

Back in the Pardot days, we’d hold most of our important weekly meetings on Mondays. This included the weekly tactical, weekly all-hands, and weekly company lunch. Timing wise, it worked well to start the week by aligning the leadership team and breaking bread with the entire company.

Only, Mondays proved a challenge for several reasons. First, holidays frequently fall on Mondays, disrupting the flow of the most important meetings (should we skip those weekly meetings or move them to Tuesday?). Second, Mondays are a great day to build momentum and set a pace for the week, but if 2-3 hours are spent in meetings, it’s hard to make as much progress. Third, Monday is a popular day for employees to take vacation as part of a long weekend. Finally, and most importantly, Mondays, especially Monday mornings, people haven’t had much time to get in the groove for the week and prepare for the meetings.

Now, I’ve found that Tuesdays are the go to day for the weekly meetings and know several successful startups that run all their meetings on Tuesday. It’s still early enough in the week to get everyone aligned, yet doesn’t have the holiday and three-day weekend issues. Plus the work week is in full effect.

Call it Talkative Tuesdays — the meeting heavy day of the week.

What else? What are some more thoughts on making Tuesday the day for weekly meetings instead of Mondays?

$136,000 Median SaaS Revenue Per Employee

Once the startup begins scaling, leaders from each team start asking for more resources (e.g. we just signed 10 more customers, let’s hire another person to do ‘X’). Only, outside the budget, it’s difficult to assess the overall efficiency. One of the best metrics to track efficiency is revenue per employee.

According to the 2016 Pacific Crest SaaS Company Survey Benchmarks, the median SaaS revenue per employee is $136,000:

Over time, the revenue per employee changes as the startup scales from pre-revenue through to seed stage and beyond. Each milestone often has a higher revenue per employee with ones at the expansion stage typically having $200,000 or more in revenue per employee.

Entrepreneurs would do well to track their own revenue per employee and benchmark it against other startups of similar size and scale.

What else? What are some more thoughts on using revenue per employee to evaluate the efficiency of the startup?

Accountability in a Startup

As the startup grows from a small group of co-founders to the first early employees and beyond, organizational accountability needs to scale as well. Co-founders, talking so frequently and being self-starters, often mind-meld on a daily basis and don’t need as much structure. Only, that doesn’t scale.

Here are a few ideas for accountability in a startup:

Accountability in a startup takes work. Make it a system with the right rhythm, data, and priorities.

What else? What are some more thoughts on accountability in a startup?