Today's software marketplace is built on the idea of renting the use of software products online instead of selling them in boxed formats.
Software as a Service (SaaS) is a way to make money from monthly subscriptions to web-hosted applications, moving the emphasis from an upfront payment to the ongoing value delivered to the subscriber by the company providing the software.
This guide will help you understand the financial aspects and the core phases of the subscription model and how those two aspects impact whether or not your subscription business grows or stalls.
The Reality of SaaS Subscriptions
Many SaaS operators do not see their sales as being different from traditional software sales through an internet browser, and this misconception leads to the creation of failed SaaS business models. When you sell SaaS to customers, your relationship with your new customer does not end after the customer signs the contract.
In order for you to earn future subscription revenues from a customer, you need to be sure that the customer has been activated, is actively using the SaaS application, has renewed their subscription, and is looking to expand their usage of your SaaS application. Therefore, after you have signed a customer to their initial subscription, you need to actively work with them to create enough value for them to continue to use your SaaS product and not leave.
There are significant differences between a $49-per-month self-service SaaS product and a $100,000-per-year enterprise SaaS platform. However, both SaaS products rely on one very important principle: The amount of gross margin (profit) made from a customer must be greater than the amount of gross costs incurred to obtain that customer, plus provide enough time for the SaaS company to build additional revenue from the same customer. Otherwise, the SaaS company will fail.
The most successful SaaS revenue teams answering what is SaaS sales will view it as a connected set of lifecycle activities, not just as a single funnel. Some of the critical lifecycle activities are as follows:
Finding the right customers that have the problems that your company is able to solve.
Converting the customer from being interested into a trial or paid subscriber through effective discovery.
Getting customers up and running on core functionality as soon as possible to drive customer success.
Developing long-term relationships and expanding accounts (via adding more seats, increasing usage limits, etc.) through a process of continued engagement.
Success in SaaS sales means the vendor knows that the first sale only provides a potential revenue source; actually achieving that, as well as long-term sustainable revenue, depends on the customer successfully adopting the vendor's offerings post-sale.
What Is SaaS Sales at a Fundamental Level?
Understanding what is SaaS sales requires an understanding of how the financial risk has been shifted between buyers and sellers and how this shift has changed the way software companies do business. Today, the software market requires companies to provide continuous delivery of product and put pressure on their customers to continuously improve.
The change from sales of perpetual licenses to subscriptions has greatly changed the nature of the relationship between vendors and customers. Historically, a company would purchase a software license, download it and install it on their own servers and manage it themselves. At this point, the vendor was paid via a single large payment. Vendors typically charged a small annual maintenance fee, but their primary focus was the initial sale of the software.
Now, due to the shift to remote hosting of software and the ability for customers to access software via the internet, SaaS companies are able to create recurring revenue streams.
They create ongoing revenue via the collection of monthly or annual subscription fees for software subscriptions. The vendor is now responsible for the hosting of the data and maintaining the servers and code, while the customer has the benefit of having lower upfront costs and immediate access to the latest versions of the software.
In this new model, the entire nature of the sales relationship has changed. The vendor now shoulders the risk of providing customers a means to continue to grow and improve. The vendor is liable to pay for all the following before any customer generates a profit, e.g. marketing, selling and onboarding costs. If a customer cancels after three months, the vendor loses the cost to acquire them.
Due to this, selling for SaaS should not be directed at just anyone who has money to spend. Salespeople should sell to customers who are likely to remain.
Aligning the Sales Process with Customer Success
Post-sale aligns sales process success to post-sale success. A traditional salesperson can overstate features to gain a contract from a prospect. A SaaS salesperson who overstates features will create a wave of cancellations by customers and this is known as customer churn. Selling the wrong products to a customer causes great harm to a SaaS business model. As a result of this, the manner in which SaaS sales occur is focused on finding the right match between customer needs and product capabilities.
The Core Phases of the SaaS Sales Process
The SaaS sales process comprises of a number of phases, and best-practice teams will not necessarily advance a deal through a phase until certain clearly defined exit criteria have been met.
Finding the Ideal Customer Profile
Prior to sending any emails, the SaaS company must determine its ideal customer and develop a marketing strategy to appeal to them; this is known as an ideal customer profile. The qualification of a prospect is the process of determining whether or not a prospect should be pursued for a sale.
