As the SaaS (Software as a Service) niche gets increasingly popular and crowded, players are looking for ways to shore up their positions in the market.
This competition might make things harder for traditional software businesses yet to move into the recurring billing niche. A recent report by research firm Gartner predicts that by 2020, more than 80% of them will be moving to a SaaS subscription-based business model in pursuit of profit and growth.
A study out of California State University found that growing too fast, though, can have negative long-term consequences for a business. The study looked at 2,000 public companies and found that those with the fastest revenue growth performed worse in terms of share price than their slower-growing counterparts.
Growing too fast is just one of the ways SaaS businesses can hurt themselves in the long run. Instead of ramping up to compete in the expanding market, now may actually be the time to reexamine your sales strategy.
It’s no secret that having an effective sales strategy is the key to success, but there are a number of mistakes SaaS businesses might not know they’re making that can have a major impact on their bottom line. Here are six common sales mistakes SaaS companies make:
1. Going into growth mode too quickly
Once a product is built, businesses often want to move quickly to hire salespeople. However, before you ramp up sales, you want to make sure you have a stable customer base. In the very early stages, the best growth channel for your product are the people who built it—the founders.
Founders often need to be the first VP of sales, even if they are not comfortable with the role.
These founding members of the business are the product evangelists—people who believe in the product and understand what it’s all about. They should be able to sell the product before bringing in outsiders.
Additionally, if you get early traction, you might think it’s a good time to scale revenue. However, jumping too quickly into revenue growth when you’re not ready can hurt your business. You need a repeatable and predictable sales model before you expand the sales team.
Even when you’re ready to hire salespeople, it’s important to start small. Businesses can run into issues if they hire too many sales staff early on, only to have to lay them off due to poor sales. This is worth avoiding; a 2018 report published in the Journal of Marketing found that downsizing the sales team leads to increased investor uncertainty.
2. Hiring the wrong salespeople
When you’re ready to ramp up revenue, the obvious first step may seem to be hiring a vice president of sales. This is a common mistake. It’s actually a better idea to start by hiring sales representatives. You don’t need a VP of sales in the early stages of growth. Instead, you need a few talented and passionate salespeople.
Hire staff with a mix of sales and entrepreneurial experience. Candidates with the most sales experience might seem attractive, but they may also come with baggage that is counter-productive to the learn-and-grow approach needed during the early days of a business.
The founder at one fast-growing SaaS company discovered that recent grads often outperformed sales pros with 10-15 years of experience.
It’s also important to examine your market when choosing sales staff. Your hiring criteria will depend on the kind of solution you’re selling.
If you’re operating in an existing or well-established market, experienced sales people will have the most value. However, if you’re operating in a new category, you need staff who can listen to what potential customers are looking for and provide guidance to your product development team.
3. Having a sales compensation plan that creates churn
In 2007, software developer HubSpot was steadily growing its customer base after hiring 15 salespeople. That year, they grew from 50 to 1,000 customers. However, in 2008. they noticed problems with retention; the business’s monthly churn rate was 8%.
HubSpot soon discovered the problem was with its sales compensation plan. The plan worked to motivate sales staff to bring in new customers, which accounted for the rapid growth. However, it provided little incentive for retention.
Whether it’s for your business or themselves, sales representatives are driven by their compensation plans. For this reason, they’re often referred to as “coin-operated”.
Make sure your compensation plan provides staff with incentives to not just obtain customers, but also keep them long-term. If there is not enough “coin” for retaining customers, your salespeople might not make this a priority.
4. Setting unrealistic quotas
In 2018, SaaS leader Salesforce released a report looking at future trends in sales. According to the report, 57% of sales professionals expected to miss their quotas for the year.
Salesforce identified a number of reasons why sales quotas weren’t being met, and one of the main reasons was that many businesses weren't setting realistic quotas. Setting realistic quotas can be a balancing act. Unrealistic expectations can quickly lead to sales staff burnout, so quotas should be based on past performance—but top sellers shouldn’t be penalized for not demonstrating exponential growth.
Quotas should always be reasonably obtainable to motivate staff who might be struggling. If a quota seems out of reach, sales representatives may become disengaged. For this reason, it’s also important for businesses to be transparent about how their quotas are determined.
Explaining your rationale to employees will generate more buy-in. It’s also important to let staff know about quota changes as soon as possible. According to Salesforce, 30% of companies do not have sales quotas ready at the beginning of the year.
5.Failing to track sales metrics
Metrics can tell SaaS businesses a lot about themselves.
If you’re not tracking sales productivity and sales pipeline metrics, it's impossible to know which elements of your sales strategy are working and which aren’t.
Whether you’re a startup or a well-established business, it’s never too early or late to start tracking metrics and using data to monitor and evaluate your operation.
According to a report by SaaS Capital, revenue growth is the most important metric for valuing a SaaS company, but other metrics can be beneficial as well. Here are a few you should be tracking:
Sales productivity measures
- Percentage of time spent on selling activities
- Percentage of time spent on manual data entry
- Percentage of time spent creating content
- Percentage of marketing collateral used by salespeople
- Average number of sales tools used daily
- Percentage of high-quality leads followed up
- Average length of sales cycle
- Average contract value
- Win rate
- Conversion rate by sales funnel stage
Use these metrics and more to make informed decisions about your sales strategy.
6. Not following up with prospects
According to a report by HubSpot, 38% of sales representatives believe that earning a response from leads is becoming increasingly difficult. That’s likely because research shows it can take sales representatives multiple follow-up attempts to close a deal with prospective customers.
Cloud computing business Velocify analyzed 3.5 million leads to determine the best strategy for increasing sales conversions. According to the report, time is of the essence:
Placing a phone call to a new prospect within a minute of lead generation can increase the likelihood of conversion by nearly 400%.
If you don’t succeed on the first try, the report indicates multiple follow-up attempts are necessary. According to Velocify, 75% of online buyers want to receive between two to four phone calls before a company gives up. However, completing a sale can take even longer. Velocify found that 93% of converted leads are contacted by the sixth call attempt.
As you build a strong sales team, there will be much learning and discovery in the interactions between your business and its customers.
A great sales team should know:
- who are the highest-value customers
- the pain points of these customers, and how to solve them with the product
- how to sell to their high-value customers by focusing on value
- the metrics to measure and improve on their successes
As a customer base grows and matures, so does the product and the processes involved in making and selling the product. It is important for SaaS companies to focus on organizing the sales team to learn as they grow.