The most important thing you can do for your SaaS company when you’re starting out is to lay down solid foundations for success. This means not only having a thorough understanding of SaaS sales cycles, models, and metrics, but also knowing how to apply that knowledge in a manner that fosters a state of growth for your startup. It can be time-consuming and confusing – but having a detailed roadmap to follow can save a ton of headaches further down the track.
You’ll never have as much time as you do right now to learn, strategize, and plan ahead for the future of your business.
The SaaS Sales Cycle
SaaS sales cycles vary and are affected by a number of factors, such as product price, target customers, and even product complexity. Based on your product – is your sales process likely to be self-service, low touch, or high touch? How long will it take you to acquire a customer? What will your average deal size be?
These are only a handful of the questions you need to ask yourself when you’re figuring out what your SaaS sales cycle will look like.
Will you have a free trial?
If so, this will be likely to extend your sales cycle by anything from 7 to 30 days, and possibly beyond that. It’s important to keep this in mind, as free trials are often overlooked when the SaaS sales cycle is being calculated.
Is your SaaS product complex or expensive?
If your product requires in-person demos and a lot of back-and-forth communication to demonstrate the value and benefits to your customers, such as an enterprise software, your sales cycle is naturally going to be longer. Likewise, if your product seems expensive compared to the competition, a lot more work will be needed on the sales and marketing side to get buy-in from your prospects.
Are you looking at securing enterprise customers?
Closing big-ticket enterprise SaaS sales can be extremely lengthy and complicated. These deals tend to involve numerous people at different levels and can take months to complete. There’s always a risk that the deals will fall through, even at the final stages, which you need to take into account. On the upside – getting enterprise customers on board can give your startup a huge advantage!
Make sure your sales cycle is realistic and that the goals and commissions you set for your B2B SaaS sales reps based on your calculations are achievable.
SaaS Sales Compensation Models and Commission Rates
Commission rates for SaaS sales are paid to your sales reps with compensation models structured just as they would be in any other industry – when a rep closes a deal with a new customer, renews an account, or upgrades a user to a higher tier plan.
Payments for SaaS sales are made based on metrics such as your monthly recurring revenue and deal sizes, so it’s important to think carefully about structuring compensation plans that will work for your particular business.
With SaaS sales models, there are a few different ways you can structure payment of your commission to keep your cash flow steady and cover the base salaries of your sales reps.
Whichever SaaS sales compensation model you decide is right for you, it should be simple for your B2B SaaS sales reps to understand, and motivating enough to drive them toward getting the best results for themselves – and ultimately for your business.
Delaying commission payments
As you’re reliant on the subscription model to grow your business, you might want to delay commission payouts in the event of customers cancelling their subscriptions early or failing to make payments.
You might even consider a longer-term delay until your reps have sold enough to cover their arranged base salary. This protects you from customers that churn out and ensures you’re not paying out more than you can afford at an early stage.
A recent survey showed that only 28% of SaaS companies used deferred payments, with the majority preferring to pay up front.
This is where the amount of commission paid to your sales reps grows as they close more deals. For example, if they meet a first-tier sales target (a low figure that most sales rep can achieve) their commission rate might be 2%. The next tier might pay them 5%, and so on.
This structure is designed to reward your best salespeople – as they are going to be some of the key drivers of profit for your company.
Hubspot gives their top performing reps access to the prestigious Presidents Club getaway to incentivize and thank them for their achievement.
Types of SaaS Sales Models
The main SaaS sales models are simple to understand, and fairly self-explanatory. Having said that – getting the right sales model for your product can be a make-or-break deal in the startup phase.
Ideal for low priced items and software that’s easily understood and adopted by new users, and if you’re expecting a high volume of subscriptions. Think Dropbox, Spotify, and Slack.
Customers sign themselves up on your website for a plan of their choosing, and use content resources or reach out to customer support if they need help. There’s typically no involvement by a sales team. Free trials and freemium models are commonplace with this kind of SaaS sales model.
For higher priced or more complex items, new customers want to know the company is trustworthy and reliable – with support on hand when they need it.
Sales reps need to show up in person or on the phone to show demos, give trainings, and go through any customized plans or setups to ensure that new users see the full value in subscribing to the product.
As this SaaS sales model involves a larger investment, the service needs to be more personalized and the sales cycle is typically longer.
If you have a top-tier SaaS product with a price to match (or a product that is extremely complicated to implement and has a steep learning curve), you’ll need a sales team that’s highly skilled at pitching and closing deals within a demanding corporate environment. You’ll be selling a lower volume of subscriptions at an exponentially higher price than the previous two models.
