Sales Mistakes that Can Kill Your SaaS Business & How to Avoid Them

He's the author of the best-selling The Sales Acceleration Formula and senior lecturer at Harvard Business School. And she's been the CRO at Castlight Health and COO of OpenDNS. Please welcome Marc Roberge and Michelle Law. Awesome. What a turnout. Thanks for coming out. So, um, Michelle and I are excited to tell everyone about the mistakes we've made over the years. Hopefully you guys can avoid them. I called her 2 weeks ago and I said, "Let's make a list of the 10 mistakes that we've made separately and compare notes." And both of us had the same number 1. Alright, so quick survey for the audience. I'm gonna give you 3 options. It was either sales hiring, premature growth, or sales compensation. How many people think it was sales hiring? That was our number 1. How many people think it was premature growth? How many people think it was sales compensation? I think we got you. It was number 2, premature growth. Alright, so we're gonna actually hit all 3 today, but we're gonna start with premature growth. So Michelle, why don't you take us away? Why was that our number 1?

Yeah, that was our number 1. I think one of the things that I've seen and I've actually experienced is a relatively classic mistake. And that's, you know, I think it's less so today, but I still see it happening. And that's when you're going into growth mode too quickly, which seems funny because the whole point of a startup is to go into growth. What I mean by that is— I'll use an example. There's a company that I'm very familiar with. It's a great set of founders. Developed a product for a problem that they had experienced for a set of customers that they knew about. They got really early revenue traction off that product. They went out, raised a nice round of funding, decided this is the time to really start scaling revenue. They ended up hiring an executive VP of sales, built out the sales and marketing team. 12, 18 months later, revenue wasn't really growing. The sales team started turning over because they weren't selling anything, weren't making money. And that's sort of when the finger-pointing started happening in the company. People were saying salespeople don't know how to sell the product. Salespeople were saying the product's not ready. And it's actually no one's fault. I think it's really a matter of not really understanding what stage they were in and jumping ahead too quickly into revenue growth when they actually weren't ready. And so one of the things that I really look at when I'm in a company is, where are we right now? And there aren't clear delineations between the different phases of a company. You kind of just sort of— it's a little bit of gut feel and it's a little bit of metrics. But it's really important to know where you are because it's gonna depend. You're gonna make a lot of decisions depending on what phase you are. Everything from hiring to the amount of money you're raising. Is it time to bring on a VP? And for me, there's really 3 phases when I think about growth. And the first is really product market fit. And this is where you have a set of founders, a core team that's developing a product to solve a problem in ideally a big market. And you're really looking to see, is this problem really important? And when you initially think you found that, now it's time to go into what I call preparing to scale. And that's a phase where you're looking to see, how am I gonna acquire customers? What's my sales playbook? You're really looking to find a repeatable and ideally predictable sales model before you go out and hire the sales team. Once you've found that, it's a really good time then to say, need my VP of sales, let's go. We're off to the races. One other thing that's super important is that I've always said depending on where you are in your company, there are 2 or 3 things that you need to focus on. Everything else is important but doesn't really matter. There's only 2 or 3 things that will make or break your company at that point in time. And so when you think about where you are as a company, you really, really need to hone in on what those things are to prove out the phase that you're in so that you can get to the next step.

