The Evolution of the SaaS Sales Model as a Company Grows

April 13, 2010

So I’m on the LinkedIn SaaS Group forum last week, and I see that Steve Forth, CEO of LeveragePoint teed up a whale of a discussion. He asked:

What are the different sales models for SaaS?

  • Direct Sales and Channel Sales (which to prioritize, how they can work together)
  • Most effective techniques for inbound lead generation
  • Sales automation
  • Growing the subscription base and ensuring renewals
  • Sales partnering
  • Solution selling
  • Value selling
  • Social selling

And I couldn’t resist myself. What else would I be doing at 5.30 that morning (yes, two-year old kid in the house)? Here was my response.

The Evolution of SaaS Sales Models

As investors in expansion stage SaaS companies (mostly B2B), we have seen a pattern repeat itself over and over. Here’s roughly how the story goes:

  1. Start-up SaaS company starts selling its product online and using word-of-mouth and Google Ads to drive traffic to the website. Product evaluations are provided through one or a combination of free licenses, trial licenses or live web demos. Leading to customers buying through a combination of on-line purchases or an inside sales channel. Rarely do we see the need for a field rep or a channel partner.
  2. And that is the start of building the inside sales operation, which is the cornerstone of any SaaS distribution model. More on that here.
  3. Setting up a new sales team requires careful process evolution and requires the recruitment of a very unique breed of sales reps, what is referred to as the renaissance sales rep. More on that here.
  4. As the company ambitions start to grow, so does the inside sales team. This puts pressure on marketing to generate more leads, which invariably results in an erosion of lead quality. Sales reps spend more time sifting through bad leads than selling. More on that here.
  5. Which forces the development of a more refined lead qualification process and implementation of a lead generation system. More on that here.
  6. As sales grow further, and a year goes by, all of a sudden the company realizes that customers are not renewing! Trust me. It never fails. SaaS companies hit a brick wall at the one year renewal phase, ending up with renewals in the 40-60% range. Which throws the distribution economics out the window. More on that here. What causes that low renewal rate?
    • 1. The product doesn’t deliver on its promises. This is where you have to focus both on evolving the product and refining your messaging so that you’re setting the right expectations on what you’re really selling.
    • 2. The product being sold to the wrong customers. The solution: Segment your customers better and figure out what segments have the highest renewal rates, and sell to more of them. Find out what customer segment renews the least, and stop selling to them. More on that here.
    • 3. No renewal process. There is a strong tendency in SaaS companies to forget about existing customers. Renewals are not guaranteed! You need to work on them. Create a renewal process, including at least three touchpoints. The first, is within three months of the first sales, preferably by your customer service team. The second is around 6-months, also by your customer service team. The third 2-3 months before the renewal date, by the sales rep.
  7. Which then leads to the separation within the sales team of new business sales from existing account management. It is inevitable.

As for indirect channel selling, it’s very tough to make that work. The problem with the channel is that it requires a services offering to wrap around a product. SaaS products typically don’t require services. And selling SaaS for license margin, when the price point is typically low, is not economical. But there are exceptions. We have a couple of SaaS companies that derive 30% or so of their revenue through partner sales. now does have an indirect channel, which is mostly the services that SFDC does not want to take on through its own internal services group.

The Chief Executive Officer

Firas was previously a venture capitalist at Openview. He has returned to his operational roots and now works as The Chief Executive Officer of Everteam and is also the Founder of <a href="">nsquared advisory</a>. Previously, he helped launch a VC fund, start and grow a successful software company and also served time as an obscenely expensive consultant, where he helped multi-billion-dollar companies get their operations back on track.