The Most Common SaaS Sales Potholes and How to Avoid Them with Mark Roberge, HubSpot's ex-CRO

All right, SaaStr 2021. Great to be back. Great to be back. Do you have this? Do you have this chart? Do you have this chart? First pothole we're talking about here. I'm seeing it as a big problem in the industry. For some reason, our customers are buying more than they're using from us. We're all in this subscription consumption economy. We're selling seats, we're selling gigs, we're selling leads, we're selling contacts, we're selling features, and for some reason our customers are only using 50% of what we're selling. Why? When I'm in the board meetings and we're looking at this, it must be the product, it must be the user experience. Yeah, but they're not even trying to use the license. Okay, well, it must be the onboarding process. It must be the CSMs. No, they're pitching it. They're doing a great job. Why? Why are our customers only using 50% of what they bought? And it's a big problem because it doesn't make for a very good retention conversation a year later. In fact, it leads to revenue contraction. Why is it happening? We're using a comp plan from the 1980s. We're using a sales comp plan that was invented in the 1980s, and it's causing our customers to utilize their licenses at a lower rate, and it's causing revenue contraction. And so I, I did a little innovation at HubSpot and with a bunch of our portfolio companies at Stage 2 that I'll show you. Has worked in a very scalable way to get this utilization up and get us back into revenue expansion. So a lot of these comp plans since the '80s, we have compensated our salespeople more for the first revenue from a customer. Pretty logical. Hard to get in the door, but easier to renew and expand once we have a relationship. But look at what happens in today's subscription economy, consumption economy. Our customers like I love your product. I could see our entire 1,000 employees using this, but I would just like to start with 10 licenses for this team to get it set up and then we'll roll it out to the rest of the company. And what does the seller say? No. No. You need to buy licenses for the whole company. Why? And they make up some BS thing. It's really because that's how I get paid. I get paid for the first revenue from the account. And because of that, we're left with low license utilization and we're left with revenue contraction. Simple innovation. Try paying them more for the expansion revenue. Try paying them more for the expansion revenue so when the buyer says, "I wanna start with 10 accounts and then we'll roll out to the whole 1,000," they're like, "Perfect! I'm gonna make more money!" And your utilization goes up and you get back into a revenue expansion mode. The beauty, the gold mine for SaaS. Businesses. When I rolled this out at HubSpot when we were doing the CRM, I told the reps, I said, "Hey folks, I'm gonna pay you 20% more for expansion seats than for new seats." And the reps were like, "Roberts, you're so stupid." They were like, "You know what I'm gonna do? I have a 100-seat account right now in the pipeline. I'm gonna close 5 seats this quarter and I'm gonna get the other 95 next quarter." And I was like, beautiful. That's exactly what I want. Because when you sell those 5 accounts, you're not going to lie. You're going to tell the truth because you know the money is made on the other 95. You're going to set really good expectations. I don't want you to turn into CSM, but you're going to watch that account. You're going to make sure that thing onboards well, and then you're going to get the 95 and you're going to get paid. And guess what? If you sell that thing wrong, I only lose 5 accounts. As opposed to most sellers are getting the 100 accounts and they churn and it crushes us. OK, now this is all connected to the pricing model too. The pricing model has to feed this as well. And then a lot of board meetings was like, hey, you hit sales in second quarter. You hit sales again. Great. We should raise prices. Let's raise the prices. And the CEO's like, hmm, yeah, maybe we should raise prices. And the VP of sales is psyched. Yes, let's raise the prices. My whole— we're going to double our prices. I need to close half the number of customers. This is perfect. And no one's paying attention to what this is doing to sales cycles, close rates, and most importantly, our disruption risk. We are misaligning our customers with our product because of the pricing model, because we're raising the price and it takes them so long to equate that value, the sales cycles go up, the close rates go down, and the one that we don't pick up on is our disruption risk goes way up. Our disruption risk goes way up. 