Number 7 on the All-Time Top SaaStr Podcasts: On the Importance of LTV/CAC

Just a quick post to say I’m honored to have made number seven on the countdown of the top ten most downloaded podcasts of all time on the SaaStr Podcast.

The podcast in question is an interview performed by Harry Stebbings of The Twenty Minute VC where we sat down to talk about the importance of the lifetime value to customer acquisition cost ratio (LTV/CAC) and why, if you could only know one SaaS metric about a company, that LTV/CAC would be it.

Of course with Harry it’s easy to end up in a wide-ranging conversation, as we did, and we thus discussed many other fun topics including:

  • How I got into enterprise software and SaaS.
  • The biggest challenge as a leader in a high-growth company (hanging on).
  • Why, for a public SaaS company, I’d probably take billings growth as the single metric, because LTV/CAC isn’t available.
  • LTV/CAC and the idea that it’s a powerful (if compound) metric that weights what you pay for something vs. what’s it worth.
  • Which churn metric to use as the basis for calculating LTV.
  • Upsell and how to design your packaging to enable both incremental upsell and major cross-sell.
  • Pricing and how to ensure your pricing is linked to at least one metric that always increases.
  • Bookings and the perils of TCV in SaaS companies, including my favorite self-quote from the podcast: “beware of Greeks bearing gifts as you would beware SaaS companies talking TCV.”
  • Multi-year deals and to what extent they should be prepaid.
  • How once, at Business Objects, we once sold a customer more licenses than they had employees (on the broader topic of vendor/customer interest alignment).
  • How sales and customer success should work together on renewals and upsells — and importance of putting farmers vs. farmers and hunters vs. hunters when it comes to competition.
  • How you can’t analyze churn by analyzing churn — i.e., gathering a list of churned customers and looking for commonalities.
  • The 90 day rule when it comes to new managers.

I hope you enjoy listening to it if you haven’t already. And for those who have, thanks for helping me make the top 10 list!

The Most Important Chart for Managing the Pipeline: The Opportunity Histogram

In my last post, I made the case that the simplest, most intuitive metric for understanding whether you have too much, too little, or just the right amount of pipeline is opportunities/salesrep, calculated for both the current-quarter and the all-quarters pipeline.

This post builds upon the prior one by examining potential (and usually inevitable) problems with pipeline distribution.  If the problem uncovered by the first post was that “ARR hides weak opportunity count,” the problem uncovered by this post is that “averages hide uneven distributions.”

In reality, the pipeline is almost never evenly distributed:

  • Despite the salesops team’s best effort to create equal territories at the start of the year, opportunities invariably end up unevenly distributed across them.
  • If you view marketing as dropping leads from airplanes, the odds that those leads fall evenly over your territories is zero.  In some cases, marketing can control where leads land (e.g., a local CFO event in Chicago), but in most cases they cannot.
  • Tenured salesreps (who have had more time to develop their territories) usually have more opportunities than junior ones.
  • Warm territories tend to have more opportunities than cold ones [1].
  • High-activity salesreps [2] tend to have more opportunities than their more average-activity counterparts.

The result is that even my favorite pipeline metric, opportunities/salesrep, can be misleading because it’s a mathematical average and a single average can be produced by very different distributions.  So, much as I generally prefer tables of numbers to charts, here’s a case where we’re going to need a chart to get a look at the distribution.

Here’s an example:

oppty histo

Let’s say this company thinks its salesreps need 7 this-quarter and 16 all-quarters opportunities in order to be successful.  The averages here, shown by the blue and orange dotted lines respectively, say they’re in great shape — the average this-quarter opportunities/salesrep is 7.1 and the average all-quarters is 16.6.

But behind that lies a terrible distribution:  only 4 salesreps (reps 2, 7, 10, and 13) have more than 7 opportunities in the current quarter.  The other 11 are all starving to various degrees with 5 reps having 4 or fewer opportunities.

The all-quarters pipeline is somewhat healthier.  There are 8 reps above the target of 16, but nevertheless, certain reps are starving on both a this-quarter and all-quarters basis (reps 4, 11, 12, and 14) and have little chance at either short- or mid-term success.

Now that we can use this chart to highlight this problem, let’s examine the three ways to solve it.

  • Generate more opportunities, ideally in a super-targeted way to help the starving reps without further burying the loaded reps.  Sales loves to ask for this solution.  In practice, it’s hard to execute and inherently phase-lagged.
  • Reduce the number of reps.  If reps 4, 11, and 12 have been at the company for a long time and continuously struggled to hit their numbers, we can “Lord of the Flies” them, and reassign their opportunities to some of the surviving reps.  The problem here is that you’re reducing sales quota capacity — it’s a potentially good short-term fix that hurts long-term growth [3].
  • Reallocate opportunities from loaded reps to starving reps.  Sales management usually loathes this “Robin Hood” approach because there are few things more difficult than taking an opportunity from a sales rep.  (Think:  you can pry it from my cold dead fingers.)  This is a real problem because it is the best solution to the problem [4] — there is no way that reps 7 and 13 can actively service all their opportunities and the company is likely to be losing deals it could have won because of it [5].

You can download the spreadsheet for this post, here.

# # #

Notes

[1] The distinction here is whether the territory has been continuously and actively covered (warm) vs. either totally uncovered or partially covered by another rep who did not actively manage it (cold).

[2] Yes, David C., if you’re reading this while doing a demo from the back seat of your car that someone else is driving on the NJ Turnpike, you are the archtype!

[3] It’s also a bad solution if they are proven salesreps simply caught in a pipeline crunch, perhaps after having had a blow-out result in the prior quarter.

[4] Other solutions include negotiating with the reps — e.g., “if you hand off these four opportunities I’ll uplift the commissions twenty percent and you’ll split it with salesrep I assign them to — 60% of something is a lot more than 100% of zero, which is what you’ll get if you can’t put enough time into the deal.”

