Stackable Revenue: Unlimited SaaS Scaling

Dave Boyce, CEO, Formative Ventures

Jacco van der Kooij, founder, Winning by Design

Trey Allison, CEO, Kronologic

“Recurring revenue is a function of recurring impact.”

-Jacco van der Kooij

Unlike business owners who cash out every day, you are building a recurring-revenue business.? As you scale your business, you need it to hold up under pressure.? To do that, you don’t need just any old revenue.? You need Stackable Revenue.

The concept is simple.? Your stackable units are your customers, inclusive of everything you do to acquire them and everything you do to keep them and help them succeed.? These units also represent revenue, and we want to stack them to the sky.

Not all revenue is stackable.

Consider the challenge of stacking the units on the left vs. stacking the units on the right:

The stack on the left can only reach so high before structural integrity begins to fail.? On the other hand, the units on the right can stack indefinitely.

Process

Let’s double-click on one of these “stackable units” of revenue.? The relevant dimension of a stackable unit is consistent edges.??

Let the horizontal edges be the processes--how do we acquire customers?? How do we retain them?? If it’s the same every time, we will represent that with straight lines.? If it’s highly variable, we’ll let the lines reflect that variability:

Why would good managers prefer the lines on the right side--isn’t more variability worse?? In truth, rational and talented managers choose the right-hand side every day for good reasons.? In many cases we sing the praises of these managers, because they have the commitment to “win at all costs.”? Non-recurring-revenue businesses sometimes benefit from this type of thinking:??

• “Whatever it takes to win the deal”
• “Unless it’s illegal or immoral, we will do it for the customer”
• “What would we not do to save the customer?”

In many good businesses we see individual heroes and individual acts of heroism celebrated.? How many times have you seen a sales rep accept an award at President’s Club based on one deal that required months of custom work and above-and-beyond resource deployment?

It is counterintuitive, but creativity can be our enemy here.? Consider the customer’s question, “could your product do ____________?” And then the thoughtful, creative, well-intentioned sales engineer’s response, “that’s a good question.? I never really thought about it…? but I suppose it could.? Yes!? I see your point--I think this could work!”? The use case being proposed here is clearly not the use case the product was designed to address, but the sales engineer is using creativity to design her way to making it work in the service of the customer.

These may be good people running good businesses, and they certainly are doing everything they can to win and serve customers.? But to the extent the processes they deploy are variable, they are not stackable.

Economics

The vertical sides of our stackable units represent “unit economics.”? These can most succinctly be summarized as:

• Customer Acquisition Cost (CAC)
• Lifetime Value (LTV)

CAC captures all variable costs associated with acquiring a customer, including all sales and all marketing.? Some managers include fixed and variable costs, but this can distort the realities of unit economics in early stages of growth.? In no case can you exclude expenses incurred in pursuit of customers you did not win.? The best definition of CAC is all customer acquisition expenses divided by the number of new customers acquired.

LTV is all revenue expected for the lifetime of the customer, net of all costs to serve that customer.? This includes support costs, account management costs, and any sales costs associated with renewing or expanding the customer.

A common SaaS metric is LTV:CAC, expressed as a ratio.? Above 2 is good.? Above 3 is excellent.?

These are your unit economics.? So how do we get in trouble here?? Again, the answer is creativity.

• “Our price list doesn’t show this, but I’ll throw in all our products for one enterprise-wide license.”
• “Try it!? If you don’t like it, you can opt out--I’ll get the CFO to approve that.”
• “Let’s ramp you into the footprint we are talking about.? I’ll make it worth your while by making your per-unit cost quite low upfront, provided you commit to a ramp schedule we negotiate now that gets you to a minimum scale within one year.”
• “Don’t leave us.? Give us some time to fix the problem.? While we work on that I’ll give you a dedicated team, and I’ll suspend your payments for 6 months.? You’ll pay nothing for the product and nothing for the team, and this will give us time to address the issues.”

We’ve all seen and probably done versions of everything above.? The intentions are good, the creativity is high, and the stackability is low.

Sales-Led Growth (SLG)

Enterprise Sales Leader:

“Guys, seriously--have you never run a business?? These are acceptable sales and retention tactics.? If you want to win and keep enterprise customers, you have to have all tools at your disposal.”

Us:

“Agreed.”*

*at the right time

Product-Led Growth (PLG)

“Product-Led Growth is a go-to-market strategy that relies on your?product as the main vehicle to acquire, activate and retain customers.”

-Wes Bush, Product-Led Growth

PLG incorporates a set of techniques along the whole length of the revenue bowtie, putting as much of the work on the shoulders of the product as possible.??

Source:? Winning by Design

Can the product be the primary vehicle to:

• Acquire customers?? If yes, then we’ll do that
• Activate customers?? If yes, then we’ll do that
• Retain customers?? If yes, then we’ll do that
• Expand customers?? Yes, please.

In the process of building these capabilities into the product, we are by definition taking responsibilities out of the hands of humans.? This means decisions are programmed in, and as a result they are consistent.? Stackable.

Product-Led Growth also leads to stackable unit economics. Common PLG techniques require practitioners to understand CAC and LTV and optimize for an LTV:CAC that makes sense for the business.? The good news is that where product can take over acquisition tasks, acquisition can be less expensive.? Likewise for activation and retention.? Furthermore, as with our processes, PLG makes pricing and contract structures less variable.? The very act of having to program those into code requires that rules prevail.

Sequence

If we want to stack our business to the sky, we will sooner or later run into the limits of PLG.? Remember the sales leader who was not impressed with our lack of practicality in acquiring and retaining customers?? We need her now like never before.? And if we build our company in this sequence, she will think she has died and gone to heaven.