Cool. So I love it, just to close it out with the metrics and how do you understand that. I love it when two people work on a problem separately and come up with the same conclusion. That's really what happened here. This is the way I've thought about it, which you can see the parallels with Michelle. I walk into so many companies and they're like, "This has been great. We've had 8 engineers. We built our product. We now have 20 customers." We're gonna hire 47 salespeople next month. And I'm like, you're gonna lay off 47 salespeople next year. And that's usually how it unfolds. So I really challenge folks, and I wish we thought about this at HubSpot in the early days, to think about customer success, then unit economics, and then growth. And customer success is not 8 people paying for your software. That's not customer success. Customer success is 20, 30, 40 customers who use your software and if I went and talked to them they'd say, "Don't you dare rip this away from me." And I don't care if it costs you $5,000 to acquire those customers that are worth $1,000 to you, who cares? I don't care about the pricing model, I don't care about hiring salespeople, I don't care about your comp plan, I care about making people successful. So I'm looking at things like weekly active usage, MPS of my folks, churn, if you want to put them on monthly pricing models, et cetera. Then once I have that, then we can talk about unit economics. Then we can talk about all the things you'll learn about this week, payback period, LTV to CAC ratios, et cetera. And once I have those two things, great, let's start hiring 2, 3 salespeople a month. So unit economics, then customer success, then unit economics, then growth. All right, so let's move to hiring. I actually— Similar thing, I've seen this messed up so many times. I wrote a case about it that we teach at Harvard now. And so I go out and I tell, I put this in front of venture capitalists, I put it in front of founders, I put it up in front of the MBA students. You're 8 people in a garage with a bunch of engineers building a product. It's going well. You got your 12 friends on it, it's going well. It's time to hire your first salesperson. So who is it? Another survey for you folks. Option number 1, the VP of sales at the big competitor you're trying to disrupt. He's doing $200 million a year, he's got 500 reps, his company's worth $1 billion, and he's like, "You know what? I wanna do something cool, I wanna come to your startup." Option 2, his number 1 rep. The guy's number 1 out of 500 reps selling to the same types of businesses. He's willing to come to your startup. Option number 3 is your buddy who's an entrepreneur. She grew up in Salesforce.com. For 5 years, learned to sell, and she started a company the last 2 years and now she's ready to jump in and help someone out. Option number 4 is a woman not in your industry but on fire in sales. She's been at this company for 8 years. She got promoted to manager in the last year, but she's not in your industry. How many people want option number 1, the big name? Wow. There's no VCs in the room. All right. How many people want option number 2? Best salesperson. How many people want option number 3, the entrepreneur? Ooh. How many want option number 4, the recently promoted sales manager? Smart audience. All right, Michelle, what's your experience there?

So again, it depends on what phase you are in your company's growth. When you're doing product market fit, you as the entrepreneur, you as the technical co-founders, are the sales folks. You know the product. You're coding, you're selling, you're wearing multiple hats, but you are the face of the company and you are actually the company's best salesperson. Every time I meet an entrepreneur and they close a customer, I know it's them. It's the sheer force of will. It's their charisma. It's their belief that they're really solving a problem. They are the best salespeople for them. Once you establish your initial product market fit, that's where, I would say, the controversy comes in. And certainly I've been a victim of that, of saying, we need a VP of sales. But I think when you think about what you're your actual needs are, you don't need a VP of sales in this phase. What you need are a couple of characteristics. You need someone who knows how to sell, obviously, but equally important, knows how to listen, because remember, you're still testing your product market fit. You don't really know how you're going to market just yet. You don't know what the sales playbook is. So you need someone who can wear multiple hats, is less of a sales specialist but more of a generalist who can sell, but also can help you and your company connect the dots both for the product and the customer, for the sales playbook, for the go-to-market, for everything that you're looking to build in order to get to the next area. So for me, what I look for, I would choose between the entrepreneur with sales background and the number one sales rep depending on the type of person, right? And I've actually had both. At OpenES, my first two sales reps were sales reps. I hired them from WebEx. That were young. They had spent about 3 or 4 years at WebEx, number 1 sales reps in their group, but, and that's where they got the great training, but were young enough and cavalier enough to wanna be part of a startup to help build what we needed to build. At Castlight, we actually hired 2 McKinsey consultants because we were trying to develop a new category of products for the benefit leader that didn't exist before. We're talking long sales cycles, 2 to 3 years, and you needed someone who could go in, establish trust with a very conservative buyer, listen to their needs, and then be smart enough to translate that into what product needed to build in order to service those needs. And so I've had both, and I think it really depends on the type of solution. If you're in an existing market with a better mousetrap, you know, I probably tend to go with the sales reps. If you're in a brand new category and you're really doing some missionary sales, that's the time when you need to start thinking out of the box and you need someone who is more consultative sell and who can both sell, but also be that great listener and be sort of that guiding light for your product development team.

Cool. Yeah, I think Michelle was in a little bit of an advantage there in hiring that second option, the salesperson, because she had sales experience, right? I think when you're two engineering-based founders, Bringing in that first salesperson, geez. That guy showed up at Oracle or Salesforce, wherever it was. He went through a month of training, how to handle the top 20 objections. That process is not built.

Yes.

And if you don't have the background in sales, he's gonna do 50 calls and be like, "It's not working." Yeah, no, that's definitely true.

