Breaking down the sales funnel metrics of our early-stage SaaS company. Part 1 of 3
A look inside our outbound sales funnel at PhoneWagon (Techstars ‘17)
The First Sale
On Wednesday January 11th 2017 at 04:14 pm I closed the first sale in PhoneWagon history.
This sale wasn’t unexpected. It didn’t materialize out of no where. It came as a direct result of over 2,000 phone calls made between myself and 1 SDR (sales development rep) between December and the time that deal closed in January.
That was the early days of PhoneWagon and our sales funnel has matured a lot since then. Now, almost 7 months later we are over 5k in MRR (monthly recurring revenue) and our funnel metrics look quite a bit different. I break them down below.
Our Outbound Sales Funnel
For the purpose of this article I’m going to simplify our model a bit and assume we are using 1 SDR making 100 dials a day and 1 AE (account executive) performing demos.
The Daily Funnel
First, we start off with outbound sales cold calls. To feed our sales funnel we have to make 100 dials a day.
Of those 100 dials we get in touch with about 14 decision makers. These are the people that can actually decide whether or not to purchase your product (or at least greatly influence the person who is in charge of purchasing). Often you get turned away before you ever make it to a decision maker. Theres a lot of voicemails, gate-keepers, ‘not interested’ etc. It’s important to optimize a sales script to get past these gate-keepers and onto DMs.
14 Decision Makers
When we reach one of these 14 decision makers a day we are going to pitch them. We listen to their pain points and empathize with their problems. It is important for us, in a crowded marketplace, to address the competition and differentiate ourselves. Ultimately we want to build value for them around our product.
In 2010 I worked for a company that sold phone calls to local businesses (think plumbers, chiropractors, electricians…medium.com
4 Demos Set
Out of those 14 decision makers we will be able to set 4 demos. This is when the DM agrees to a 10–15 minute demo of our product with one of our product specialist. We get them to agree to a specific time and date and we send these 4 people calendar invites and follow up confirmations. It is important to try and get them to agree to a time within the next couple of days. The sooner the demo, the higher the percentage chance they show up.
3 Demos Show
Now of those 4 demos that got set, not all of them are going to show up. It is important to follow up with the person you set the demo with to confirm they are coming.
People are more likely to show up for a demo if you show them in your confirmation email that you are a real person setting aside time in your day to give them something beneficial and valuable to them.
Even if you do this right there is going to be some cancellations, some no-shows and some rescheduling involved here. Of our demos set, we generally have about 75% show up. So of 4 demos set in a day, we have 3 show up. So from those initial 100 dials, we are able to perform 3 demos.
Right now our close-rate is about 30–35%. That’s generally considered about average for a SaaS company today. So of those 3 demos we perform, we will make 1 sale.
Our average revenue per sale is about $200. So that 1 sale leads to an additional $200 of new MRR. So that’s $200 new MRR per day from 100 dials.
Now let’s extrapolate that to show what it looks like on a monthly basis with 1 SDR doing 100 dials a day.
The Monthly Funnel
There are roughly 20 working days in a month. Simply by multiplying all of the figures above by 20 you get this result: 2000 dials > 280 Decision makers > 80 Demos set > 60 Demos show > 20 Sales made > $4,000 new MRR each month. So with this model we will bring in $4,000 per month of new MRR with 1 SDR making 100 dials a day.
Pay Back Period
The next thing you’ll want to figure out is what your pay back period looks like.
For the above model, we need to figure out how much it cost us to acquire that $4,000 dollars in MRR and then how long it will take to pay back those costs to become ROI positive.
Let’s start. The above model requires 2 different sales people; 1 SDR and 1 AE (account executive). So let’s assume that fully-baked we are paying out $150k in combined salary to the two sales reps it took to acquire that $4k in new MRR.
$150k in salary / 12 months = $12,500 per month in salary.
So it costs us $12,500 to acquire $4,000 in monthly recurring revenue. But how long will it take us to pay that back?
$12,500 cost / $4,000 new MRR per month = 3.125 months pay back period
Our pay back period is about 3.1 months. This means it will take us 3.1 months to pay back that initial investment of $12,500 to become ROI positive.
Because we are paying a one-time acquisition cost of $12,500 to receive a recurring $4,000 a month we are in the negative for 3.1 months but we will be ROI positive on that investment after that. 3 months is considered a very good pay back period for a subscription model.
It is important to try and get that pay back period as short as possible. A smaller pay back period frees up cash to invest in other areas of the business and ultimately allows your company to grow faster.
So how do you get that pay back period shorter? Well you optimize your funnel. Some levers could be; increasing your average MRR per sale, improving your close-rate on demos or upping the amount of demos you set. Optimizing one part of the funnel could have a drastic effect on your pay back period.
For example, if we can figure out how to increase our close-rate on demos from about 30% to 60% (which would be an incredibly good close-rate) we would bump up our sales in this model from 1 to 2 per day. That means $8,000 in new MRR per month instead of $4,000 and that lowers our pay back period to just over 1.5 months! wooo hoo.
You want to look at every area of your sales funnel to see where you can optimize to ultimately lower your pay back period.