Efficiency as the Primary Operating Principle

Eight initiatives to increase efficiency in an economic downturn

The SaaS recession is here and it’s time to optimize with decisive action.

Tech markets have experienced a paradigm shift, swinging from 2021’s record-setting funding activity at sky high valuations to a sharp market correction in 2022. Growth at all costs has been replaced by a return to SaaS fundamentals: revenue durability, growth efficiency, and healthy unit economics.

Throughout 2022, Craft held several talks with founders about the new economic realities and how to best operate during a downturn. David Sacks and Jeff Fluhr’s latest discussion covered the demand slowdown and the importance of acting fast, extending runway >24 months, and retooling businesses to operate with hyper-efficiency. Here I drill down on how to do that.

Eight Initiatives for Operational Efficiency

In early January, I hosted a talk covering eight actions SaaS companies can take to drive operational efficiency and navigate the strong headwinds. These are lessons learned from my experiences joining companies to quarterback growth and ‘strive for efficiency’ turnarounds.

All eight of these initiatives may not be immediately relevant to your business, but they should inspire strategic conversations among your executive team. If your goal is to exit the downturn in a position of strength, be hyper focused on conserving cash, deepen your relationships with customers, do more with less, and seriously sweat the details of execution and process optimization.

1) Churn Mitigation: A churn problem is a burn problem (7:32)

Churn is the Achilles’ heel of a SaaS company’s growth and efficiency. Logo churn or downsell (seat contraction, discounts) is particularly damaging because on average it’s 5x more expensive to acquire versus retain customers. ​​Managing churn is a critical indicator of a SaaS company’s health and it impacts all the key SaaS metrics. Companies must be maniacal about keeping their ideal customer profile (“ICP”) customers healthy and happy.

Additionally, up for renewal logo, dollar and net dollar retention metrics are critical to track. These metrics offer the most accurate view of retention characteristics because they remove the noise from multi-year contracts. Below are the formulas to know:

Economic downturns test whether products are “need to have” versus “nice to have.” In these tougher times, high gross retention is not only critical for maintaining efficient growth, but is a strong indicator of customer love for your product and tangible ROI. Expanding with existing customers will be harder given headwinds but is still a much cheaper option than new acquisition. The “Churn Mitigation Playbook” below has proven to be very effective.

Improving retention feels like the sum of many small gains, but given the compounding effect, it makes a huge difference. Go all-in on minimizing churn!

2) Customer Prioritization: Re-evaluate your ICP and focus on your best verticals, segments and geographies (12:12)

All customers are not created equal. In the early days during product-market fit experimentation, acquiring customers — regardless of vertical, segment, geography — is a win. As a company matures, the go to market (“GTM”) engine develops focus, repeatability, and standardization. During the “growth at all costs” era, it’s likely your ICP definition broadened; now it’s time to reel it back in. Sales reps chasing prospects outside of the ICP is highly inefficient.

In my January talk, I shared three real-world examples where SaaS companies drove efficiency by revisiting their ICP and GTM focus towards verticals (13:19), segments (14:43) and geographies (15:53) with the most attractive unit economics.

To do this for your business, analyze your customer data across verticals, segments, and geographies. Review a broad range of important metrics including growth, gross and net dollar retention, win rate, sales cycle duration, gross margins, average selling price, sales efficiency metrics, etc.

Once the data is pulled, discuss the “why” behind the metrics with your executive team. Rank the verticals, segments, and geographies from most to least attractive. Below are some key questions to discuss:

• Verticals: What verticals have the fastest growth rates, largest markets, fastest sales cycles, lowest churn rates and largest expansion opportunities? Where should we double down? Which should be deprioritized if any?
• Segments: Do all segments have attractive gross margins, customer acquisition cost (“CAC”) payback metrics, gross and net retention rates? Do we have an enterprise GTM motion and onboarding process for smaller customers? What segments will be most durable in tougher times?
• Geographies: Which geographies and territories have the strongest product market fit? What is the CAC payback for each region and are certain geographies dragging down our efficiency?