I think if I weren't there, the model and just sort of the initial call script, the initial approach, the initial deck, they would be on their own. And I'm not sure that they would've been able to do that themselves. And so you definitely need someone who can help guide the initial sales reps team. If that's not you and that's not something you want, I would highly recommend hiring somebody who can eventually do that. And to Marc's point, I think, you know, when you have an entrepreneur who's got a sales background, what you're looking for is someone not only to listen and be able to sell for you, but ideally, you know, can actually take on some of that sales management responsibility. One example was I played that role at OpenDesk. I had multiple hats since I was the COO, but I think one of the mistakes that we made there was not hiring a sales manager or director underneath me fast enough. And I fell into the classic, we fell into this classic mistake of we needed a VP of sales from the get-go. We weren't ready for one, nor could we attract the ones that we wanted. But we held out for that, and I had interviewed a director of sales who I thought was a rock star. Like I knew he could get the operations done. He could do the day-to-day management, forecasting, pipeline review. I could focus on other things of the business. We held out for the VP of sales. 2 years, 40 interviews later. That was painful for me 'cause I became the default. I was doing that and I should've been doing other things. So when you think about it, you know, you wanna make sure you're leveraging your talent and where you should spend your time. And when you hire, you're looking for the ability to either find someone who can rise up into that position, or if none of the ones that you hired, you know, have that leadership position, you don't have that leadership management ability to coach them there, then I would highly recommend getting a sales manager or director of sales in there. 'Cause they're easier to find, they're cheaper, and they're gonna take a lot of the day-to-day work off your plate.

[Speaker:JASON M. LEMKIN] Cool. So one of the big takeaways for me too is think about in the early phases of your business, What is more valuable from those first 100 dials you do? Is it the customers and revenue or is it the feedback? And what is the salesperson that's gonna enable that learning and feedback? So let's switch to customer success and churn. I think as we develop our SaaS businesses, we start to recognize that churn is probably the most important metric we've gotta obsess over, highly related to customer success. So let me tell you about how we totally screwed that up at HubSpot in the early days and how we used the comp plan to address it. So this was the comp plan. So if I take you back to the summer of 2007, there were 8 people at the company. I had 2 salespeople. We were doing a couple hundred thousand in revenue. And Halligan was like, "Alright, hire 1 rep a month." So I did for 8 months. 8 months later, it was looking good. We probably were doing $2.5 million at that point. We had 10, 12 reps. But churn was 8% a month. 8% a month. If we're gonna drop an F-bomb, we should drop it right now. It's like, that is not a business. And so what I did was I looked at the customer success reps and I was like, we had a couple of them, and I was like, some of them must be doing something right and some of them must be doing it wrong. So let's look at the churn rate by customer success. Rep. It turned out the churn rate was really similar. So then I redid the analysis by salesperson and gosh, that was where the difference was. Some of the reps had really good churn, others it was really bad. And so let's look at the comp plan. At the time, I paid the reps $500 per customer. We kept it super simple. It was like, there's only one product, it's $250 a month. So we paid them $500 a customer. We had an accelerator. So when you got over your quota, we paid you twice as much. Each customer's $1,000 and they better stick around for 4 months, otherwise you're gonna take your commission back. Really great plan for hunting, for getting from that 100 to 1,000 customers. And so here's what happened. As we looked at it, in the first month of every customer, their churn was nothing. Second month, third month, fourth, nothing. And then boom, month 5. Sales reps work their comp plan. And that can be a good thing as long as we appreciate that. So what I did was I analyzed their churn rate and I showed this analysis to the reps. And you can see down the bottom, the green, that was the average number of customers they brought in per month. So the number one person there from an LTV standpoint was 10.8, the first person, and their churn is 1.6. So if you do the lifetime value analysis on that, of what they were bringing in per month, that's on the y-axis, it was a little under $180,000 that she was bringing in every month. Now these folks down here, they were actually outselling that rep from the legacy ways we look at sales efficiency. 11.7, 12.0, 11.1 customers per month, but churn rate was horrendous. So the lifetime value they were creating was less than a third of that top rep. Totally different way. Of looking at this. I was like, folks, we're gonna start comping you on this stuff. So that's what I did. Sure enough, in that second, the next quarter, I said, those of you who are in the top quartile, I'm now gonna pay you $1,000 a customer. Twice as much. If you're in the second quartile, I'll give you a 50% raise, $750. If you're in the third quartile, no change. If you're in the fourth quartile, you're gonna make half as much. If you wanna leave, there's the door. But we're gonna train you like rock stars to try to bring in really successful customers. And churn dropped by like 70% in 6 months. Sales reps worked their comp plan. Now it got to the point where the churn that was happening after that was for things outside of the control of the salesperson. The product was buggy here and there, like a company went out of business. So I had to redo the plan again to something of like, what does the rep control fully? 100% in their control that is aligned with churn. For our business, it happened to be payment period. I put together a plan that comped them based on getting annual contracts up front, which helped people to be committed to inbound marketing. We didn't have a very low time and effort to value type value prop. These folks need to be committed up front. For our context, it worked really well. Now, should I have just jumped to the 2012 plan? I don't know. I think we needed a bolder plan than that. But regardless, my takeaway here is just, you wanna close it out here, Michelle, for?