[5] Better yet, in anticipation of the inevitable opportunity distribution problem, sales management can and should leave fallow (i.e., unmapped) territories, so they can do dynamic rebalancing as opportunities are created without enduring the painful “taking” of an opportunity from a salesrep who thinks they own it.

Do We Have Enough Pipeline? The One Simple Metric Many Folks Forget.

Pipeline is a frequently scrutinized SaaS company metric because it’s one of relatively few leading indicators in a SaaS business — i.e., indicators that don’t just tell us about the past but that help inform us about the future, providing important clues to our anticipated performance this quarter, next quarter, and the one after that.

Thus, pipeline gets examined a lot.  Boards and investors love to look at:

  • Aggregate pipeline for the year, and how it’s changing [1]
  • Pipeline coverage for the quarter and whether a company has the magical 3x coverage ratio that most require [2]
  • Pipeline with and without the high funnel (i.e., pipeline excluding stage 1 and stage 2 opportunities) [3]
  • Pipeline scrubbing and the process a company uses to keep its pipeline from getting inflated full of junk including, among other things, rolling hairballs.
  • Expected values of the pipeline that create triangulation forecasts, such as stage-weighted expected value or forecast-category-weighted expected value.

But how much pipeline is enough?

“I’ve got too much pipeline, I wish the company would stop sending so many opportunities my way”  — Things I Have Never Heard a Salesperson Say.

Some try to focus on building an annual pipeline.  I think that’s misguided.  Don’t focus on the long-term and hope the short-term takes care of itself; focus consistently on the short-term and long-term will automatically take care of itself.  I made this somewhat “surprised that it’s seen as contrarian” argument in I’ve Got a Crazy Idea:  How About We Focus on Next-Quarter’s Pipeline?

But somehow, amidst all the frenzy a very simple concept gets lost.  How many opportunities can a salesperson realistically handle at one time? 

Clearly, we want to avoid under-utilizing salespeople — the case when they are carrying too few opportunities.  But we also want to avoid them carrying too many — opportunities will fall through the cracks, prospect voice mails will go unreturned, and presentations and demos will either be hastily assembled or the team will request extensions to deadlines [4].

So what’s the magic metric to inform you if you have too little, too much, or just the right amount of pipeline?  Opportunities/salesrep — measured both this-quarter and for all-quarters.

What numbers define an acceptable range?

My first answer is to ask salesreps and sales managers before they know what you’re up to.  “Hey Sarah, out of curiosity, how many current-quarter opportunities do you think a salesrep can actually handle?”  Poll a bunch of your team and see what you get.

Next, here are some rough ranges that I’ve seen [5]:

  • Enterprise reps:  6 to 8 this-quarter and 12 to 15 all-quarters opportunities
  • Corporate reps:  10 to 12 this-quarter and 15 to 20 all-quarters opportunities

I’ve been in meetings where the CRO says “we have enough pipeline” only to discover that they are carrying only 2.5 current-quarter opportunities per salesrep [6].  I then ask two questions:  (1) what’s your close rate and (2) what’s your average sales price (ASP)?  If the CRO says 40% and $125K, I then conclude the average salesrep will win one (0.4 * 2.5 = 1), $125K deal in the quarter, about half a typical quota.  I then ask:  what do the salesreps carrying 2.5 current-quarter opportunities actually do all day?  You told me they could carry 8 opportunities and they’re carrying about a quarter of that?  Silence usually follows.

Conversely, I’ve been in meetings where the average enterprise salesrep is carrying close to 30 large, complex opportunities.  I think:  there’s no way the salesreps are adequately servicing all those deals.  In such situations, I have had SDRs crying in my office saying a prospect they handed off to sales weeks ago called them back, furious about the poor service they were getting [7].  I’ve had customers call me saying their salesrep canceled a live demo on five minutes’ notice via a chickenshit voicemail to their desk line after they’d assembled a room full of VIPs to see it [8].  Bad things happen when your salesreps are carrying too many opportunities.

If you’re in this situation, hire more reps.  Give deals to partners.  Move deals from enterprise to corporate sales.  But don’t let opportunities that cost the company between $2,000 and $8,000 to create just rot on the table.  As I reminded salesreps when I was a CEO:  they’re not your opportunities, they’re my opportunities — I paid for them.

Hopefully, I’ve made the case that going forward, while you should keep tracking pipeline on an ARR basis and looking at ARR conversion rates, you should add opportunity count and opportunity count / salesrep to your reports on the current-quarter and the all-quarters pipeline.  It’s the easiest and most intuitive way to understand the amount of your pipeline relative to your ability to process it.

# # #

Notes

[1] With an eye to two rules of thumb:  [a] that annual starting pipeline often approximate’s this year’s annual sales and [b] that the YoY growth rate in the size of the pipeline predicts YoY growth rate in sales.

[2] Pipeline coverage = pipeline / plan.  So if you have 300 units of pipeline and a new ARR plan of 100 units, then you have 3.0x pipeline coverage.

[3] Though there’s a better way to solve this problem — rather than excluding early-stage opportunities that have been created with a placeholder value, simply create new opportunities with value of $0.  That way, there’s nothing to exclude and it creates a best-practice (at most companies) that sales can’t change that $0 to a value without socializing the value with the customer first.

[4] The High Crime of a company slowing down its own sales cycles!  Never forget the sales adage:  “time kills all deals.”

[5] You can do a rough check on these numbers using close rates and ASPs.  If your enterprise quota is $300K/quarter, your ASP $100K, and your close rate 33%, a salesrep will need 9 current-quarter opportunities to make their number.

[6] The anemic pipeline hidden, on an ARR basis, by (unrealistically) large deal sizes.

[7] And they actually first went to HR seeking advice about what to do, because they didn’t want “rat out” the offending salesrep.

[8] Invoking my foundational training in customer support, I listened actively, empathized, and offered to assign a new salesrep — the top rep in the company — to the account, if they’d give us one more chance.  That salesrep turned a deal that the soon-to-be-former salesrep was too busy to work on, into the deal of the quarter.

Whose Company Is It Anyway? Differences between Founders and Hired CEOs.