'Cause now you're charging $20,000 a month for this thing, fine, it works for a couple quarters 'cause you're the only player in the category, but you are a ripe target for a bunch of hotshot engineers here in Silicon Valley to rebuild your product. And charge half the price. So be careful about raising your prices unless you have a sustainable moat. And that's number 3. Well, what is a sustainable moat? How do I know if I have a sustainable moat? Because I asked like 10 engineers, founders, we're talking about investing. This sounds awesome. It's a great market. You're obviously very talented. You've got some great traction. Can you tell me about your moat? How are you going to defend against the competition? And they're like, well, We built this awesome feature that everyone likes. And I'm like, okay, well, how long would it take the competition to build that feature and copy it? 'Cause they're obviously gonna find out about it. And they'll say, I don't know, like 3 months. And I'll be like, well, that's not a sustainable moat, that's a temporary moat. So this begs the question, what is a sustainable moat? And I can tell you, like, here's my little test. Here's my little test is, Great. You're crushing it. You're in the category. You're the only person in the category. Fine. You want to consider raising prices? You want to have a good answer to moat? Tell me this. Imagine if 5 rockstar engineers from right around the corner, maybe they're at Google or something, quit their jobs, raise $10 million from Sequoia, which is happening all the time right now, and they reverse engineer your product and sell it for half the price. Do you still win? Do you still win? If so, you have a sustainable moat. Well, that sounds really hard. That sounds really hard. And I'll tell you, it's not because of product features. It's not because of your support hotline. It's not because of how much you raised, $20 million. It's not because of the integrations you built. And the best work that I've seen in this space was decades ago with Porter's Five Forces. Michael Porter, anyone know? Porter's Five Forces. Couple MBAs in the room. OK, so let me try to translate because he did this decades ago. And I'll translate his work, which I think is the best. He's an HBS professor, translated to today's modern software and SaaS businesses. So network effect, the more people that use the product, the more valuable it is to all the users. The first phone sucked. Like, who do you call? Right. But as we built and, you know, it got better and better. It's the same thing with the stuff that's happening in social networks and marketplaces with Amazon, etc. That's a true network effect and sustainable moat. Brand. Why do we spend so much money on our Armani shirt? Right, we build a brand and today if you've read Play Bigger, then you know category creation is a way to build a sustainable moat. It worked beautifully for us at HubSpot. We were like, listen, we're gonna invent a word called inbound marketing and if it fails, the company will fail, but if it works, we'll have a sustainable moat because we'll own the first 10 pages of Google, the conference, the book, the LinkedIn network, everything. And it worked and the competition copied us and it just fed our demand. Everybody can build a category, right? Read, play bigger. And that's a sustainable moat. Economies of scale. If we're buying bulk, then we can buy it cheaper. AWS does this right. They buy servers cheaper than anyone else. And the big one right now is AI. There's an economies of scale in terms of more volume. So let's, let's pretend we're selling gone.io. All right. So Let's say the 5 Google engineers quit and copy Gon's product and they go and try to sell it. Why do I still win? It's very simple. It's like, yeah, fine, you can buy that one for half the price, but you know they've only processed 100,000 sales calls. Their algorithm is only that good. We have been in business for 6 years. We've processed 5 billion sales calls. So what do you want? How important is this software to you? Do you want the one that processes 100,000 or the one that processes 5 billion? It's hard to catch that. That's a sustainable moat. Switching costs, I don't love, but it's out there. Obviously, I don't know if— does anyone think they're paying too little for Salesforce? They really crush it here. No offense, they're rock stars. They're good friends, they're investors, but they crush the switching costs. And hey, Toast, congrats. IPO last year. They have a little hardware-software hybrid. Beautiful. The only time they had churn was March of 2020 because of that craziness. And ever since then and every time before then, they had no churn because of that hybrid hardware-software combination. So that's a true sustainable moat. I don't love it because it doesn't help you to win evergreen deals. It helps you keep people and you can raise the price through expansion, but it doesn't help you win evergreen deals. In fact, it could work against you if it gets out that you're gonna take advantage of your customers on that. The other two are