The sales compensation is a powerful vehicle to drive customer success. Your comp plan, no kidding folks, like your comp plan, salespeople are smart. They will analyze their comp plan. They know exactly how to make money. And so it's your job to ensure that the comp plan is aligned with what you're trying to drive for the business. And if you put it out there and it's fair, I think you will see success both for the business and both for your sales reps.

Cool. So I wrote a couple articles about this. One's in Harvard Business Review if you wanna check that out. This deck is up on my Twitter feed like 5 minutes ago. Alright, let's close it out on org structure. So now I'm gonna forward fast the clock another 2 years. And we had probably 250 people at the company. And we got large enough that you, you, a lot of you are probably at that stage. You know, you, you start ending up on two floors. It starts to be like a kind of a big company. And we organize ourselves like most organizations. You know, we had those are the marketing people over there and back there is the whole sales team and there's our customer success team over there. And as we grew to this stage, I found that the definition of an ideal customer was changing depending on the group that you were in. Like the marketing team, they're like, "Oh yeah, the people we love to sell to, they're the people that are easy to get to fill out a landing page." Right? The salespeople were like, "Oh yeah, the people that are best for us are the folks that it's easy to get their credit card." And the customer success folks were like, "Oh yeah, it's the people who we can make really successful on our product." Right? Now obviously the customer success folks were most right, but how are we gonna create this alignment in this new world of SaaS where there's a really, there needs to be a really nice handoff from demand gen to sales to customer success, right? So what we essentially did was reorganize the company by our buyer persona. So we destroyed the marketing team, sales team, services team seating, and sat people by small businesses, mid-market, and enterprise. And within those groups, we had representation from marketing, we had a couple dozen salespeople, we had half a dozen customer success folks. And they all were marching to the same order that we as a company were marching to for our business. So it was no longer like, oh, churn's blowing up, it must be the leads or it must be expectation setting. It's like, no, you have everything right there amongst you folks. And there was relationships between the salespeople and the customer success folks. They grab beers together. And the last thing that salesperson was gonna do was arm twist some really bad customer into the business to hand it off to their friend to have fun with. And their friend in customer success saw their buddy struggling all quarter to get to their number, and it was the last hour of the quarter, and they knew that this customer may or may not be a good fit, but they jumped on the phone with their sales friend and said, "You know what? We can make this work." So they felt each other's pain. Right? And we were able to, we destroyed that kind of marketing meeting, sales meeting, customer success meeting, and we started having small business meetings and mid-market meetings and enterprise meetings. And we measured each one of those groups in the same way the board measured us. It wasn't just about leads from the marketing team and revenue from the sales team and churn from the customer success team, 'cause this was a cohesive unit. Each one of these teams were responsible for their own unit economics and churn. We were able to pass the education of how a SaaS business works down to our mid-level managers, which is really critical for that next wave of growth. So the point there that I'd love to take away is churn customer success is so important to our businesses. Are we really doing ourselves justice by organizing ourselves by function, or are we better off organizing ourselves by our buyers. Those are our 4 critical mistakes. I think we're going to be around a little bit after for questions. I'll actually be on one of the stages in half an hour or so for an ask me anything. Hopefully you can avoid these mistakes going forward. Thanks so much for your time.