Over the years I’ve noticed how different CEOs take different degrees of ownership and accountability when it comes to the board of directors.  For example, once, after a long debate where the board unanimously approved a budget contingent on reducing proposed R&D spending from $12M to $10M, I overhead the founder/CEO telling the head of R&D to “spend $12M anyway” literally as we walked out of the meeting [1].  That would be one extreme.

On the other, I’ve seen too-many CEOs treat the board as their boss, seemingly unwilling to truly lead the company, or perhaps hoping to earn a get out of jail free card if good execution of a chosen plan nevertheless fails.

This all relates to a core Kellblog theme of ownership — who owns what — that I’ve explored in some of my most popular posts:

Let’s now apply the same kind of thinking to the job of the CEO.  Startup CEOs generally fall into one of two categories and the category is likely to predict how they will approach the ownership issue.

Founder CEOs:  It’s My Company

Founders think it’s their company, well, because it is.  Whether they currently own more than 80% or less than 5% of the stock, whether they currently even work there anymore or not, it’s their company and always will be.  CEOs will come and go along a startup’s journey, but there is only one founder [2].  The founder started the company and made a big cultural imprint on it.  Nothing can take that away.

However, as soon as a founder/CEO raises venture capital (VC) they have decided to take investing partners along on the journey.  The best VC investors view their relationship with the founder as a partnership:  it’s the founder’s company, we are investing to partner with the founder, and our primary job is to advise and support the founder so as to help maximize the outcome.

However, VC investors are material shareholders, typically negotiate the contractual right to sit on the board of directors, and have certain governance and fiduciary duties as a part of sitting on the board.  (Those fiduciary duties, by the way, get complicated fast as VC board members also have fiduciary duties to their funds as well [3].)

Most of the time, in my experience, VCs run in advice/support mode, but if a company starts to have continual performance problems, is considering a new financing, or evaluating potential exit opportunities (e.g., M&A), founders can get a quick (and sometimes stark) reminder of the “second hat” that their VCs wear.

While it’s always spiritually the founder’s company, it’s only really and totally the founder’s company if they’ve never raised money [4].  Thankfully, most founder/CEOs don’t need to be reminded of that.  However, some do [5].

Hired CEOs:  It’s the Board’s Company vs. It’s My Company to Run

You become a hired CEO primarily through one path — climbing the corporate ladder at a large tech company [5a], reaching the GM or CXO level, and then deciding to branch out.  While virtually all hired CEOs have been large-tech CXOs or GMs, not all large-tech CXOs or GMs are wired to be successful as CEOs in the more frenetic world of startups.

Regardless of whether they should take the plunge, the problem that CEOs sometimes face is fighting against decades of training in climbing the corporate ladder.  Ladder-climbing wires you with three key priorities [6]:

  • Always make the boss look good
  • Never surprise the boss
  • Build strong relationships with influential peers

The problem?  When you’re CEO of a startup there is no boss and there are no peers.  Yes, there is a board of directors but the board/CEO relationship is not the same as the manager/employee relationship with which corporate execs are so familiar.

Yes, boards provide strategic and financial input, support, guidance, help with recruiting, and occasionally help with sales, but boards don’t run companies.  CEOs do.  And to repeat one of my favorite CEO quotes from Sequoia founder Don Valentine:  “I am 100% behind my CEOs up until the day I fire them” [7].

The challenge for hired CEOs is for them to understand:  it’s not my company in the sense that I founded it, but it is my company to run.  It’s not the board’s company to run and the board is not my manager.  The board is my board, and it’s not at all the same relationship as manager/employee.
Because this is somewhat conceptual, let’s provide an example to make this concrete.

“It’s My Company” Thinking “It’s the Board’s Company” Thinking
Based on what is happening in the market and our models we think it’s best to shoot for growth of X% and EBITDA margin of Y% How much do you want us to grow next year and at what EBITDA margin?
We believe we need to focus on a vertical and we think Pharma is the best choice. We were thinking that maybe we could focus more on a vertical, what do you folks think?
We think we should hold off doing channels until we’ve debugged the sales model. You told us to do channels so we signed up 17 partners but no one is actually selling anything.  Maybe it wasn’t a great idea.
Pattern:  we think we should do X and here’s why.  Please challenge it. Pattern:  we are here to do what you want, so what do you want us to do?  

CEOs need to remember that:

  • The management team spends 50-60 hours/week working at the company.  The board might spend that same amount of time in a year [8].  The team is much, much closer to the business and in the best position to evaluate options.
  • Even if they don’t always sound that way, the board wants the CEO to lead.  The scariest thing a new CEO can say is “it looks like you guys had a bad quarter” [9]. The second scariest thing is “looks like we had a bad quarter, what do you want us to do about it?”  Instead, they want to hear, “we had a bad quarter and here’s our plan to get things back on track.  Please give us frank feedback on that plan because we want the best plan possible and we want it to work [10].”
  • The CEO’s job is not to execute the board’s plan.  The CEO’s job is to work with the team to create the plan, get board approval of it, and then execute.  If the plan doesn’t work, the CEO doesn’t get to say “but you approved it, so you can’t fire me.” The job was to both make and execute the plan.

Finally, there are certain risk factors that can increase the chance a hired CEO will adopt the wrong type of thinking:

  • PE-backed firms.  In most venture-backed firms, a hired CEO will find a board consisting of several different venture capital partners, each with their own opinion.  Even though most venture boards do end up with an Alpha member [11], it’s still hard for the CEO to get confused and think of the Alpha member as the boss.  In a PE-backed firm, however, the board may consist of a single investing partner from the one firm who owns the company, perhaps accompanied by a few more junior staff.  In this case, it’s fairly easy for the CEO to revert to CXO-mode and treat that board member as “the boss” as opposed to “the board.”  While PE firms are more active managers who often come with playbooks and best practices consultants, they still want the CEO to be the CEO and not the EVP of Company.
  • First-time CEOs.  Veteran CEOs have more time to learn and understand the board/CEO relationship.  First-timers, fresh from climbing the corporate ladder, sometimes have trouble with the adjustment.