slightly less Well, distribution, huge. And I know the woman before talked about PLG. That was fantastic. I'm a huge PLG fan in terms of sustainable mode. And we kind of talked about the last piece with the pricing. Like Calendly, how do you disrupt Calendly? Like it starts for free. Imagine if they charge $10,000 a month. Like we'd just be attacking it. But you start free. Slack, Zoom, all these folks. It's beautiful. Right? Now the other two, like government policy and Capital requirements, those are just in Porter's work. They're probably less applicable to us, but I mean it would probably be hard to go after Elon Musk and SpaceX right now. Like you're not gonna raise $20 million and take them on. But hopefully that gives you an example of sustainable moat. And this is our job as founders, CEO, is we need to define that for the company. And sometimes as you grow, don't work on sustainable moat, in my opinion, at Series A. But around Series B and Series C, Build the moat. Know what it is, build the moat, and sometimes it comes at the expense of growth and that's okay. If I had to choose between this year building a great moat and only growing 80% or not building a moat and growing 120%, I'd choose the former. I want to build that moat. Jesus, more charts, Robert. I had a beer at lunch. It's like I can't handle this. What's going on in this one? Pothole 4. Pothole 4. What is going on here? Switch gears from the first 3. What this means, the chart on the left, it shows that the better the salesperson is at hitting quota and their percentile on the team, the more likely they are to get promoted to manager. Promote your top reps. But it also shows that the better they are on the team, the higher rank they are as a sales rep, the worst manager they are. We've known this forever. Your top rep does not make your top manager. It does not always make a good manager. In fact, the stats show it mostly fails, but so many founders are like, yeah, Tommy's been with us forever. Tommy's our top rep. Tommy does amazing. Why don't we just promote Tommy to manager and he'll hire 8 other people and teach them what he knows how to do? It sounds logical, but it doesn't work. Like the best athletes and the best musicians and the best actors don't always make the best coach, and that's what's true in sales as well. Sales management is about hiring talent and coaching talent. It doesn't have a lot to do with sales. So what do you do? Promote your worst rep? Can't do that. So what do you do? So Robert is just saying, you can't promote my top rep to manager, I need a manager. Well, you got to put them through a process, right? So it's like, okay, fine. You want to be manager? Here's what we're gonna do. You just hit your quota for 6 months in a row. Hit your quota for 2 quarters in a row. You don't need to be number 1. You just need to hit your quota. No one's gonna respect you if you can't hit your quota. So just hit your quota. Then I'm gonna put you through a leadership development course. You know, and this— I built this when we were only like $5 million in revenue. It's like, it sounds like a lot, but it's just like I picked out I picked out like a bunch of subjects like managing conflict and building team spirit and delivering negative feedback. These are the things that a manager needs. Now I built this 12 years ago. There's better readings out there, but this will give you like the sense of what you need to do. And I had them just read this 10-page ebook and then we did a role play for half an hour of like, hey, imagine one of your reps is furious because some other rep just sold a deal that they've been working on for 3 months. How do you handle it? Thank gosh we role played all those scenarios because all of those happened the first week on the job and I just want to see how they do it. And then the last thing I'm gonna do is I'm like, great, you've been hitting your quota. You've gone through this and it seems like you like to do this stuff. What I wanted you to do now is hire the next salesperson. We have a hire coming up next month. You're gonna make the hire. You're still gonna carry your quota. Not forever. I hate the team lead hybrid carry your own personal quota and run a team. That doesn't work. But just for like 2 or 3 months, you're gonna make the hire. You're gonna tell me what you think after the interview so I know how how you interview, and they're gonna coach 'em for 2 or 3 months to see if you're good at it. You're probably gonna mess up, but it's a lot better to just mess up with 1 person than 8 people, right? So if you like it and you do well, then we'll promote you. And so we had a pipeline of people vying for management. I would tell you that less than half the people that got into the program became a manager, and most of the time because they opted out themselves. Like, I don't really wanna do this. I just want to stay a salesperson. And