How we Optimize our SaaS Sales Funnel — Part 2 of 3
A look inside our outbound sales funnel at PhoneWagon (Techstars ‘17)
In part 1 of this series, I discussed the metrics of our outbound sales funnel for our SaaS company PhoneWagon. I talked about how if we make 100 dials a day we will ultimately get 1 sale from those dials. Our average sale at that time was approximately $200. I extrapolated those daily statistics over a month to demonstrate how with this model we can make 2000 dials a month, reach 280 decision makers, schedule 80 demos, 60 of those demos will show up, we’ll make 20 sales, and add $4,000 new MRR (monthly recurring revenue) each month.
A look inside our outbound sales funnel at PhoneWagon (Techstars ‘17)medium.com
Near the end of part 1 I explain how optimizing any spot in your funnel can drastically increase output. In our funnel for example, if we increase our close-rate on demos from 30% to 60% our sales would go up from 1 to 2 per day. That means $8,000 in new MRR per month instead of $4,000.
‘Close-rate’, ‘demos set’ and ‘demos show’ are all metrics we can work to optimize. The one metric that is more difficult to improve in our funnel is the number of dials / decision makers reached. This is largely based upon calling at the right time of day, day of week, and availability of the person. This metric is harder to improve than the other metrics. Figuring out how to optimize any of these metrics can have a drastic affect on our payback period.
Our Payback Period Breakdown
Payback period is the number of months a company requires to payback its cost of customer acquisition. This is a very important metric for any SaaS company. Understanding and optimizing your payback period is what I discuss in detail in today’s post.
According to Tom Tunguz, the median SaaS startup has a payback period of 15 months on a gross margin basis.
“A short payback period confers two massive advantages to a startup: smaller working capital requirements and a consequent ability to grow much faster.” — Tom Tunguz
Basically, if you have a short payback period, your company requires less capital to grow and therefore you are able to expand much faster than a company with a long payback period.
At PhoneWagon, we are seeing some early wins. The first is that our payback period is around just over 3 months for our outbound sales funnel. This means that it takes us about 5 weeks to payback our cost of acquiring a customer. After this period, we are profitable on that customer.
The breakdown looks like this: We pay our SDRs (sales development reps) and AEs (account executives) $150k per year. That breaks down to $12,500 per month in salesperson expenses. Keep in mind that this is for 2 full time salespeople (AE and SDR). These two positions will generate 20 sales per month. That breaks down to a customer acquisition cost (CAC) of $625.
CAC = ($150k / 12 months ) / 20 sales = $625.
Our average customer gross margin is $200 per month. To calculate the payback period we simply divide the CAC ($625) by the gross margin per customer ($200) to get 3.12 months. That means that after 3.12 months our customers are profitable and we can reinvest that cash into the business to grow even faster.
One thing we are keeping an eye on is how these numbers scale as we add additional resources. Typically as companies scale their customer acquisition efforts, the payback period fluctuates and affects the working capital requirements and growth characteristics. We are choosing to not participate in those trends.
Tactics to Optimize your Funnel and Decrease Payback Period
Our payback period of 3.1 months is well below the industry standard of 15 months. There are many reasons for our short payback period (including us being rather lean) but some of the tactics we use to optimize our funnel can be replicated by anyone. Here are a few of my favorites:
Tactic 1: Ask Questions
The first tactic is pretty simple. We ask a lot of questions. We use this tactic to optimize our ‘Demos Set’ and ‘Demos Show’.
Questions help us identify the specific pain points our prospects are having and personalize our pitch. It also allows us come across less salesy. Asking questions, letting our prospects talk, listening and giving advice helps us be more consultative and helpful, instead of aggressive and pushy.
Additionally, asking questions allows us to figure out exactly where we can add value. We don’t want to assume that there is a pain point with price or user experience or customer service. Those are big assumptions to make and if we choose the wrong one, our value proposition won’t resonate.
We start our calls with why and what. “What are the problems you are having..” “What are you currently doing to solve this problem..” “Why are you looking for a new solution…” etc. Then we can mold our pitch accordingly. We record and track the answers to these questions and exchange information in our end of day sales recap meeting.
Tactic 2: Selling Pain Killers Not Vitamins
I learned a few years ago the value in selling pain killers instead of vitamins. Vitamins are nice-to-haves. You take them when it’s convenient. In terms of product, ‘vitamins’ are usually features or extra functionality.
Pain killers are must haves. Products that are ‘pain killers’ hit on major pain-points for customers and usually focus on driving revenue and/or cutting costs. And just like at the drug store, you can charge more for pain killers than vitamins.
This tactic goes hand-in-hand with the tactic above. Once we identify pain points by asking questions and listening we can press on those points and then offer our solution as a pain killer to this problem. We explain that our product isa tool that they NEED in their toolbox in order to most effectively run their business instead of a ‘feature’ or ‘add on’ that might be nice to have.
By applying these 2 tactics, we are able to set more demos (% of phone calls) and get more demos to show up (% of demos set). This drastically improves our funnel and helps reduce our payback period.