If you’re in either of the above categories or both, it’s important to ask yourself, and most probably your board, about what kind of relationship is desired.  Most of the time, in my estimation, they hired a CEO because they wanted a CEO and the more leadership you take, the more you think “my company” and not “board’s company,” the better off everyone will be.

Finally, you may also want to read this post about the board/CEO relationship which includes another of my favorite passages, on what I call the Direction Paradox.

The Direction Paradox
While discussions, challenges, advice, and questioning are always good, when boards give operational direction (i.e., “you should do X”) they risk creating a paradox for the CEO.  It’s easy when the CEO agrees with the direction and in that case the direction could have been offered as advice and still would have been heeded.
It gets hard when the CEO disagrees with the direction:

Case 1:  If the CEO follows the direction (and is correct that it was wrong), he or she will be fired for poor results.
Case 2:  If the CEO fails to follow the direction, his or her political capital account will be instantly debited (regardless of whether eventually proven right) and he or she will eventually be fired for non-alignment as the process repeats itself over time.

In case 1, the CEO will be surprised at his termination hearing.  “But, but, but … I did what you told me to do!”  “But no,” the board will reply.  “You are the CEO.  Your job is to deliver results and do what you think is right.”  And they’ll be correct in saying that.

Once caught in the paradox, weak CEOs die confused on the first hill and strong ones die frustrated on the second.

See the post for advice on how to prevent the Direction Paradox from starting.

# # # 

Notes
[1] And clearly within earshot of the directors

[2] To simplify the writing, I’ll say “one founder” meaning “one founder or equivalent” (i.e., a set of co-founders).  To the extent that this post is really about the CEO role, then it does flip back to one person, again — i.e., that co-founder (if any) who decided to take the CEO role.  This post isn’t about non-CEO co-founders, but instead about [co-]founder CEOs.

[3] See this 27-page classic (PDF) by Wilson Soncini, The Venture Capital Board Member’s Survival Guide:  Handling Conflicts While Wearing Two Hats.  It’s a must-read if you want to understand these issues.

[4] Increasingly, experienced founders (and/or those sitting on a hot enough hand) are able to raise venture capital and maintain near-total control.  Mechanisms include: a separate class of founder stock with 10x+ voting rights; control of a majority of the board seats; or protective provisions on the founder stock, such as the right to block a financing or sale of the company.  Even in such cases, however, a high-control founder still has fiduciary duties to the other shareholders.

[5] I believe incubators (and the like), by removing a lot of hard work and risk in starting a company, can inadvertently produce what I call “faux founders” who — when it comes to the business side of the company — act more like first-time hired CEOs than typical founders.  Don’t get me wrong, plenty of fine founder/CEOs come out of incubators, but I nevertheless believe that incubators increase the odds of creating a founder/CEO who can feel more like a CTO or CPO than a CEO.  That’s not to say the company won’t be successful either with that original founder or a replacement; it is to say, in my experience, that incubator founders can be different from their non-incubated counterparts.

[5a] And even better, helping to make it large while so doing.

[6] Like it or not, it’s not a bad three-part formula for climbing the corporate ladder.  And the “don’t surprise” rule still applies to boards as it does to managers.

[7] Note that any idea that the CEO might quit doesn’t seem to exist in his (or most VC’s) mind.  That’s because it’s incomprehensible because it’s a career mistake that may well make the person unemployable as CEO in a future VC-backed startup.  Who, after all, wants to hire the Captain of the Costa Concordia?  See this post, Startups CEOs and the Three Doors, for more.

[8] 6 board meetings at 4 hours = 24 hours, one hour prep per board meeting = 6 hours, 2 hours x 4 committee meetings = 8 hours, 2 hours/month on keeping up with news, updates, monthly reports = 24 hours.  Total of 62 hours/year for a committee member, less if not.  Time can vary widely and may be much higher if the board member is providing ad hoc support and/or ad hoc projects.

[9] Oh no!  The new CEO doesn’t even yet consider himself one of us!

[10] Because it’s not about ego or authorship, it’s about the best results.

[11] Often, but not always, the person who led the Series A investment.

I’ve Got a Crazy Idea:  How About We Focus on Next-Quarter’s Pipeline?

I’m frankly shocked by how many startups treat pipeline as a monolith.

Sample CMO:  “we’re in great shape because we have a total pipeline of $32M covering a forward-four-quarter (F4Q) sales target of $10M, so 3.2x coverage.  Next slide, please.”

Regardless of your view on the appropriate magic pipeline coverage number (e.g., 2x, 3x, 4x), I’ve got a slew of serious problems with this.  What do I think when someone says this?

“Wait, hang on.  How is that pipeline distributed by quarter?  By stage?  By forecast category?  By salesrep?  You can’t just look at it as a giant lump and declare that you’re in great shape because you have 3x the F4Q coverage.  That’s lazy thinking.  And, by the way, you probably don’t even need 3x  the F4Q target, but you sure as hell need 3x this quarter’s coverage [1] and better be building to start next quarter with 3x as well.  You do understand that sales can starve to death and we can go out of business – the whole time with 3x pipeline coverage — if it’s all pipeline that’s 3 and 4 quarters, out?”

I’ve got a crazy idea.  How about as a first step, we stop looking at annual pipeline [2] and start looking at this-quarter pipeline and, most importantly, next-quarter pipeline?

What people tell me when I say this:  “No, no, Dave.  We can’t do that.  That’s myopic.  You need to look further out.  You can’t drive looking at the hood ornament.  Plus, with a 90-day average sales cycle (ASC) there’s nothing we can do anyway about the short term.  You need to think big picture.”

I then imagine the CMO talking to the head of demandgen:  “Yep, it’s week 1 and we only have 2.1x pipeline coverage.  But with a 90-day sales cycle, there’s nothing we can do.  Looks like we’re going to hit the iceberg.  At least we made our 3x coverage OKR on a rolling basis.  Hey, let’s go grab a flat white.”

