S&M vs. R&D: Where does your company stack up?

Perhaps the biggest decisions C-level executives make is resource allocation:

• Should I double down on hiring more Account Executives?

• Should we invest in hiring more top-tier PMs to guide product development?

• What are the cost implications of migrating our backend to H-Base/AWS? 

• Does sales really need $350k for SPIFFs next quarter?

Therefore, let's create some guide wires with the data that's publicly available to understand how Sales & Marketing costs typically compare to Research & Development costs:

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Source: Tomasz Tunguz

Notice the spike in the S&M-R&D ratio in year two: this is usually the result of the founding pair hiring some sales muscle once they've established product fit, sometimes prematurely. You can use this chart to benchmark your levels of relative investment over time.

But publicly-available 10-Ks and S-1s have a misleading quality to them: they bundle very big things into bigger things. Therefore, I've injected six line items in blue to help you isolate the following costs relative to median revenue:

1. S&M Investment

2. Sales-Only Investment

3. R&D Investment

Based on the data, marketing is typically 19-22% of revenue, so I've unbundled the above numbers to show just the 'S' in S&M. The critical achievement here really starts in year 3-4 when the successful companies start to focus on driving sales efficiency per rep thereby eventually reducing Sales:Revenue from ~50% to 30-35% in year 7-8. 

The most underrated growth strategy in tech/SaaS

By now most executives have heard of the Net Promoter Score system, aka the #1 litmus test for customer loyalty: "On a scale of 1-10 how likely are you to recommend [your company] to a friend or colleague?"

As we've written about in past DBT blog posts, the NPS responses tell you a lot. . .

Starting from the left in red:

Detractors (0-6) borderline hate you. As unhappy customers the don't say nice things about you at cocktail parties or conferences, and they certainly wouldn't recommend your company or product.

Passives (7-8) are on the fence. They are the swing states of the NPS electorate.

Promoters (9-10) fucking love you. They'd hand out your goddamn business card at the mere mention of your company. Recall, when you asked them "How likely are you to recommend us?" they said 9! or 10! Promoters are super stoked about what you're up to.

So what is the most underrated growth strategy in tech/SaaS?

To illustrate—and as a bit of a teaser—here is how the NPS thing works at most tech/SaaS companies.

• Company: "Dear [first name], How likely are you to recommend our product to a friend or colleague?"

• Customer: 9 !!! You guys rock !!! My whole team LOVES your product.

• Company: [canned response] Thank you for your feedback.

• Company: [awkward silence]

• Company: [awkward silence]

• Company: [random marketing update]

• Company: [six months later]: "Dear [first name], How likely are you to recommend our product to a friend or colleague?"

• Customer: 10 !!! It's even better than last time. Honestly, I consider you family. Well done.

• Company: [canned response] Thank you for your feedback.

• Company: [awkward silence]

• Company: [awkward silence]

Meanwhile at the Company's quarterly leadership offsite. . .

Chief Revenue Officer: "Thank you all for coming to this quasi-swanky venue today. We are here—as a leadership team—to figure out our growth challenges and brainstorm how we can grow revenue faster and hit our goals for 2017. I assume you all read the pre-read [blank stares] so we'll go right into the ideation phase. Who wants to go first?"

• VP Marketing: "What if we did more EVENTS! Like real enterprise caliber events?"

• VP Sales: "Pipeline generation is weak. We need more support in late stage deals."

• VP Success: "We could hire more CSMs and Support reps to help customers drive more value."

• VP Monetization: "We could rethink our pricing and packaging. . ."

• Everyone: "Haven't we tried that like 3 times already?"

• VP Monetization: "Or, I mean, Product could build new features that customers really want."

• VP Product: "I think everyone's shared some great ideas today. I'll have the PMs incorporate all of this at our next release planning."

• VP Engineering: "I mean, can't the sales people just close more deals? Sorry, why am I here again?"

Chief Revenue Officer: "Thank you—all of you—for the very, very good ideas. Growing revenue is challenging, especially during times like these [strong eye contact with VP Sales]. We just need to roll up our sleeves and get to work."

• EA who's at the offsite for the sheer purpose of keeping track of time and taking notes: [brazenly] "What if. . . we asked our happy customers. . . to introduce us to people they know. . . who might consider buying from us?"