Prospect qualification is done by sales representatives who will evaluate whether the prospect has an immediate need, the authority to purchase the solution, has the budget, and has established a timeline. For qualification purposes, simple qualification can often be done with a quick phone call, while detailed/complex qualification will require a deeper understanding of the prospect's internal goals and the underlying technology needed to solve their problem.
Deep Discovery and Asking the Right Questions
Deep discovery is a systematic process; thus it requires ongoing discovery to gather more data and learn about the true pain points of the decision maker. By asking the right questions, the salesperson will be able to discover what processes the buyer currently use, the impediments to those processes, and what financial loss the problem is producing for the organisation. They ask for features instead of understanding the buyer's business by asking how much money is being lost because of the problem being encountered.
Tailoring the Product Demonstration
Product demonstrations typically fail due to the sales team showing all of the various features of their product when demonstrating it to the buyer. Buyers do not desire to know every feature of the software product; they are interested in the solution that will help them address their specific issues and pain points.
Therefore, sales engineers/account executives must create a demonstration that shows how the software will specifically address the issue/pain point that had previously been uncovered in the deep discovery stage. The end result of the demonstration will prove to the buyer that the level of efficiency with the software will represent an improvement over their current operation without the solution.
Creating a Business Case and Navigating Procurement
When an organization engages with a vendor for a mid-market or enterprise software deal, the actual end-user of the application, who will ultimately use it, typically will not be the individual who signs the contract. The sales team must collaborate with their primary point of contact (the buyer) to develop a solid business case that provides justification for the purchase to the leadership team.
This justification should be presented in terms of a clear return on investment. The sales team will also work with their buyer to ensure that the buyer navigates through the necessary procurement, legal, and security processes before a product is purchased. The sales team will ensure that the IT department at the buyer's organization is satisfied that the vendor's data/protection standards meet the seller's requirements.
Closing the Sale and Handoff to Customer Success
Closing the sale is simply the moment when both parties enter into a contract with one another and agree to the payment terms to finalize the transaction. However, the most important aspect of completing the sale is transitioning the account to the customer success team.
The seller must capture and provide documentation of all notes, expectations, and objectives that were discussed throughout the sales process. If the customer success team has to ask the buyer questions during the onboarding process that have already been answered by the seller, the relationship will begin with a level of annoyance for the buyer.
Primary Sales and Marketing Strategies
The marketing and sales approach you take for selling a $50 product cannot be the same for selling a $50,000 product. The pricing of the software and the size of the organization you are selling to will dictate the sales and marketing process.
Self-Service and Product-Led Growth
In a self-serve sales model, the software is the salesperson. The end-user visits the company website, registers for either a free or paid version of the software then uses the product right away. At this point, there is no human sales representative involved in this initial transaction. The aim is to allow users to grasp the advantages of using this tool as quickly as possible.
Once they reach a limit in the amount of time they used the tool or want to access premium features, they enter their credit card information to upgrade their account. This is an effective way for software with a low-cost business model that sells to individual users and small teams (e.g., SaaS).
The Inside Sales Model
In the inside sales model, representatives typically work with customers through phone calls and video calls, rather than face-to-face meetings in fields. The inside sales process is generally much shorter compared to traditional field sales, taking between thirty (30) to sixty (60) days. Most buyers of software in this price range are managers/directors who do not need board approval to make a purchase.
Complex Enterprise Sales
Enterprise sales typically involve large contracts that exceed $100,000 annually. In this case, the software replaces the organization’s core business systems. Because of the high-risk nature of this type of transaction for the buyer, the sales cycle is usually measured in months.
The sales team often has to communicate with numerous decision-makers across several departments and divisions of the customer organization, including department heads, IT security officers, financial officers, etc. The enterprise sales model requires strong technical and account management skills and team alignment.
Common Roles in a Modern Software Sales Team
Organizational structures for modern software sales often include the following roles. Each role in the revenue organization has a defined responsibility for their specific segment of the customer life cycle.
Sales Development Representatives (SDRs)
Sales Development Representatives (SDRs) perform sales development and outbound prospecting functions.
They are responsible for creating a pipeline, and they do not close deals. They are responsible for identifying and contacting prospects through telephone, e-mail, and/or social media, and arranging initial meetings with potential customers.