I loathe this attitude for several reasons:

  • It’s parochial. The purpose of marketing OKRs is to enable sales to hit sales OKRs.  Who cares if marketing hit its pipeline OKR but sales is nevertheless flying off a cliff?  Marketing just had a poorly chosen OKR.
  • It’s defeatist. If “when the going gets tough, the tough get a flat white” is your motto, you shouldn’t work in startup marketing.
  • It’s wrong. The A in ASC stands for average.  Your average sales cycle.  It’s not your minimum sales cycle.  If your average sales cycle is 90 days [3] then you have lots of deals that close faster than 90 days, so instead of getting a flat white marketing should be focused on finding a bunch of those, pronto [4].

Here’s my crazy idea.  Never look at rolling F4Q pipeline again.  It doesn’t matter.  What you really need to do is start every quarter with 3.0x [5] pipeline.  After all, if you started every quarter with 3.0x pipeline coverage wouldn’t that mean you are teed up for success every quarter?  Instead of focusing on the long-term and hoping the short-term works out, let’s continually focus on the short-term and know the long-term will work out.

This brings to mind Kellogg’s fourth law of startups:  you have to survive short-term in order to exist long-term.

This-Quarter Pipeline
This process starts by looking at the this-quarter (aka, current-quarter) pipeline.  While it’s true that in many companies marketing will have a limited ability to impact the current-quarter pipeline — especially once you’re 5-6 weeks in — you should nevertheless always be looking at current-quarter pipeline and current-quarter pipeline coverage calculated on a to-go basis.  You don’t need 3x the plan number every single week; you need 3x coverage of the to-go number to get to plan.  To-go pipeline coverage provides an indicator of confidence in your forecast (think “just how lucky to do we have to get”) and over time the ratio can be used as an alternative forecasting mechanism [6].

this qtr togo

In the above example, we can see a few interesting patterns.

  • We start the quarter with high coverage, but it quickly becomes clear that’s because the pipeline has not yet been cleaned up. Because salespeople are usually “animals that think in 90-day increments” [7], next quarter is effectively eternity from the point of view of most salesreps, so they tend to dump troubled deals in next-quarter [8] regardless of whether they actually have a next-quarter natural close date.
  • Between weeks 1 and 3, we see $2,250K of current-quarter pipeline vaporize as part of sales’ cleanup. Note that $250K was closed – the best way for dollars to exit the pipeline!  I always do my snapshot pipeline analytics in week 3 to provide enough time for sales to clean up before trying to analyze the data.  (And if it’s not clean by week 3, then you have a different conversation with sales [9].)
  • Going forward, we burn off more pipeline to fall into the 2.6 to 2.8 coverage range but from weeks 5 to 9 we are generally closing and burning off pipeline [10] at the same rate – hence the coverage ratio is running in a stable, if somewhat tight, range.

Next-Quarter Pipeline
Let’s now look at next-quarter pipeline.  While I think sales needs to be focused on this-quarter pipeline and closing it, marketing needs to be primarily focused on next-quarter pipeline and generating it.  Let’s look at an example:

next qtr pipe

Now we can see that next-quarter plan is $3,250K and we start this quarter with $3,500K in next-quarter pipeline or 1.1x coverage.  The 1.1x is nominally scary but do recall we have 12 weeks to generate more next-quarter pipeline before we want to start next quarter with 3x coverage, or a total pipeline of $9,750K.  Once you start tracking this way and build some history, you’ll know what your company’s requirements are.  In my experience, 1.5x next-quarter coverage in week 3 is tight but works [11].

The primary point here is that given:

  • Your knowledge of history and your pipeline coverage requirements
  • Your marketing plans for the current quarter
  • The trends you’re seeing in the data
  • Normal spillover patterns

That marketing should be able to forecast next quarter’s starting pipeline coverage.  So, pipeline coverage isn’t just an iceberg that marketing thinks we’ll hit or miss.  It’s something can marketing can forecast.  And if you can forecast it, then you adjust your plans accordingly to do something about it.

Let’s stick with our example and make a forecast for next-quarter starting pipeline [12]

  • Note that we are generating about $250K of net next-quarter pipeline per week from weeks 4 to 9.
  • Assume that we are continuing at steady-state the programs generating that pipeline and ergo we can assume that over the next four weeks we’ll generate another $1M.
  • Assume we are doing a big webinar that we think will generate another $750K in next-quarter pipeline.
  • Assume that 35% of the surplus this-quarter pipeline slips to next-quarter [13]

If you do this in a spreadsheet, you get the following.  Note that in this example we are forecasting a shortfall of $93K in starting next-quarter pipeline coverage.  Were we forecasting a significant gap, we might divert marketing money into demand generation in order to close the gap.

fc next qtr

All-Quarters Pipeline
Finally, let’s close with how I think about all-quarters pipeline.

all qtr

While I don’t think it’s the primary pipeline metric, I do think it’s worth tracking for several reasons:

  • So you can see if pipeline is evaporating or sloshing. When a $1M forecast deal is lost, it comes out of both current-quarter and all-quarters pipeline.  When it slips, however, current-quarter goes down by $1M but all-quarters stays the same.  By looking at current-quarter, next-quarter, and all-quarters at the same time in a compact space you can get sense for what is happening overall to your pipeline.  There’s nowhere to hide when you’re looking at all-quarters pipeline.
  • So you can get a sense for the size of opportunities in your pipeline.  Note that if you create opportunities with a placeholder value then there’s not much  purpose in doing this (which is just one reason why I don’t recommend creating opportunities with a placeholder value) [14].
  • So you can get a sense of your salesreps’ capacity. The very first number I look at when a company is missing its numbers is opportunities/rep.  In my experience, a typical rep can handle 8-12 current-quarter and 15-20 all-quarters opportunities [15].  If your reps are carrying only 5 opportunities each, I don’t know how they can make their numbers.  If they’re carrying 50, I think either your definition of opportunity is wrong or you need to transfer some budget from marketing to sales and hire more reps.

