What I Learned from David Skok’s Interview on SaaStr

What I learned from David Skok's Interview on SaaStr

What I Learned from David Skok’s Interview on SaaStr

There is always more to learn in the world of SaaS, and David Skok’s interview on SaaStr was full of practical and actionable information.  SaaS is moving to a data-driven world, and you have to know your numbers more than ever.  Not just your financials, but your SaaS metrics and economics.

For those who did not catch part one and two of the interview, here are some takeaways that I felt were important to share.

Board Meetings – No Excuses

When you are facing the heat in a board meeting for missed sales targets, you have got to understand the root cause.  As David states, missed goals can’t be blamed on politics or seasonality or some other macro influence.  Bad companies are not sure why they missed targets and offer general excuses.

Good companies will break down the specific reasons why they missed.  For example, they might offer regional variances in their bookings (west was stronger than east) or the productivity ramp up for the new hire sales reps was slower than planned, or the close rate conversion percentage changed due to a new competitor.

Bottom line, you have to work backwards from your missed goal to determine what was the root cause of the miss.  Something that you can measure and take action on.

Metrics are a Hierarchy

There are four high-level metrics to monitor: Profit, Cash, Growth, and Market Share.  If you are missing targets in one of these key areas, you need to drill down to underlying SaaS metric or metrics that might be causing the miss.

For example, if you missed sales targets, you need to drill down to funnel metrics, lead velocity, and/or sales conversion ratios to truly understand your performance.

Bottom line, you have to peel back your financial statements to find the correlated SaaS metric that sheds light on one of your high-level metrics.  My previous post walks you through the SaaS P&L.

Do you have a Good SaaS Business Model?

When evaluating if a SaaS business is a good performer, David breaks down the fundamental unit economics.  For example, he looks at CAC, LTV, the CAC to LTV ratio, and the CAC Payback Period.

He believes that 12 to 18 months is the ideal CAC payback period.  Up to 20 to 22 months may be ok, but over 24 months is a red flag.  If you have long CAC payback periods, understanding churn’s impact is much more important.

Sales Rep Productivity

This was a great gem of insight from David as customer acquisition costs are so important to a SaaS company.  David states that good companies have sales reps who can bring in 5X ARR over their compensation.

For example, if a sales rep earns 50K in base in and 50K in commissions for a total of 100K in compensation, the sales rep should bring in 500K off ARR to the company.  That is the target to strive for.

He’s seen some companies get to as high as 8x to 11x, but there is some sort of viral network effect that assists in reaching these levels.

ACV (Annual Contract Value) is the Focus

David wants to know the following ACV metrics each month from his companies.

  • Signed new customers – Lost customers + Expansion revenue = Net ARR
  • This is the cornerstone graph management should use to run their business.
  • With Net ARR, you can really understand whether founders are hitting their bookings numbers.
Net ACV Chart
The Cornerstone Chart for Founders

SaaS companies like to show the trending ARR number, but…

  • David looks at the ARR growth rate.  If you can draw a straight line through the slope of the chart, growth is not changing and that could be a problem.
  • He uses a different bookings chart which shows the sequential quarter-over-quarter growth in bookings.

If this QOQ comparison is flat, then the SaaS company hasn’t figured out a repeatable way to grow customers, hasn’t added sales capacity, and/or increased lead flow or they have a broken sales funnel and don’t know how to scale the funnel.

Net ACV Bookings by Quarter
Founders usually present ARR like the chart above, but…
Quarter over Quarter Bookings Chart
David Skok likes to frame bookings growth like this chart.

Three Phases of a Startup

Look at a SaaS startup in three phases.

  • Phase 1 is product/market fit.
    • Don’t grow your sales funnel too aggressively until you know have good fit.
  • Phase 2 is building a repeatable, scalable, and profitable sales machine.
    • Do I know how to increase leads to grow funnel, do I know how to add sales people and help them reach productivity.  If bookings are growing nicely, the founders have figured this out.
  • Phase 3 is hitting the gas pedal.
    • Once you know your process is scalable and repeatable and profitable, you should hit the gas pedal and invest as much cash as you can, because you have a cash machine provided that your LTV to CAC and other metrics are aligned.

Common Mistakes

Mistake 1 – still searching for repeatable process and try to throw more sales people at the process and increase cash burn rate.  Much more complicated with more people trying to figure out the sales process.

Mistake 2 – Phase 2 has been achieved and don’t realize that they are ready to invest aggressively in sales.

What is a Pricing Axis?

If you have a single product and single price point, you must add one or more variable pricing axes to continue to drive growth.  A good SaaS product will have at least one variable pricing axis and possibly more.  This does not just mean more seats, because you could be delivering more value despite seats remaining the same.

For example, Hubspot’s variable pricing axis is leads and Dropbox is storage.  Don’t worry about this yet if you are in the early phase of startup.  You should be more focused on adding customers.

Other pricing examples could be segmenting the product into pro and enterprise versions and/or add-on products like reporting.  Mature SaaS companies find themselves breaking their product into modules so can they satisfy customers on different ends of the pricing spectrum.

Customization is NOT Scalable

David believes that customization is very dangerous.  If you can productize the customization, then that’s great.

Customization is not ideal, because you must use a human element to customize the product.  If you can create a product where the user can configure it themselves, that’s ok and scalable.  Or you can find a channel partner to add this customization service, but then you must spend time growing that channel and your growth could slow if you rely on that channel.

Separate Customer Success and Sales

Customer success managers should create and maintain highly trusted relationships with your customers and shouldn’t ask for money or risk damaging the relationship.  Customer success should not ask for the renewal or upsell.  You can get them to want the upsell but then hand off the deal to sales.

Customer Champion

Harry asks, should you be focused on a customer champion? Absolutely.  Related to this, he believes there are two important predictors of churn.  First, after they have bought the product and you successfully on board, you have a great customer.  If you don’t successfully on board and try to fix the customer’s problems at the time of renewal, you’re at high risk for losing that customer.

Implement a scoring system at the end of the on boarding period to get the customer involved in how well you made them successful and get them happy if not.

If the customer champion leaves and product is not sticky, then this is a huge predictor of churn.

Quick Fire

Excited about Artificial Intelligence.

In hindsight, it is so crucial to build a great management team.

Top Sales Funnel Mistake – most mistakes are made in the last 2 phases of a startup.  In the third phase, companies are not aggressive enough in building a sales recruiting machine.  They are not hiring when they should be investing, because they have found a repeatable and profitable sales process.

Conclusion

Wow, a wealth of information in this podcast!  This was a great interview by Harry Stebbings and a “must listen to” SaaS podcast.  I’m sure there is a nugget of wisdom that will help even the most experienced SaaS veteran.

It’s great that the SaaS community is so willing to share resources and insight, so that we can all improve our understanding of the SaaS business model.

What other insights did you gain from this podcast?  Please post your comments below.

Leave a Reply