To help with this analysis, Craft developed a tool called SaaSGrid, which ingests your customer data via Excel, Google Sheets, or Salesforce and instantly produces your key SaaS metrics. You can then create custom Segments which allow you to identify the attributes of your ICP.

3) Nail Your Sales: Optimize activities, execution & process (17:17)

You can’t control the macro headwinds but you can control sales execution. Once your ICP is refined and crystalized, retool your processes to align marketing, sales, enablement, customer success, and product to the highest value opportunities.

Be tenacious on sales execution, collaboration, and accountability. Revisit the qualification process and the milestones to advance an opportunity into the next stage in your sales cycle. Explore early executive sponsorship with the most important prospects to put your best foot forward on critical deals that can make the quarter. A predictable and efficient GTM machine requires a balanced performance across the sales team.

Monitor pipeline metrics to track the leading indicators of a demand slowdown. This should guide your hiring decisions. Be prepared to collapse territories if demand disappears. Strive for the optimal balance of account executives (“AE”) to territory demand using pipeline creation and conversion rates. Be very disciplined on pipeline clean up. If your pipeline starts to disappear, but sales and marketing (“S&M”) costs remain the same, your CAC payback will skyrocket. Don’t let this happen.

4) Sales Efficiency: GTM’s #1 priority every quarter (20:09)

Sales efficiency is all about maximizing ARR bookings and revenue with the fewest resources possible. Formulas you should know:

In a downturn, net sales efficiency is an important metric to monitor because the formula takes into account churn and downsell ARR. Gross margin adjusted CAC payback is also a very effective metric, but be aware that it doesn’t capture churn — a company with 5 months CAC payback with low retention (acquiring high churn customers) is not building a durable business with long term profitability.

Based on the formula, you have four options to improve sales efficiency:

1. Increase new and expansion ARR bookings with the same S&M cost structure (top-line focused): Raise quota to on-target earning ratios, improve quota attainment, raise pricing without sacrificing deal velocity, and optimize marketing efficiency.
2. Improve gross margins: Optimize IT infrastructure costs, automate customer support, delivery and customer success processes.
3. Decrease S&M costs while maintaining bookings (bottom-line focused): Review the ROI of every dollar invested in S&M and rationalize low performance.
4. Reduce churn while maintaining same customer success expense: Optimize the customer journey and crystalize your ICP.

With the shift towards great efficiency, it is important to revisit your GTM organizational structure and sales plan for 2023.

Start with setting your baseline. Calculate the sales efficiency metrics and review quota attainment by AE for the last four and next four quarters. If you have high quota attainment with weak sales efficiency metrics, something doesn’t add up and if your sales efficiency is trending in the wrong direction, it’s time to adjust.

To diagnose this, breakdown your GTM engine by geography and assess quota attainment by AE, AE support ratios, quota to on-target earnings ratios, quota carrying OpEx versus non-quota carrying OpEx, and the ROI of marketing spend. Monitoring non-quota carrying OpEx is critical as the GTM engine scales because this is frequently a contributor to sales inefficiency (I walk through an example at 22:44). A helpful framework to use to see if this applies to your business is the Sales Pod Profitability Analysis (example run-through at 24:50). This can help you assess if the key assumptions in your 2023 sales plan are aligned for success. If you assume 85% quota attainment and your CAC payback is 12+ months, revisit your plan as you have little room to miss.

When it comes to marketing, during downturns you need to be nailing the audience and the value proposition. If you aren’t, you’re wasting money. Conduct a lead source split analysis (marketing, sales, channel) for closed/won deals and for late-stage pipeline. A general guideline is 30% of closed deals should be sourced by marketing. It is also important to track the qualified pipeline to spend ratio. Aim for a 10x ratio; generate $10 in pipeline for every $1 invested in marketing.

You need both ratios to be healthy. If you are below these guidelines, pause your spend, fix the problem, test and iterate, and then resume once it’s working. If your qualified pipeline to spend ratio is healthy, but marketing-sourced, closed/won deals, or late stage pipeline is low, look into why those deals are not converting through the funnel. To fix this, go back to the basics. Review in detail the customer characteristics that result in closed/won versus closed/lost deals. Are there patterns and what are they? Collaborate with sales to really understand who is buying and what is compelling them to buy. Is your messaging aligned? Double down on data-driven proof that you are targeting the right ICP.