After an SDR has successfully identified a qualified prospect and scheduled an appointment, they pass the deal to an Account Executive (AE) so that the AE can concentrate on closing sales.
Account Executives
The AE is responsible for managing the sales process with each prospect from the time of their first appointment with the AE to the time that the AE and the prospect sign a sales contract. The AE is responsible for leading the discovery phase of the sales process, for conducting software demonstrations, and for negotiating price.
In addition, the AE manages the buyer’s procurement process through to its conclusion when the contract is signed.
In sales situations where the sale is likely to be complex (e.g., an enterprise sale) the AE will often also act as a project manager and will need to enlist assistance from technical subject matter experts (SMEs) and/or executives from their company to ensure that the sale closes as scheduled.
Sales Engineers
Buyers of complex software products typically will require answers to many technical questions about the product (e.g., about data storage strategies, security compliance, and integration with other software systems). The AE will collaborate with a Sales Engineer (SE) to provide answers to buyers’ questions. The SE will ensure that the software can operate effectively within the buyer’s technical environment. In addition, the SE will develop a positive relationship with the IT division of the buyer’s organization.
Customer Success Managers
Once the sale is completed, the Customer Success Manager (CSM) will take ownership of the customer, and their responsibility will be to ensure that the customer realizes the business benefits discussed during the sales process.
CSMs will guide the customer through onboarding, monitor the use of the software by the customer, and step in and help the customer if they stop using the software. While the CSM will be focused on ensuring that the customer is adopting the software (using the software), Account Managers (AMs) typically will be managing the commercial aspect of the customer relationship and will be responsible for negotiating renewals and identifying opportunities to sell more software seats.
How Experts Measure SaaS Sales Performance
While you can tell how much revenue your business brought in for the month, there are additional variables associated with running a subscription business. To effectively analyze the condition of your company's operations and truly grasp what is SaaS sales, there are essential metrics that leaders must monitor.
Customer Acquisition Cost (CAC) and Payback Period
To calculate the customer acquisition cost (CAC), look at the total amount spent on marketing and sales efforts over a given time. For example, if a company has spent $10,000 in marketing/sales capital over a month and has acquired 10 new customers, that company has a CAC of $1,000, as they have spent $1,000 in marketing and sales for each customer acquired.
The payback period indicates how many assets will be required to make back the CAC of $1,000 from monthly subscriptions from customers. If the monthly subscriptions are $100, that would be $10 (months), indicating that it will take 10 months to recoup the CAC. However, if the payback period goes beyond this timeline for the business, they will likely run out of cash before generating enough income to generate profit.
Pipeline Velocity and Conversion Rates
Pipeline velocity (PV) is how quickly money moves through the sales pipeline. It's calculated by multiplying the number of active opportunities with an average size deal and win rate by the length of the sales cycle. Therefore, if you have more active opportunities, a larger average deal size, or a win rate that is improved, your velocity will be higher.
Leaders also watch conversion rates between each pipeline stage to identify potential leaks in their processes:
Visitor-to-lead conversion shows how effective the marketing message is.
Lead-to-meeting conversion shows if the outbound targeting was accurate.
The percentage of leads that are converted to proposals from meetings indicates the effectiveness of the discovery and demonstration stages.
The percentage of proposals that are converted to contracted deals demonstrates how well the sales team is able to overcome the barriers of pricing and procurement.
Churn and Net Revenue Retention
Churn is the rate at which subscribers cancel their subscription within a specified period of time; high levels of churn can devastate a SaaS-based business because the sales team is constantly required to replace its revenue losses just to stay flat.
Net revenue retention is the most important indicator of the long-term viability and health of an organization.
Net revenue retention considers all revenue from existing customers, including upgrades, downgrades, and cancellations, during a specific one-year period. For example, assume that your starting revenues from a specific group of customers are $1,000,000; if your customers' aggregate spend increases to $1,200,000 due to additional product purchases after 12 months, your organization's net revenue retention is 120%. A net revenue retention rate greater than 100% means your business will continue to grow, even if your sales team does not add any more new customers to your portfolio.
A Realistic Example in Action
To understand the practical application of these metrics, let’s look at a hypothetical example: An operations team at a large logistics company is upgrading their current digital workflow solution.