The spreadsheet I used in this post is available for download here.

# # #

Notes

[1] Assuming you’re in the first few weeks of the quarter, for now.

[2] Which is usually done using forward four quarters.

[3] And ASC follows a normal distribution.

[4] Typically, they are smaller deals, or deals at smaller companies, or upsells to existing customers.  But they’re out there.

[5] Or, whatever your favorite coverage ratio is.  Debating that is not the point of this post.

[6] Once you build up some history you can use coverage ratios to predict sales as a way of triangulating on the forecast.

[7] As a former board member always told me — a quote that rivals “think of salespeople as single-celled organisms driven by their comp plan” in terms of pith.

[8] Or sometimes, fourth-quarter which is another popular pipeline dumping ground.  (As is first-quarter next year for the truly crafty.)

[9] That is, one about how they are going to get their shit together and manage the pipeline better, the first piece of which is getting it clean by week 3, often best accomplished by one or more pipeline scrub meetings in weeks 1 and 2.

[10] Burning off takes one of three forms:  closed/won, lost or no-decision, or slipping to a subsequent quarter.  It’s only really “burned off” from the perspective of the current-quarter in the last case.

[11] This depends massively on your specific business (and sales cycle length) so you really need to build up your own history.

[12] Technically speaking, I’m making a forecast for day-1 pipeline, not week-3 pipeline.  Once you get this down you can use any patterns you want to correct it for week 3, if desired.  In reality, I’d rather uplift from week 3 to get day-1 so I can keep marketing focused on generating pipeline for day-1, even though I know a lot will be burned off before I snapshot my analytics in week 3.

[13] Surplus in the sense that it’s leftover after we use what we need to get to plan.  Such surplus pipeline goes three places:  lost/no-decision, next-quarter, or some future quarter.  I often assume 1/3rd  goes to each as a rule of thumb.

[14] As a matter of principle I don’t think an opportunity should have a value associated with it until a salesrep has socialized a price point with the customer.  (Think:  “you do know it cost about $150K per year to subscribe to this software, right?”)  Perversely, some folks create opportunities in stage 1 with a placeholder value only to later exclude stage 1 opportunities in all pipeline analytics. Doing so gets the same result analytically but is an inferior sales process in my opinion.

[15] Once you’re looking at opportunities/rep, you need to not stop with the average but make a histogram.  An 80-opportunity world where 10 reps have 8 opportunities each is a very different world from one where 2 reps have 30 opportunities each and the other 8 have an average of 2.5.

Kellblog's Greatest Hits 2016-2019 per the Appealie SaaS Awards

I’ll be speaking at the APPEALIE 2019 SaaS Conference and Awards in San Francisco on September 25th and I noticed that in their promotions the folks at APPEALIE had assembled their own Kellblog’s Greatest Hits album from 2016 to 2019, complete with its own cover art.
appealie
When I looked at the posts they picked, I thought they did a good job of identifying the best material, so I thought I’d share their list here.  They also called me “a GOAT software blogger” and after playing around with acronyms for about half an hour — maybe Groove, OpenView, AngelVC, Tunguz? — my younger son swung by and said, “they called you a GOAT?  Cool.  It means greatest of all time.”  Cool, indeed.  Thanks.
Here’s the APPEALIE Kellblog’s Greatest Hits 2016-2019 list:

 

If Rebranding’s the Answer, What was the Question?

From time to time, every CMO faces a key question:  to brand or not to rebrand?

Often, it’s right after joining a company and you want to make a big splash.  Sometimes, it’s after you’ve been with a company for a while and you and some told-timers are bored with the current branding and want something new.

My general advice to those considering rebranding is “don’t do it” because I think it’s a siren’s call for several reasons:

  • Branding projects are usually big and expensive. They cost a lot money.  Lots of important people get involved, for example, in Post-It oriented workshops to help determine brand values and the real inner spirit of the company.  You’ll need a new corporate identity so everything from business cards to email footers to booth signage to social media icons to collateral layout all needs to get re-done.  And, of course, you’ll need to completely overhaul your website.  It’s easy for a $30M company to spend $400K on a rebranding and not hard for a larger company to spend millions.
  • Branding projects are highly visible. Everyone from customers to board members to employees to spouses to competitors to analysts is going to have an opinion on the new brand.  There’s no opportunity for quiet failure as you’d find with testing a new message or experimental online campaign.  Rebranding is a performance without a net in the center ring of the circus with the whole market watching.
  • Branding projects are risky. Part of the risk comes from the fact that they’re expensive and visible.  When rebranding includes renaming, there’s a whole additional level of risk around the name in terms of unknown meanings and homophones, missed trademark conflicts, problems with URL and/or social media handle availability (e.g., Netflix’s Qwikster debacle), or simply poor choices (e.g., PWC’s renaming to “Monday” [1A]).  Agencies often compound the risk by insisting on keeping everything secretive during the process, resulting in unveilings that tend to work either really well or really badly when they finally occur [1B].  Finally, if you mess up a rebranding project, it’s nearly impossible to walk it back.  When Business Objects did a dubious multi-million-dollar rebranding under the slogan, “Let There Be Light” and literally tried to trademark biblical content, there was no going back.
  • Rebranding is usually not the most important priority of the business. If your sales force is starving for pipeline or the industry analysts aren’t placing you in their leader quadrants, sales probably wants you investing in demand generation or analyst relations, not rebranding.  They’ll see rebranding as marketing for marketing’s sake more designed to impress other marketers (e.g., “we won an award”) than to help the business.  And they’ll see the CMO who led it as “ivory tower” and misaligned with their needs.

For these reasons, we can say that it’s a pretty bold decision for a CMO to undertake a rebranding project.  And CMOs should never forget the maxim about pilots:  “there are old pilots and bold pilots, but no old, bold pilots.”

What is a Brand?
Since brand is a highfalutin word that marketers often toss around with a certain arrogance – as if only they understand its meaning — let’s take a minute to bring branding back down to earth.

