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 Open DNS. Please welcome Mark Roberge and Michelle Law. Awesome. What a turnout. Thanks for coming out. So 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 two 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 one. So, quick survey for the audience. I'm going to give you three options. It was either sales hiring, premature growth, or sales compensation. How many people think it was sales hiring? That was our number one. How many people think it was premature growth? How many people think it was sales compensation? I think we got you. It was number two, premature growth. All right, so we're going to actually hit all three today, but we're going to start with premature growth. So, Michelle, why don't you take us away? Why was that our number one?

Yeah, that was our number one. 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 feelings, a little bit of metrics, but it's really important to know where you are because it's going to depend. You're going to 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 three 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, and 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 going to 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 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 two or three things that you need to focus on. Everything else is important, but doesn't really matter. There's only two or three 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 like, this has been Great. We've had eight engineers. We built our product. We now have 20 customers. We're going to hire 47 salespeople next month. And I'm like, you're going to 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 eight 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 weak 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 learn about this week, payback period, LTV to CAC ratios, et cetera. And once I have those two things, great, let's start hiring two, three salespeople a month. So unit economics, then customer success, then unit economics, then growth. So let's move to hiring. I actually similar thing like seeing 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 eight 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 a first salesperson. So who is it? Another survey for you folks. Option number one, 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 a billion dollars. And he's like, you know what? I want to do something cool. I want to come to your startup. Option two, his number one rep. The guy's number one out of 500 reps selling to the same types of businesses. He's willing to come to your startup. Option number three is your buddy who's an entrepreneur. She grew up in salesforce.com for five years, learned to sell, and she started a company the last two years. And now she's ready to jump in and help someone out. Option number four, Is a woman not in your industry, but on fire in sales. She's been at this company for eight years. She got promoted to manager in the last year, but she's not in your industry. How many people want option number one? The big name. Wow, there's no VCs in the room. All right, how many people want option number two? Best salesperson? How many people want option number three? The entrepreneur. How many want option number four? 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 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 sales people for them. Once you establish your initial product market fit, that's where sort of 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 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 Open es. My first two sales reps were sales reps. I hired them from WebEx. They were young. They had spent about three or four years at WebEx, number one sales reps in their group. And that's where they got the great training. But we're young enough and cavalier enough to want to be part of a startup. To help build what we needed to build at Castlight, we actually hired two 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, two to three 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 an existing market with a better mousetrap, 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 a 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.

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. I think when you're two engineering based founders bringing in that first salesperson, geez, that guy showed up at Oracle or Salesforce where 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 going to 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 have 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 Mark's point, I think 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 can actually take on some of that sales management responsibility. One example was I played that role open. Yes. 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 you know, 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 two years, 40 interviews later, that was painful for me because I became the default. I was doing that and I should have been doing other things. So when you think about it, you want to 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 none of the ones that you hired 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 because they're easier to find, they're cheaper, and they're going to take a lot of the day to day work off your plate.

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 hundred dials you do? Is it the customers and revenue or is it the feedback? And what is the salesperson that's going to 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 got. Obsessed over, highly related to customer success. So let me tell you about how we totally screw that up at HubSpot in the early days and how we use the comp plan to address it. So this was the comp plan. So if I take you back to the summer 2007, there were eight people at the company. I had two salespeople, we were doing a couple hundred thousand in revenue and Haligon was like, all right, hire one rep a month. So I did for eight months. Eight months later it was looking good. We probably were doing two and a half million at that point. We had, you know, 10, 12 reps, but churn was 8% a month. 8% a month. If we're going to drop an F bomb, we should drop it right now. Right? 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 going 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 on, 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. There's only one product that's 250 bucks a month. So we paid them 500 bucks 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 four months, otherwise you're going to 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 five sales reps work their comp plan. And that could be a good thing. As long as we appreciate that, right? 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. Okay, 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. And I was like, folks, we're going to 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 going to pay you a thousand. I'm going to 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 going to make half as much. If you want to leave, there's the door. But we're going to train you like rock stars to try to bring in really successful customers. And Churn dropped by like 70% in six months. Sales reps work 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. And for our business, it happened to be payment, period. Right. So I put together a plan that comp them based on getting annual contracts up front, which help 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. So 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 want to close it out here.

Michelle, for the sales compensation, powerful vehicle to drive customer success. Your comp plan. No kidding. Folks like your comp plan. Salespeople are smart. They will analyze their con plan. They know exactly how to make money. And so it's your job to ensure that the con 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 want to check that out. This deck is up on my Twitter feed like 5 minutes ago. All right, let's close it out on org structure. Right. So now I'm gonna ford fast the clock another two years and we had probably 250 people at the company and we got large enough that a lot of you are probably at that stage. You know, 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, 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 are 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 going to create this alignment in this new world of SaaS where there needs to be a really nice handoff from demand gen to sales to customer success. 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 expectations 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 grabbed beers together and the last thing that salesperson was going to 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 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, you know, leads from the marketing team and revenue from the sales team and Churn from the customer success team. Because 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 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? So those are our four 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 a half an hour or so for an ask me anything. Hopefully you can avoid these mistakes going forward. Thanks so much for your time.