The success of enterprise sales relies on your team and their ability to understand and explain your product down to the tiniest nuance in order to sell these high-ticket packages to big brands and large companies.
This SaaS sales cycle can be complex and drawn out over many months from the time a new lead is acquired to the point of closing the deal.
5 Key SaaS Sales Metrics
Sales metrics will become something you eat, sleep, and breathe as a SaaS founder.
Tracking the right ones will steer you on a course for sustainable growth, but focusing on vanity metrics that don’t mean a lot in terms of your marketing and ROI can waste a lot of your time and budget.
These are the SaaS sales metrics you’ll be seeing a lot of:
1. Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is a measure of predictable subscription income for each month. It’s one of the most important metrics for a SaaS business to track in terms of measuring growth.
Calculating MRR is fairly straightforward. Sum up your monthly subscription revenue for any given month to arrive at your monthly recurring revenue.
For example: If your subscription service costs $100 per month, and you have 100 customers, your MRR is $100 x 100 = $10,000.
2. Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is similar to MRR in that it takes into account the value of recurring subscriptions over a 12-month period. It’s typically used when the majority of the subscriptions in a business are annual or multi-years in length.
To calculate ARR, simply multiply your MRR by 12 for one year, or multiples of 12, if you want more than a year.
For example: If your subscription service costs $100 per month, and you have 100 customers, your MRR is $100 x 100 = $10,000. Your ARR would be MRR x 12 (or $10,000) = $120,000.
3. Churn Rate
Churn rate looks at the number of subscribers who cancel their accounts or don’t renew them over a given time, usually monthly.
Calculating churn rate goes something like this: If your total monthly recurring revenue is $10,000, and during that same month you churn out $1,000 worth of contracts, the churn rate would be MRR churn / MRR for that period, or $1,000 / $10,000 = 10% churn rate.
Churn rate is one of the metrics that SaaS companies obsess over, as it’s tied to customer acquisition cost. If a customer churns before a company has made back the money it cost to sign them up, then it means the business will lose money. The relationship between this metric and the long-term sustainability of a SaaS company is exactly why so many startups go to great lengths to reduce churn rate and keep it as low as possible.
4. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is one of the top key performance indicators, and increasing the efficiency of your CAC is one of the best ways to increase the profitability of your SaaS company. It takes into account the total cost of signing up one new customer.
You need to think about all the resources you put into an acquisition such as sales, marketing, and advertising in order to calculate CAC accurately.
The customer acquisition cost is calculated by dividing all the costs spent on acquiring more customers (like marketing and sales expenses, research and development, and more) by the number of customers acquired in the month, quarter, or year that the money was spent in.
As a very basic example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC would be $1.00.
Paying attention to your CAC is the best way to gauge how profitable your business is so you can make the correct changes to your marketing and steer your business in the right direction.
5. Net Promoter Score (NPS)
Net Promoter Score (NPS) is a measure of customer experience with your business. It looks at how likely customers are to refer you to other people, and how loyal they are to you as a brand. This metric ties to your growth as a company. If customers aren’t enjoying your product and think you have terrible service, then you can bet they’re not going to recommend you to anyone — which means you have some work to do!
By measuring customer loyalty with your NPS, you can identify weak points in your customer experience that need improvements, but to do this, you need to know how to conduct Net Promoter surveys.
Calculating NPS first involves issuing a consumer survey along these lines:
“On a scale of 0-10, how likely is it that you would recommend us to your friends, family or business associates?”
All scores below 6 are called “detractors,” scores of 6 or 7 are called “passives,” and scores above 7 are called “promoters.”
To calculate your Net Promoter Score, subtract the percentage of detractors from the percentage of promoters. So, if 50% of participants were promoters and 10% were detractors, your NPS would be 40.
Net Promoter Score is important because it gives you insight into your customer loyalty spectrum. As you move up the scoring scale, from 0 to 10, customers defect at lower rates, will spend more, and will move from negative to positive word of mouth.
In summary, there’s a lot to think about as the founder of a SaaS startup. SaaS sales cycles and models, building a top sales team (and paying them what they’re worth), and keeping a close eye on key metrics are all part of the foundational process that will steer your startup to success.
Resource: Joel York. 2016. “SaaS Startup Strategy | Three SaaS Sales Models.” Last modified July 27, 2021. https://chaotic-flow.com/saas-startup-strategy-three-saas-sales-models/ Author-date citation: (Joel York, 2016)