In short, a company’s brand involves four things:

  • Name (what I call it)
  • Corporate identity (what it looks like)
  • Brand values (what it stands for)
  • Corporate voice (what it sounds like)

The Joy of Naming
The fact is that in high-tech, naming doesn’t matter much.  Plenty of technology companies have been successful with pretty bad names.  For example, one of today’s hottest companies has one of the worst names ever, MongoDB, which works in English but in several European languages translates roughly to RetardDB [2].

Does anyone believe the success of Red Hat, SAP, or Veeva was due to an outstanding company name?  Or the success of Hashicorp, Zuora, or New Relic – each of which are just twists on the founder’s name [3]?

Pretty much any name that passes these tests works:

  • Short, ideally 3 or fewer syllables (especially if used as product name prefix)
  • No unintended meanings in other languages
  • Clear on trademark conflicts
  • Available URLs and social media handles
  • Easy to pronounce (people avoid saying words they’re not sure how to pronounce)
  • If descriptive, won’t becoming limiting and/or misleading over time [4]
  • If multi-word, doesn’t form an awkward acronym (even if you add I or C for “Inc.” or “Corp.”)

In my opinion, names fall into four buckets:

Bad, due to unintended meanings, pronunciation difficulty, length (too many letters and/or syllables), or being descriptive but misleading.  Examples:  MongoDB, Versant, Business Objects, and Ingres [5].  These can slow you down, but they certainly can’t stop you — which is why, when you compare brand equity to the risk and cost of renaming, it’s usually not worth it to change.  Unless it’s early days, simply accept you have a bad name and move on to more important matters.

Potentially problematic, descriptive but potentially limiting in the mid- or long-term.  Examples:  Microsoft, PeopleSoft, Salesforce.com, VMware, and Zendesk [6].  As the examples show, you can easily overcome the limits of such names, but they’re still not objectively great names in the first place.  These companies have simply overpowered the description in the names and turned them into meaningless brands over time [6A].

Good enough. These are typically meaningless – which is fine – and they obey the above rules well.  If they are descriptive, they’re broad enough to last long-term, given the company’s vision.  Examples: Okta, Veeva, Marketo, Atlassian, Coupa, Intacct, Siebel, Zuora, New Relic, Ooma, Medalia, GainSight, PagerDuty, and FloQast [7].  If you’re doing a renaming, good enough should be your practical goal.

Good.  I think we all like names that are either suggestive or broadly descriptive (and are thus good for the long haul).  Examples:  Anaplan, Oracle, Uber, Workday, Splunk, Kustomer, Airtable, Cisco, and Snowflake [8].  These are hard to find and you can waste a lot of time striving for a good name when you already have several good-enough candidates, and good enough is really all you need.

No discussion of technology naming would be complete without a reference to the epic episode of HBO’s Silicon Valley where Bachman decides to pick a new company name by going to the desert on a “vision quest” and eating psilocybin mushrooms to foster his creativity in so doing (NSFW).

The moral of the naming story is simple. There are bad names and good names and company success seems pretty much uncorrelated to them.  Your goal should be to get a good-enough name and then stop obsessing.

Elements of Corporate Identity
Corporate identity is what you look like, the idea being that I could see your booth from a distance, look at your website from across the room, or see one of your brochures without my glasses on and still know it’s you.

Corporate identity thus deals in defining:

  • Your logo, and its approved derivative forms
  • Your standard color palette
  • Your standard imagery
  • The templates for your website
  • The templates for collateral (e.g., data sheets, white papers)
  • The template for your PowerPoint presentations
  • The templates for business cards and email footers
  • Your social media icons

This is all very graphic design-y and it consists of defining the identity, documenting it in a graphic design manual which can be given other graphic designers to ensure they produce identity-consistent material, re-flowing all existing content into the new templates, and of course, re-implementing your entire website.

This alone can run in the hundreds of thousands of dollars, even when you’re executing on a budget.  And the fact is few people notice it.   Yes, there is a basic professionalism bar that you need to surpass, and a light brand refresh from time to time to fix problems (that really should have been caught on the first go-round) is probably OK.  But spending $1M on a corporate identity makeover is rarely appropriate, welcomed by sales, or a good use of money – unless your image is really, really out of date.

Understanding Brand Values
Quick, what does Coupa stand for?  How about Microsoft?  Or Adobe?  Or New Relic?  What’s the Oracle brand promise when you do business with them?

The reality is that most tech companies don’t stand for anything and don’t deliver much of a brand promise.  You could say the Atlassian stands for developers, FireEye for security, or GainSight for customer success, but that’s more a description of what they do than their brand values.

And Oracle’s brand promise?  Do they have one?  They seem to think it’s all about “simple, authentic, adaptive, …” and such.  If you asked ten Oracle customers about the Oracle brand promise, I think you’d more likely hear:  “they promise to extract as much money from me as they possibly can each year.”

I make a distinction between brand values which are external, customer-facing and usually involve some sort of promise and corporate values which internal, employee-facing, and try to guide employees in decision making.  Yes, there should be some linkage between the two and while virtually all technology companies have corporate values, they are also all too often empty words, not lived day-to-day and not reinforced in the culture [9].

So when it comes to brand values and technology companies, there’s not a lot to talk about.  I think one notable exception is Salesforce.com.  Salesforce understands branding, invests in it, trains new hires on it, and most importantly actually stands for something in the minds of customers.  What does Salesforce stand for?  In my opinion:

  • Philanthropy.  Exhibited both by Benioff personally and, as importantly, in the company’s 1-1-1 model where, among other things, employees get both paid time off (PTO) and volunteer time off (VTO) each year.
  • Trust.  Well ahead of its time and drilled into employees like a mantra, “nothing is more important than the trust of our customers.”

They may stand for other things as well.  But the interesting part is that they actually stand for something, which most technology companies simply don’t.