The software company has created a target list of potential customers for this product based upon their recent expansion of warehouse facilities and the associated risks that are arising from the inefficiencies of their manual processes due to this expansion.
Shortly after the logistics company has announced their expansion in the news, the software company's SDR has spotted this opportunity! An email was sent to the director of operations by the account executive with the intention of letting them know that the business is expanding and to inquire how they are managing the increased data load on their operations. The director recognized the issues they were having due to the broken processes and agreed to meet for thirty minutes.
Executing the Strategy
The account executive conducted the meeting. The account executive chose to not show them the software right away but started by asking how many hours the logistics team spends on a weekly basis fixing data errors. The director said that it was costing approximately forty hours per week for the entire logistics team.
With this information, the account executive calculated that the forty hours per week equates to a cost of approximately four thousand dollars per month in lost labor. This made the annual cost of the software (twelve thousand dollars) a very good deal.
The account executive then engaged the assistance of a sales engineer to demonstrate how the software will automate the process of data entry and to show that the tool integrates with their existing warehouse management software.
Overcoming IT Roadblocks
Once the director made the decision to purchase the software, it was stopped by their IT department. The IT department required a comprehensive security review. The account executive communicated with his company's legal and security departments to obtain the necessary compliance documentation to maintain the deal.
After about three weeks of review, the contract was signed; but at this point, it was not a true close of the deal. The customer success manager would have to get all fifty warehouse staff members to log into the new system.
The customer success manager continued for three months post contract signing to hold training sessions and track usage data. When workers use the software to achieve the promised saved time (40 hours per week), the logistics company will be very happy to renew their annual subscription. In fact, they will even purchase an additional ten subscriptions for a new regional office.
The Key to Customer Activation
The most significant aspect of successful software sales is the extent to which what is promised in the sales process aligns with what is provided through the subscription service. The traditional sales process focuses primarily on closing the sale. In the subscription economy, the biggest negative outcome of closing a bad sale is the fact that the company will have to spend resources onboarding, supporting, and ultimately losing a customer.
All of these resources should be devoted to increasing healthy accounts rather than wasted on bad accounts.
The real opportunity for revenue growth occurs when the sales organization focuses its resources on creating satisfied users, as opposed to simply acquiring signatures on contracts. The sales organization benefits when marketing, sales, and customer success work as one continuous cycle. The initial sale is just the starting point; customer activation and long-term usage of the product are the benefits that drive revenue growth.
Operational Bottlenecks in the Subscription Revenue Model
Many software companies are trying to grow profitably as they scale, and they face similar operational challenges, regardless of their size or resources.
What are some reasons why high-velocity sales teams have trouble converting late-stage opportunities?
Leads generated at a high volume are usually pushed through the sales process without sufficient qualification. As a result, sales reps may try to get prospects who have only a mild interest and not enough of a budget or timeframe into the pipeline.
Even though the deals may seem like they will move smoothly through the early stages because prospects are happy to agree to product demonstrations, once it comes to pricing or signing contracts, they will stall out indefinitely. The likely culprit for this is that the sales teams have not executed sufficient discovery to uncover the compelling business event(s) that will force the buyer to make a decision at that time.
How does poor discovery leak revenue during the procurement phase?
In the absence of a strong financial justification established in the discovery phase, the deal will encounter substantial resistance in procurement.
Procurement departments exist to save the buyer money, requiring that the buyer validate, or justify, a price tag for a product. Therefore, if a sales rep only sells on the features of the product/program, the finance department will perceive the product as an unnecessary expense and will try to lower the cost. However, if a rep clearly articulates in detail how the product will save them or generate revenue for them during the discovery phase, the internal champion for that product will be able to validate or defend the price.
What are the reasons customers churn early when they are closed smoothly?
Customers do not cancel within the first three months because the software is significantly broken; they cancel because their expectations during the sales cycle do not align with what they received. Over-promising in the sales process will result in this misalignment of expectations. The delivery of the customer to the customer success team is another point of potential misalignment.
If the customer is not able to begin onboarding for a long time or if they find out that the specific feature they wanted requires an additional cost upgrade, they will lose confidence and leave. A smooth close means very little if the customer has to wait for their desired value to be realized, which is the core of what is SaaS sales.
