The Wrong Way To Build A SaaS Business

The most common mistake I see SaaS businesses make is thinking that hiring sales reps equals growth. When in fact, this is totally backward.  

This is actually a very common mistake.

Consider a SaaS business that gets to $100K in ARR. Maybe they're ramping up to raise a round of investment based on that initial revenue with the intention to spend some of the money to hire more sales people.  

This is a fundamental mistake.

The mistake here is their math is based on a direct correlation of SDR’s being the key driver of revenue growth, not a proven and scalable sales process. 

The issue here is the model is based on growth as a function of sales person headcount, not on demand. 

Instead, it should be based on the ability to generate demand, build pipeline and convert it to revenue. 

SaaS companies do not drive growth simply by hiring more sales people. Sales people are the vehicle to convert demand into new customers and revenue growth.

Growth is created as follows (and in this exact order):

1. A SaaS product with validated product-market fit, solving a specific problem.
2. Experienced marketers who know how to predictably channel and scale demand. 
3. A sales team who can consistently convert that demand into new subscribers.

Too few SaaS companies are building their growth model with a clear understanding of this operations model. Instead, they’re trying to build their businesses and revenue plan by simply hiring more sales people hoping they’ll keep bringing in revenue. 

This is why more than two-thirds of Sales Development Reps miss quota (and most SaaS businesses die).

The right way to do it, is to first get good at attracting high value leads at the Awareness stage. Use strategic content (case studies, etc.) in a simple funnel to move leads to the Consideration stage. Then engage directly (ie: qualification, demos, etc.) to move them to the Decision stage.

Founders should be closing initial deals to prove their concept and stay lean. Then, once some cash is flowing and the concept is proven to solve a specific problem, for specific person, in a specific vertical, hire a sales person to engage future leads to move them from the Consideration to Decision phase.

Your first customers should become initial case studies as soon as possible. Leverage these as extreme social proof for getting other customers (with the same problems) in the same niche.

This is how you build a SaaS selling machine.

Because here's what I'm seeing happening in too many SaaS companies right now:

• New reps are hired based on an artificial and unrealistic quota with no proof of concept to work with and no defined sales process in place.
• Because there is no proof of concept or sales process in place, the sales rep is left to "figure it out on their own" (remember: everyone is hired based on past performance).
• The sales person has limited resources and support to draw upon for becoming successful in the role because the founder(s) have no system or clue how to get customers predictably.
• The sales person doesn't have a clear understanding of who to target and why. Therefore they flounder with their outreach efforts despite likely being an excellent sales person.
• The result is the sales person can't generate enough leads to sell to and doesn't even come close to achieving plan. 
• Morale tanks, the business misses its "projections", investors lose faith, culture becomes toxic, the blame game reaches new heights, the sales person gets fired and trashes the startup on Glassdoor, the founder becomes jaded and thinks all salespeople are lazy, incompetent, greedy derelicts.
• To keep going, the founder has to further dilute their equity through another round and come up with "better plan"... hoping it works.
• Sound familiar?

I've seen this happen so many times. Even in large SaaS companies.

The answer to this problem is actually very straightforward.  

Instead of hiring more sales people hoping they will drive your revenue plan, get clear on exactly what problem you're solving and for who. Get some proof of concept customers. Get them material results and turn those into compelling case studies. At the most basic level, you want your case studies to tell a "before and after story" showing how your customer traded some of their money for a greater sum of money in return.

Then, iterate off that success to build a targeted marketing funnel (with the same type of buyer) that brings in more leads than your existing sales capacity can handle.

Finally, and probably most important - have a defined, rinse and repeat process in place with scripts, demo outlines and data driven feedback loops in your sales process to help iterate and improve results.

The goal here is simply to exceed capacity with demand.

Once your existing capacity is tapped out (whether it’s a single founder or team doing the selling), work backward from your capacity to figure out how much demand each person can handle. Then, increase demand to the point where it makes sense to bring on another sales person. 

For example in B2B SaaS, if the calendars are empty and you (or your sales team) aren’t doing at least 3-5 demos a day, DO NOT HIRE ANY MORE SALES PEOPLE. Understanding the utilization rate of a fully ramped sales rep is critical here. 

Before hiring any more sales people, you have to develop the ability to get more leads. 

Let’s say you want to do 4 deals per month, per sales person. If the closing rate benchmark from a qualified demo to a booked customer is 15%, that means each reps needs to do about 27 demos month to hit quota, or roughly demo 1-2 per day (assuming a bit of margin for error and maybe 3-6 months ramp time). 

This means the business needs to first create the ability to get 27 demos per month on the calendar.

Now, you’ve got an easy way to eyeball when it’s time to hire a new rep - and that’s when they’re doing more than 3-4 demos per day (double their normal capacity). 

So if your SaaS business doesn’t have a repeatable process to get qualified leads,

DO NOT HIRE MORE SALES PEOPLE. 

You must first create the demand. 

Only once you’ve got your demand problem solved can you then hire sales people.

Not before.