To understand brand value, it’s thus easier to look at consumer examples.  In my mind, brand value is what you sell in the store.  To pick some controversial examples, in the store, I think Chick-Fil-A sells a quality chicken sandwich.  While the founder had strong religious views which, for example, drove the decision to close on Sundays – I don’t think they’re selling a religious experience.  And when they crossed their wires, they seem to have learned from it, effectively saying they’ll leave policy to government and continue to focus on making quality chicken sandwiches and giving back to the communities in which they operate.

SoulCycle, to stay with controversial examples, on the other hand apparently sells more than a workout, but a lifestyle, or as this Washington Post story put it, “an idealized version of you.”  I’m not a customer so I can’t speak first-hand on this, but it appears that SoulCycle’s value proposition was bigger than a great spin class, selling values that their parent company owner visibly eschewed.  That caused a customer uproar which drew this response.  Quote:

This is about our values. So today, we are responding in the best way we know how—with diversity, inclusion, acceptance, and love.

Speaking with a Consistent Corporate Voice
If you think it’s hard to differentiate on visual identity or brand values, think about how hard it is to define a corporate voice.  It’s really hard.  Few companies do it.  Most companies strive to sound, well, like companies.  They want to be professional.  They want copy written by 50 different people to read and sound like copy written by one.  Towards these ends, companies usually produce Style Guides to drive such consistency, in matters from capitalization to spelling to diction to writing strategies [11].

But it’s rare in my experience to have an enterprise software company sound different from its peers.  Yes, I’d say open source and developer-oriented companies sound a bit different from applications companies.  But the only enterprise software company that I ever noticed having a unique corporate voice was Splunk, back in the day when Steve Sommer was CMO.  Splunk’s copy always had a certain approachable snark that I always enjoyed and that made it pretty unique and recognizable.  Some example Splunk slogans:

  • Finding your faults, just like mom
  • All bat-belt; no tights
  • Winning the war on error
  • CSI: logfiles
  • Take the sh out of IT

But most technology companies sound like technology companies and there’s nothing really wrong with that.  Just be professional and consistent.

To Net It All Out
My proudest accomplishment as a CMO was that in over 10 years I never instigated a major rebranding.  I ran a huge rebranding project — but it was started before I joined — and I’ve run several brand refreshes.

Wholesale rebranding is expensive, visible, and risky.  And it’s rarely the top priority of the business.  So I have a strong presumption-of-guilt bias when it comes to rebranding – it’s something marketing wants to do because marketing likes doing it.

To overcome that presumption, I’ll need to see sales alignment (i.e., they support it as a top priority) and real, hard reasons why it needs to happen.  Remember it’s not only a huge direct cost, but there’s a large opportunity cost as well — the entire time you’re re-implementing your website, re-laying out all your collateral, and refreshing your campaigns, you’re not making new content, collateral, and campaigns.

Looking at rebranding from my four perspectives, I think:

  • Renaming should be undertaken rarely. As we have shown, there are few names that can’t be overcome.  Be good enough.
  • Refreshing corporate identity is appropriate from time to time. Minimize change both to stay recognizable and reduce costs associated with re-implementation – see the delicate evolution of Chick-Fil-A’s logo over 50+ years, below.  Keep changes light.
  • Putting a lot of work into brand values at any enterprise software company below $1B (and arguably above $1B) is probably a waste of time. Yes, you should have corporate values and live them.  If you do, your customers will notice the visible ones and they will form the eventual basis for your brand values, if and when you formally define them.
  • While you should establish (and continually enhance) a written Style Guide early in your marketing evolution, I wouldn’t invest much in defining a corporate voice unless you happen to have a gifted marketer who has the knack.  Odds are you’ll end up sounding like everyone else, anyway, and that’s OK.  It’s technology marketing — differentiate with your message, not your voice.

chick-fil-a-logo-history-512x1024

# # #

Notes
[1A] Think:  “We’re going to meet the guys from Monday on Tuesday.”

[1B] Agencies like unveilings because it makes their life simpler.  Just get the CMO, the CEO, and maybe some small branding committee to say yes and they’re on their way.   They are typically terrified of open voting, town halls, and other such forums to solicit wide input.  If the unveiling fails, the agency can walk away and they were still paid, handsomely in most cases.  You don’t have that luxury.

[2] The name originally comes from the word, huMONGOous.  Apologies for using the R word, but it is the translation and the shock value is kind of the point.

[3]  Founded by Mitchell Hashimoto, Tien Zuo, and Lew Cirne (which is an anagram of New Relic).

[4]  Which is a great argument to avoid descriptive names in the first place.  They’re also harder to register as trademarks.

[5] MongoDB has unintended meanings, Versant and Ingres are non-obvious to pronounce, Business Objects has too many syllables and is misleading-descriptive (to object-oriented programming).

[6] Microsoft meant software for microcomputers and isn’t a great name for server and/or cloud software.  PeopleSoft meant HR software, not a great name for their financials application.  Salesforce now does marketing and service, not just sales.  VMware was about virtual machines and is not a great name as we move into a world of containers and serverless architecture.  Zendesk was a great name for help desk software, but less so for sales.

[6A] Meaningless, not in the sense that the brands don’t mean anything – e.g., saying “Microsoft” evokes meaning and feelings – but in the sense that the original words don’t mean anything.  You don’t immediately think, “the microcomputer software company.”

[7] I’m assuming Marketo wants to stay in marketing, Intacct wants to stay in accounting, and PagerDuty – the most potentially limiting name on this list – wants to stay in pagers and notifications.

[8] Most are self-explanatory, but on the more subtle side, Splunk suggests deep diving a la spelunking and Snowflake suggests data warehouses which are often built using snowflake schemas.

[9] One problem with core values is that they’re often all the same.  For example, these are five of the most common:  teamwork, customer service, lead-by-example, operational excellence, accountability.  This alone tends to hollow them out.

[10] This blog lists the Chick-Fil-A brand message:  part of the community, serving great food, giving back.  They’re selling great chicken sandwiches, not religious experiences.

[11] Example writing strategy:  Avoid using Business Objects in the possessive.  Say:  the people who work at Business Objects, not:  Business Objects’ people.