we had a huge success rate through that model with our management layer, which is so critical during scale. Now, the other complement to this, I don't know why more folks don't use this compensation plan. What about the people that do want to stay as manager? I mean, as salesperson, they should be able to get promoted even though they're not going to manager. So we just set up a, like a way to do that. You know, you come in, you're making $80K a year as a junior salesperson with 5,000 stock options. And you're gonna get promoted when you sell a certain amount of monthly recurring revenue install base, which is probably gonna take you anywhere between 7 months and 18 months to do it, and you need to average your quota, above your quota for 3 months in a row, and then I'll promote you. And I'll give you a bump in your variable, and I'll give you more stock options, and there's the next goal. It's crazy that we do these annual reviews for salespeople for such a metrics-driven success or failure function. This is like we can just use a promotion path and salespeople love this. They obsess with this. And you can alter the right-hand side to be aligned with your strategy. This is an example for an SDR team. That's the hardest job, SDR. 12 to 18 months of cold calling. If you're lucky, you get one appointment a day. Holy cow, what a hard job. But this is 6 tiers that they go through every 2 or 3 months graduating up to a kind of executive school and it's very motivating for that 22-year-old SDR. OK. I'll post these slides. I'll tell you at the end. And so if you didn't get it, you can take a look at it. All right. Now 5 and 6. 5 and 6, I think, are causing more failure in SaaS than any of the other ones. And number 5 is scaling before we're ready. When are we ready to scale? When are we ready to scale? I ask 100 founders, when are you ready to scale? They all say, When we have product market fit. Great. Thanks to Eric Ries and Lean Startup. Beautiful answer. The problem is you ask them, what is product market fit? You get 100 different answers. And half the answers are about revenue. I have product market fit when I have a million in revenue. I could not disagree more. That's market message fit. Congratulations, you know how to sell. Doesn't mean your product works. So it's like, we got to work on this product market fit definition and know when to scale. And so I know like some people say it's like, well, you just know there's a lot of pull in the market. It just feels too squishy for me for such an important strategic question. I do like Sean Ellis's model. He says if you survey your customers and 40% say they'd be very disappointed if your product didn't exist, then your product market fit. I actually really like that. It's about the product experience and whether it's delivering on the value. But I do— I don't like surveys. They're just riddled with false positives. So for me, the metric's customer attention. You know, if someone used your product and buys it again, I feel like we have product-market fit. The problem is it takes like a year to figure that out. And so I love customer attention as a proxy to product-market fit, but it's a lagging indicator. So what we encourage is to create a leading indicator of retention. That is the key metric for you in the scale-up mode to know when you're gonna scale. What can you see in your customer's behavior in the first month that if it happens, they'll be with you forever, and if it doesn't happen, they're gonna churn? Alright, so the way I think about it is in this format. If P% of customers do E event in T time, then you have product market fit. Okay, so Slack, right? If 70% of our customers send 2,000 team messages in the first month, then we have product market fit. It's beautiful. Online, I don't talk to the Slack people. I think it's pretty close to what actually happened. I mean, imagine if the founder of Slack stood up and say, our first North Star metric is a million in revenue. Which happens a lot. Or imagine if they stood up and said, our first North Star metric is to get 70% of our customers to send 2,000 team messages in the first month. That's beautiful. That's a beautiful company. I'd love to build a sales team on that company. OK, Dropbox, back up your device in 1 hour. HubSpot, we caught this late at like $10 million in revenue. Our churn was not good. And we ran 50 permutations. And found out that if our customers use 5 or more features in the platform in the first 2 months, the retention rate is like 97%. And if they don't, the retention rate is like 50%. Wow. We found something beautiful about our business. OK, so I'll post this. Here's a couple of guidelines on how to think about defining that. As you can see, it differs with each company. But it's definitely something that's factual, like not a CSM saying, they're in good shape. That's too subjective. It has to be a very