Imagine a world where your sales job is to pick through happy customers who are already using your product and help them structure enterprise contracts that both save them money and help them scale the benefits of your product across the rest of their company?? Imagine if sales were not so much sales but high-end concierge service?? This is what it was like for the first sales teams at Dropbox, Docusign, Lucid, and Twilio.? These sales teams sign large contracts and deal with enterprise-scale customers, but they have the benefit of a product that has already been through the refining fire of PLG.

There is a best sequence for building a structurally sound revenue machine, and it is this:

1. PLG
2. Inside Sales
3. Field Sales

Note in this example when the growth starts to really be evident?? It’s when sales begins to kick in.? But PLG never lets off the gas and continues to provide a solid foundation for scaling, even as sales grows at break-neck speeds.? In this example, PLG is the reason sales can scale without breaking the company.? The discipline acquired while assembling those first stackable units resulted in a well-designed, easy-to-use product that serves very well the needs of end users.

Note also that in this example, each channel of sales is equal in the terminal year.? Yes, enterprise sales scaled faster to that number than did inside sales.? Likewise inside sales scaled faster than PLG.? But each built on the foundation of its predecessors, and the cumulative effect is exponential growth.

What if We Didn’t Build the Company That Way?

At Kronologic we assembled our first few million in revenue through good, old-fashioned sales.? We neither relied on the product to acquire nor activate the customers (retention is a different story--the value proposition of Kronologic drives net retention well above 100%).? So does that mean the laws of scale physics don’t apply to us?? Absolutely not.? Does it mean we can’t be a product-led company?? Also not.

We realize our ability to scale the company depends absolutely on the efficiency, consistency and reliability of our acquisition and activation processes.? We also know that unit economics are key to get right before you start adding growth fuel (luckily our unit economics are quite good).

So we are a good example of a company that found product-market fit through traditional sales and marketing and has aspirations to grow exponentially through the unicorn barrier and beyond.? Perhaps you are in a similar situation?

It is never too late to adopt the principles of Product-Led Growth and build a Stackable Revenue machine.? The key is not “free trial” or “self-service activation.”? These are typical hallmarks of PLG, and they may or may not apply to you.? The key is to take the variability out of the business.? At Kronologic we have adopted the mantra:

Do 100% of the time what works 70% of the time

In sales we don’t expect to win all deals.? We wouldn’t want our sales team coloring way outside the lines to bring in that one additional customer.? If it’s outside the lines, it’s outside the lines.? We know that if the customer requires coloring outside the lines during the sales process, they will likely require coloring outside the lines after the sale.? This will stress our onboarding, support, and success systems.? No, we sell consistently, and we expect to lose some customers.? But the ones we win are center-of-the-bullseye customers from an ideal customer profile (ICP) and use case standpoint.? They are stackable.

Likewise, we are actively building consistency, automation and even self-service into our onboarding process.? The more consistent we can be here, the better we can understand what works and what doesn’t.? We can use PLG principles to iterate our way to an onboarding process that works for our customers and for us (in the case of retention we are not satisfied with 80%--we want 90% gross retention and well over 100% net retention).

We have seen too many companies ignore these realities and continue stacking “unstackable” revenue.? For these resistors, the end of the movie is not good.? Unwitting investors might keep funding that company because the overall growth characteristics look good in the beginning.? But just like compounding interest, the accumulating debts of inconsistent processes and/or inconsistent or unfavorable unit economics will bring that business to its knees with all the reliability of gravity.

What Does That Mean for Me?

For the SaaS Salesperson:

We recommend you choose your next employer very carefully.? Pay special attention to the product.? Has the company put its product through the PLG fire?? That would be a good sign.? Is the product easy to understand and use?? Absolutely critical.? If your employer is saying things like, “sales leads, product follows,” run don’t walk--this is not the company where you can build a career.

For the SaaS Executive:

If you have the choice of how to spend money between:

1. Finishing out the product so it’s extraordinarily easy to use
2. Building new features so your product can meet the growing expectations of customers
3. Scaling the company by adding quota-carrying headcount to the team

Choose 1) every time.? You may not have this choice if you are unprofitable and your runway is short.? We feel so strongly about this recommendation however, that we would restructure other parts of the company to afford choice 1).

The alternative is not pretty. It may take years to play out, but the end of that story is either a business that generates cash but has stalled out on growth, or even worse: a smoking crater.? There is no high-growth end to this story without fundamentally fixing the usability of your product.? And the years you spend fighting against the inevitable are years you will never get back.

For the SaaS Investor:

Not all revenue is the same.? Some investors look for the triple-triple, double-double, and if a company is tracking to that, they invest.? Our observation is that companies can hit those numbers with excellent sales execution and still not be a good prospect for IPO scale.? You want to make sure the composition of the revenue is stackable.? We would trade off early years of growth for a solid product that can serve as a foundation for years of growth (see the Stackable Revenue chart above).

Conclusion:

If you are building a b2b SaaS business, you are not pursuing revenue at all cost.? The object is to build a machine that delivers value on a recurring basis, such that users come back again and again.? Recurring revenue will be one of the results.? We need predictable outputs for known inputs.? This means we need processes and economics we can rely on--the two foundational principles of Stackable Revenue.

In our experience, the school of thought around Product-Led Growth is the best, most fertile place to learn the art of Stackable Revenue.? Get that right, then rapidly layer on sales, and watch your company stack to the moon.

Rock on!

-Dave, Jacco & Trey