5) Roadmap Refresh: Prioritize killer features that drive topline

When it comes to R&D and your product roadmap, prioritize initiatives that drive revenue or reduce churn. Understand the business case for every single roadmap item — assess whether it will increase ARR, increase win rates, reduce churn, open up new markets, or act as an expansion opportunity. Apply a dollar value to every project on the roadmap, then calculate the cost and timeline for each project. From there, prioritize which to focus on and which to shelve.

6) OpEx Examination: Hold all non-quota carrying OpEx to a “critical & excellent” standard

General & administrative expenses are non-quota carrying and is an area to optimize during a downturn. Unfortunately, certain functions become obsolete when growth slows. Similar to the previous exercises, map out your G&A OpEx to determine ROI for each department and role. G&A should be around 15% of revenue for later stage companies and 20% for earlier stage companies.

7) Come Together: Align the team on new reality & shift culture to reward efficiency

Your team must be aligned on the new reality the company is facing. While this is more of an internal communications initiative rather than a quantitative assessment, it’s no less important. Inspire your team to band together and celebrate collaboration.

“The strength of the team is each individual member. The strength of each member is the team.” — Phil Jackson

Working together, every team has the incredible power to increase productivity, performance, cultural connection, and good vibes within the company. Prioritize frequent communication in large and small groups to emphasize the new focus on efficiency. Be transparent, compassionate and direct. Recognize and celebrate efficiency relentlessly. Positive feedback encourages more of the behavior and decision making you need to win.

8) Cash Management: Build a conservative plan for 2023 and 2024

When it comes to budgeting and cash management, adjust your OpEx to keep your runway over 24 months, strive for a burn multiple under 2 (and ideally around 1), and adjust S&M expenses to keep your gross margin adjusted CAC payback under 12 months. If you are experiencing high churn, then focus on net sales efficiency being around 1.

Create a company-wide, department-by-department cash savings plan. Complete a deep dive on your fully loaded cost of goods sold and explore ways to optimize all costs. Explore pricing for professional services/implementation as this can be a significant cash drain.

In 2023, companies should take a very conservative view with revenue projections. In this section at 37:55, I share an important budgeting tactic, which involves reviewing all of your SaaS metrics for the projected period. In the midst of a recession, if your cash budget assumes improving retention and efficiency metrics, revisit the assumptions. Focus on your burn multiple today, not the one you’re growing into. It’s dangerous to assume new revenue growth when calculating burn. On a monthly basis, report on burn and cash attainment to the original budget. Keep cash runway top of mind to avoid a surprise fundraise scenario.

Stay Positive

“Optimism is essential to achievement and is also the foundation of courage and true progress.” — Nicholas M. Butler

In the face of economic headwinds, it’s important to remember that adversity fuels strength, innovation and growth. Many of today’s best tech companies were created through downturns and it’s a long list; Microsoft, Amazon, Google, Venmo, Instagram, Uber, and WhatsApp. Continue to look for the best talent to fuel your growth, even if you have had to do layoffs. This is a prime opportunity for entrepreneurs to build and grow stronger. Founders and companies that strategically use turbulent times to their advantage will be rewarded during and after a downturn.

So Get Started

• Develop a plan: Create short- and long-term goals, rank them, and ensure alignment across the executive team. Assign one owner to drive each initiative. Consider tapping board members or active investors to collaborate with each lead.
• Drive accountability: Discuss weekly goals and blockers every Monday. Stay accountable to moving the needle every week. This process works if everyone is inspired to make change. Align on KPIs and success metrics to monitor progress and make adjustments as needed.
• Be adaptable and pragmatic: Reiterate the important work that moves the needle. Don’t waste time and maintain urgency.

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Mike Robinson leads Craft’s growth fund and is a partner on the investment team. Michael has spent his career in investing and operating roles working with horizontal and vertical B2B SaaS companies.