Examining the Sale Efficiency in Public SaaS Companies

SaaS investors spend a lot of time examining the different go-to-market models and sales efficiency of businesses. Given the nature of subscription business models, customer acquisition is one of the most important attributes of a SaaS business — the cost to acquire is up front and the customer pays ratably over the subscription period. It’s necessary to understand for every dollar that is spent in sales and marketing, what is the incremental subscription gross margin that the business gets back? Typically, investors like to see around a 1:1 ratio, which implies a one-year payback. But given the nuances around different markets, seasonality, churn, up-sell and size of deals, the ideal payback period can range from 6 months to maybe even two years depending on the nature of the business.

While I spend a lot of time with these metrics for private companies, I don’t typically look at them for public companies, so I decided to benchmark the sales efficiency among a group of public software businesses. I picked 20 companies out of the broad software group based on the following criteria; $500M+ market cap, growing ~30% YoY from 2015–2016, and trading at a high-growth multiple i.e. 4x+ EV / 2017 revenue (median of this comp group is ~6x EV / 2017 revenue). Overall, these companies represent almost $140B of market cap and in sum almost $16B of ARR based on CY Q2'16. (Note NetSuite was acquired in Jul-16 but I still wanted to include them in this analysis).

For these companies I looked at the past 8 quarters and pulled subscription or recurring revenue, gross margin and non-GAAP sales and marketing. Given these businesses charge on a subscription or recurring basis, I multiplied each quarter’s revenue by four to get an implied ARR figure. I also took subscription gross margin where it was reported. I then took the median CAC ratio over the past 8 quarters for each company and was able to calculate the implied payback period for each. There is a large range of scale between these businesses, with Salesforce at $7.5B of implied ARR and AppFolio at $100M. Interestingly, there wasn’t one recurring theme across the most efficient companies, but certainly some similarities. I’ve added more on that below.

In regard to CAC ratio, see the below chart. The median is actually .7, implying a longer than one-year payback.

Secondly, in regard to the implied payback period, see the chart below. Among this comp set the median is 16.3 months.

Is there anything we can learn from the most efficient companies? I dug a little deeper into the GTM of the companies with less than a one-year payback. It includes Paylocity, Shopify, Atlassian, Paycom, Veeva and Twilio. I wrote a few notes about each company’s GTM below:

Paylocity: SaaS SMB and mid-market payroll and HCM suite provider. Their average customer has ~100 FTEs. How are they so efficient in a market that is competitive and fragmented? Paylocity uses a regionally focused direct sales team who live and work in their territories. They also have a network of over 30,000 brokers where they generate ~30%+ of their ARR through referrals. Brokers affiliated with Paylocity have a large partner network where they can recommend HCM product offerings to customers (such as 401k, benefits and other insurance), of which Paylocity has over 200. This makes them a neutral party that enables the brokers without competing with them.

Shopify: SaaS small merchant eCommerce and physical retail solutions provider. Their ideal customer does less than $1M in annual revenue. Shopify has enabled small merchants to have sophisticated, yet easy to use tooling and a partner network previously only large eCommerce or retail vendors had access to. Given this leadership position, great product and network, most of their customers are acquired organically (~40% of customers were acquired by word of mouth at their IPO). Another 30% come through their partner referrals and the remaining 30% from ad spend on Facebook and Google. They also did not have an outbound sales force until recently, and they are typically only focused on Shopify Plus!, which costs $1,00 or more a month and is their premium offering.

Atlassian: SaaS and on premise software for technical teams to collaborate, plan and build software. Their main product, Jira, is software for developers to track and manage tasks and represents a majority of their revenue. Atlassian has been incredibly efficient in its GTM and uses a low-friction, self-serve sales model. They do not discount on price and are mostly selling to individual developers or technical teams through word of mouth and online ads. They also do not have a direct sales staff. What they do save in sales and marketing they invest in research and development to keep creating great products that developers love. Given the collaborative nature of their products, the numbers of users at a given customer increases over time, increasing account sizes significantly.

Paycom: SaaS SMB HCM and payroll vendor. Paycom also has a unique GTM. They have inside and regionally-based field reps, and do not hire sales reps from competitors, but train and develop them internally (reps have little or no previous sales experience). Management says this enables them to ensure quality. New sales offices take a unique approach as well — the company takes a proven sales manager from an existing team and then relocates him/her to the new office location. The team is then fully staffed slowly rather than all at once, with a strict adherence to quality and efficiency. It takes two years for a new sales office to mature into full productivity. At the IPO, many reps were selling more than $1M in ACV/year and sales compensation has been steadily increasing over time.

Veeva: SaaS solutions for the life sciences industry, with the core product being a CRM for pharma and biotech reps that supports a wide range of industry specific functions. The company has continued to broaden their product suite and are considered to be an end-to-end workflow provider for the life sciences industry. The industry is large and complex and was slow to move to the cloud due to high compliance and regulation. Veeva was the first to build a SaaS platform that fit their business and compliance needs. Veeva sells through a direct sales force that targets two groups 1) research and development teams and 2) commercial teams which includes sales and marketing. They are considered to be the only viable SaaS platform for enterprises in the industry.

Twilio: SaaS developer-focused platform that enables companies to operate real-time communications — SMS, voice, video and authentication within software applications. Similar to Atlassian, Twilio has targeted the individual developer with a self-serve business model and great product. Twilio evangelizes its platform through developer-focused events and hackathons to fill the top of the funnel. Twilio can also be trialed for free and this low friction model gets developers using the product, which eventually leads to paying customers. There are almost 1 million developers using Twilio today. The company has also started building out an enterprise field sales team to focus on large customers.

Salesforce on the other hand, has some of the worst sales efficiency in the comp group. Why is this? While I don’t know exactly, I suspect that earlier in the company’s life cycle their sales efficiency was probably quite good. One theory I have is that they have such a large and profitable existing customer base, they can afford to acquire customers with less than stellar efficiency because they have the margin to support it. They are also mostly focused on large enterprises with high acquisition costs, but high ACVs. NetSuite I would suspect is in a similar position with regard to the large, profitable customer base.

Overall, there isn’t one, specific recurring theme across the most efficient companies, but it’s clear that a strong brand, great product and continued development, self-service and word of mouth (organic) traction has a lot to do with an efficient sales organization. There also isn’t a target market that is most important either — Paycom, Shopify and Paylocity focus on the SMB and mid-market, whereas Twilio, Atlassian and Veeva focus on medium to large enterprises (although Twilio and Atlassian sell to the individual developer). I’m looking forward to tracking these companies over time and seeing what new models earlier-stage SaaS companies employ.

If you have any questions or would like to chat about any of this, drop me an email at aclayton@sparkcapital.com.