measurable, instrumentable event, because we're going to measure this forever. We're going to measure this forever, because it's going to break. So you can check that out. And I like to have them occur in about the first month, if possible. If you're doing a big enterprise Workday type thing, it'll take a couple months. And if you're doing a real PLG Dropbox, then it'll take hours. But something at least in the first month. And then finally, on this piece, here's how I like to measure it. Is I like to measure it in customer acquisition cohorts so I can pick up on product-market fit as early as possible. So what this shows is, let's say, let's use the Slack example. This isn't their data, but let's just use it. So this company, let's say Slack, acquired 24 customers in the early days in January. After 1 month, only 3% had hit the lead indicator of retention, had sent 2,000 team messages. After 2 months, 27%. After 6 months, only 39% had sent 2,000 team messages in a month. That is not good if you're a collaboration software. So they made a bunch of changes to how they sell, to their product, to their onboarding, and look at how that improved. Just look down the month 2 column. In January, only 27% of those customers they signed up had hit the lead indicator of retention and sent the 2,000 team messages. But by September, 68% had done it. They have product-market fit. And it's not because some subjective thing or some random ARR number, it's because of their data and the success of their customers. So that's how I think about product-market fit. Now, are you ready to scale yet? I don't think so. Because notice that I didn't really mention anything about unit economics and scale yet. I believe that we have to tackle our customer retention and success first, then focus on unit economics, not do them at the same time. David Cancel, the founder of Drift, they just had their exit 2 weeks ago. Sold only for $1 billion these days, oh my gosh. So he did this beautifully in the early days. Like he was literally on an airplane flying to onboard customers that were paying him $50 a month. That is beautiful behavior at the product market fit stage. It is so hard to get your customers to realize the value of your product, and he was doing that as founder. It doesn't scale, but throw everything in the kitchen sink at making this happen. And don't talk— we don't need to talk about scalable demand gen or pricing models or compensation. We're just trying to get 80% of our customers to do this event. So are we ready to scale when that happens? No. We have to prove— all we've shown now is that if we're going to sign up 100 customers in this quarter or 10 or 20 customers in this quarter, we know that most of them are going to see the value of our product. But we don't know if we can sell them at a CAC low enough to offset the LTV. So we have to think about scalability and profitability. And we usually talk about that in SaaS of unit economics, right? So pick your poison, the magic number, payback period, LTV to CAC. I'm going to use LTV to CAC. Okay, so fine. We want our LTV to CAC to be greater than 3. All right, so but how, like, what does that mean? Like, I can't tell a 26-year-old account executive, hey, your job is to make an LTV to CAC greater than 3. Like, they don't know what to do. So we have to extract this back to actionable activities that they understand, like the price per customer or the close rate on a lead. It's not that hard to do. I mean, we can take lifetime value and it's just how much they pay us times the gross margin divided by the churn rate. So there you go. What is our average sale? And the CAC, that's just the marketing CAC plus the sales CAC. And the marketing CAC is just our cost per lead divided by the close rate. And our sales CAC is just how much we pay our reps divided by the number of customers they sell. And the number of customers they sell is just the number of leads we give each rep and what the close rate is. So now I've extracted this like very hard to conceptualize unit economics thing of LTV to CAC greater than 3. And extracted it back to stuff that's meaningful and we have a business model. We can actually put that together and say, hey, if our average sale is $20,000 and our cost per lead is $1,000 and we close 5% of them, we have a business. And I can operationalize this into our dashboards. As long as the blue line stays above the red, we're able to scale. Our unit economics are going to spit out great. And this particular framework gives us direction about what we should work on now. Now we do need to build a sales playbook. We didn't need it during the product market fit stage. We do need to get our compensation model right and our pricing model right. We didn't need it during the product market fit stage. So we can figure out what in sequence we should be working on, whether you're starting a new company or rolling a new product