• CFO: [looks up from his computer for the first time in 1.5 hours] "Go on. . ."

• EA: "Well, we've been doing our NPS survey for 4 years now and some of our customers are actually quite happy and gave us a 9 or 10 when we asked them would you recommend us to a friend or colleague. . ."

• CFO: [eyebrows raised] "Are you suggesting that we ask happy customers if they'd recommend us to a friend or colleague?"

• EA: [looks around] 

• EA: [brazenly] "Yes."

[10 seconds of silence that feels like 10 minutes to the EA]

• Everyone: ". . .That's AMAZING! Holy smokes. It's SO OBVIOUS—why didn't we think of that? We could ask promoters to recommend us to a friend or colleague! I mean, that's the question in the NPS survey, right? Haha, it makes SO MUCH SENSE."

EA be like:

 So what is the most underrated growth strategy in tech/SaaS? You betcha. Customer referrals. Specifically, referrals from promoters (assuming you use NPS), or overall happy customers (if you don't use NPS).

Why are referrals so valuable?

• 1-2x higher close rates

• Shorter deal cycles (20-50% depending on complexity)

• Lower customer acquisition cost (CAC) due to lesser marketing spend / nurturing

• Higher retention (customers that were introduced from a friend/colleague are more likely to stick around)

• More referrals: customers that were introduced via referral/promoter are 2x more likely to provide additional referrals—so the whole strategy can grow exponentially if you really get behind it

That's it really. At DBT we've witnessed several tech/SaaS companies make the grave mistake of clinging to what they know: hire enterprise AEs, hire more AEs, close deals, pay generous commissions, grow revenue, attract more investors, start thinking about retention when it dips, freak out when it dips more, hire more Customer Success people, "take a step back", think market share, craft go-forward strategy, growth decelerates, freak out, schedule leadership offsite for the Company.

If you want to equip your team on how to become dangerous with referrals, check this out:

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Click here to download the whole PDF

We hope you find this resource helpful to empower your account teams to have more effective conversations with your happy customers to ultimately generate more leads the close quicker and more often to ultimately drive revenue to the heights of your ambitions.

Want to blow up your SaaS business? Ignore C4.

Story Highlights:

• There are MANY SaaS metrics to consider these days. Today we will review "C4"—which includes CLV, CAC, CRC, and Churn—and explain why they matter to a SaaS subscription revenue model.

• Any one of the C4 elements can blow up a business.

• Therefore, we must have a deep understanding of C4, how each element is calculated, and what we can do to manage and improve them.

Want to confuse your board along with all your employees? Start by showing them the below table of 59 different SaaS metrics.

These days, SaaS metrics are abundant if not overgrown. Similar to the investment industry, you can go down the metric rabbit-hole pretty quickly before you realize, "Wait a minute, what are we actually trying to accomplish here?"

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But there are four key metrics that rule them all. You guessed it: C4. What is C4? 

This explosive composite combines four vital SaaS diagnostics:

1. CLV: Customer Lifetime Value

2. CAC: Customer Acquisition Cost

3. CRC: Customer Retention Cost

4. Churn

Churn—which typically garners most of the limelight—is the most cancerous, yet easiest to calculate. Churn is typically expressed as either a dollar figure or a percentage of revenue over a certain time period.

For example, let's say a SaaS startup has $1MM in monthly recurring revenue (MRR). Last month, a customer paying $10k/mo churned. Therefore, churn could be expressed as:

• $10,000 MRR

• Gross churn = 1%

Simple enough, right?

Churn is insidious, even maddening at times. But once properly understood and effectively managed, churn can materially improve how your run your business. The key is to treat every churned customers as an archeologist might approach a dig. The good stuff is down below, and you'll have to institute a process to have these conversations, diagnose root cause, and ultimately arrive at a LEARNING that will improve how you do business.

For example, you will likely lose a customer for product reasons. Perhaps you lacked the feature, functionality or performance they seek. This information MUST reach the ears of the Product and Engineering teams so that they can prioritize such items in their release planning.

Is there anything worst than a churned customer? Yes: when you fail to learn something as a business. That, in other words, is the greatest disservice of all.