It’s easy to say “We’ll increase revenue for our software company by accelerating organic growth.”
After all, the concepts are straightforward:
- Align with your buyers.
- Build out content that educates and builds trust.
- Create a clear and simple route for people to subscribe so that you continue to educate and nurture a relationship.
- Optimize your conversion funnels.
But then several questions arise.
- What sales model should you use?
- How many leads and opportunities do you need to generate each month?
- How many marketing and sales people should you hire?
- How will you know if you are on target to achieve your customer goals? What key performance indicators will you use?
Use HubSpot’s model for successful growth
Wouldn’t it be helpful if you could see a model of a company that has successfully accelerated organic growth?
In fact, they’ve shared enough information to assemble a rough approximation of their sales model (as of July, 2012). Let’s see how it works.
[Note that I said “rough approximation.” I put together bits and pieces from different public sources to assemble this model. It’s not intended to be an accurate report of HubSpot’s business in July, 2012. It’s simply meant to provide an example of a software company that you can use for your own business planning.]
The HubSpot sales model relies on both Online Marketing and Inside Sales
David Skok has observed that as sales complexity increases from Online Marketing to Inside Sales to Field Sales, the costs increase logarithmically.
HubSpot’s Monthly Recurring Revenue is about $600 ($7200 Annual Recurring Revenue), so it needs to keep its Customer Acquisition Costs under $7200. It does this by generating as many leads as possible using Online Marketing. Then it uses Inside Sales to qualify and convert opportunities.
How many leads and opportunities does HubSpot generate each month?
Since HubSpot pretty much invented the term Inbound Marketing and sells an inbound marketing software platform, you won’t be surprised to see that 75% of its leads come from inbound marketing. The remaining leads come from outbound efforts.
The inbound leads are 50% cheaper than its outbound (paid) leads and it closes 100% more of the inbound leads than the paid leads.
By comparison, HubSpot says that most other SaaS companies only generate ~20% of their leads from inbound marketing. Thus HubSpot is able to spend much less to produce higher-quality leads.
In July, 2012 HubSpot was growing at about 45% per year (or 3% per month). It was generating an astounding 45,000 marketing leads per month. It converted 5% of those into sales opportunities and turned 14% of the opportunities into new customers.
The take-away from this chart is that you not only have to generate a lot of leads every month, they have to be high-quality so you can convert a significant number of them into opportunities and customers.
How much does it cost to produce this many leads and to convert them into customers?
It’s vital that software companies keep their Customer Acquisition Costs (CAC) low. You have to pay the CAC up front and then you receive your corresponding revenue slowly month by month.
In 2012 HubSpot was spending about $6,800 to acquire each customer. The money was used to staff 30 marketing people and 120 sales people. The total annual cost per person is about $150K. This number includes all the costs associated with each person: both individual compensation and program costs associated with that person.
Now you can create a single customer cash flow statement
Finally we have enough information to assemble a single customer cash flow statement for the month of July, 2012.
In addition to reducing the Customer Acquisition Cost, Sales and Marketing will work to improve the other items it has some control over. These include reducing the Cost to Service customers and increasing the Monthly Recurring Revenue from each account.
How do you know if you are becoming profitable?
HubSpot is producing a lot of leads and converting them into customers. But how do they know if their model is financially viable?
Two performance indicators to watch closely at a SaaS company are:
Lifetime Value > 3x Customer Acquisition Cost
Months to recover Customer Acquisition Cost < 12 months
In an article on SaaS Metrics, David Skok used the chart below to show how HubSpot has improved its key metrics over time.
In particular, by lowering the monthly Churn Rate from 3.5% to 1.5%, they were able to increase the LTV:CAC ratio to a very respectable 4.7.
HubSpot shows how to build a coherent sales model
The HubSpot example shows the importance of making all the pieces of the model work together.