out in a bigger company. Now we know when we can scale. We can scale when we have product market fit and go-to-market fit. Attacked in sequence, and we have data on our business to know if we're able to scale. Okay, now the other one, the biggest one, the biggest killer, and the last one is how fast to scale. Pothole number 6. How fast should we scale? Because I hear this all the time. These are real stories. Every quarter I hear another one. You know, hey Mark, yeah, it's September 27th. You know, this summer we had a good summer. We have 20 people in the company. I think there's like 12 engineers. There's a couple product managers. There's 3 salespeople. There's a marketer. There's a customer success manager. And we crushed it. And we just raised a Series A, $15 million. Great. And so what'd you do? We hired 20 salespeople. Oh God. What? Is that bad? Yeah, you're gonna fire 20 salespeople in like a year. Like, are you kidding me? Do you know what it takes to hire 20 salespeople in a month? Do you know how many interviews that is? And how are you gonna feed them with demand? And who's gonna manage them? The average rep-to-manager ratio in inside sales is 8 to 1. Now you need, overnight, you need 3 managers. Are you kidding me? Why'd you do that? Now you know the answer. It's because they negotiated this huge round, like the huge valuation and they showed the VC investor the triple, triple, double, double and they actually bought it and gave them the $70 million valuation and now they're like, "Oh my gosh, now we have to do it. Let's hire a bunch of salespeople all at once." It's not good. It kills company. It's the number one killer. So how fast should we scale? All right, let's not think about hiring as this lump sum hiring at the beginning of a fiscal year or right after a funding round. Let's establish a pace. We are now ready to scale because we have product market and go-to-market fit. Let's establish a pace. Let's hire 2 reps every other month. Let's do that for 6 months and let's watch what this becomes, which is our speedometer. This is our speedometer. It's going to break. I guarantee you from $0 to $1 billion, this will break. And when it does, you know very early because most companies out there deciding if we're scaling too fast or too slow, are looking at the quarterly P&L at the board meeting and the quarterly P&L is what happened 9 months ago. This is what's happening today. So you know more than your peer. You know about your business 9 months faster than your peers. So good. Hire 2 reps every other month and watch the speedometer. If it stays green, hire 2 reps every month. Do it for 6 months. If it stays green, hire 4 reps a month for 6 months. If it stays green, hire 8 reps a month. For 6 months, congrats, you're a unicorn. And you did it in a very scientific way. OK, that's the final pothole there. And you can use— not only does this framework help you understand the sequence of bringing a new product to market, whether it's in a big company or small, but it helps you understand what to focus on. A couple of things here. So yeah, I started a VC firm 3 years ago called Stage 2 Capital. My co-founder, Jay Poh, formerly from Bessemer, is out there. It's the first VC firm run and backed by sales, marketing, and customer success leaders. So you can see there the CRO, CMO, COO of Atlassian, Zoom, Snowflake, Okta, Asana, Twilio. We have 250 of them that have backed us. We look for companies that are around $1 million in revenue. We don't really care how fast you're growing. We care more about your customer retention and your customer engagement. I love to help a company that's having trouble scaling sales but has amazing customer success. Okay, so probably a little different than most of the investors out there. If you wanna download some of the stuff here, a lot of this stuff is in this 45-page ebook I wrote on the website. These slides I just posted on my LinkedIn profile. So if you wanna go to my LinkedIn profile, you can click through, download these slides and get these links. I know a lot of you have sent me notes of like the book I wrote a couple years back. Thank you for the support there. Just note that 100% of the proceeds are donated to build.org. Anyone involved in Build? Oh, it's an awesome organization. They start out of here. They basically team up with the worst performing high schools in every major city. Kids that probably didn't have the beginnings that we had and they teach them entrepreneurship in their freshman year and they put them through a 4-year program to try to get them through high school and into college and 99% of the kids graduate, which is way higher than regular high school— their regular graduation rate. I think 85% go into college. College. So if you support the book, you're supporting them. Thank you for that. Jason M. Lemkin, thank you for an amazing platform. Enjoy the show. Stay safe, everyone.