MEDDIC has long been one of the most effective sales methodologies used in enterprise sales. In the years since MEDDIC was originally developed, the focus of sales has shifted to the idea that recurring revenue happens after you close a deal. And while MEDDIC works quite well for a seller-centric sales motion that primarily focuses on closing deals, it provides less guidance for what happens after the deal is closed (Figure 1). Recent updates with derivatives such as ‘MEDDPIC’ (Paperwork) and ‘MEDDICC’ (Competition) add an even greater focus on closing. This extreme focus on closing causes challenges when applied to a recurring revenue business, such as SaaS.

Figure 1. The application of MEDDIC in Enterprise Sales

In SaaS, the revenue is not paid up front, but spread over months or years. It is quite common for a profit to be realized 9 to 18 months (Ref. 2.) after the client makes a commitment. Any time after committing, if the client does not experience the impact they are looking for, they can and will cancel. So to earn a profit, you need a recurring revenue stream — and to earn that, you need to provide the recurring impact a client wants. The focus on “closing a deal” not only increases the churn — it increases the losses.  

This demonstrates that we need to think differently here, that we need to treat a SaaS deal different from a perpetual one. Here are a few considerations: 

1. Recurring revenue is the result of recurring impact: Gaining commitment from the right clients means that you first must understand the impact that clients are seeking.
2. Priority, not budget: SaaS clients buy dozens of SaaS products, and their decision is not based on “Do we have a budget?” but rather, “Is this a priority?” So you must understand if the impact you can deliver matches up to your client’s priorities.
3. Company wide, not just the sales team: In SaaS, all departments (whether they realize this or not) are connected through the concept of Impact: Marketing raises awareness of the impact you can provide, the Sales team qualifies prospects based on the ability to deliver impact, and Customer Success is responsible for helping customers realize the impact that you have promised.
4. The risk is no longer on just the buyer: With perpetual sales such as hardware, the risk mainly lies with the buyer; no seller will be fired for selling too much. However in SaaS, similar to a rental car company leasing out a car, the seller also faces certain risks, because the buyer will cancel if they do not realize the recurring impact they are expecting. 

To fill this gap, consider SPICED — a customer-centric diagnostic framework that focuses on delivering the customer’s desired impact, on a recurring basis. The methodology is based on the fundamental principle that recurring revenue comes from recurring impact (Figure 2). By using SPICED and MEDDIC in combination, a SaaS revenue team can apply these methods together to successfully drive recurring revenue.

Figure 2. The application of a methodology to apply to Recurring Revenue

Many SaaS companies using methodologies designed for perpetual licenses (Ref. 3, 4, 5, 6) are starting to see their conversion rates decline, and this is because their sales teams are not well equipped with a sales process that matches with the actual journey that a SaaS customer takes. By focusing their process only on closing the deal, those companies are preventing their Go To Market teams from providing the true impact to customers of which they are capable.

We have created a methodology specific to a recurring revenue business, in order to address the full customer journey. This methodology is called SPICED. You can see in Figure 3 that MEDD(P)ICC focuses on the criteria that the seller needs to close the deal, while SPICED is a customer centric methodology that focuses on helping the customer realize the impact they are seeking.

How to Make MEDDIC Work in a SaaS Model

MEDDIC can be applied quite effectively in a Software as a Service (SaaS) sales model, by combining it with the SPICED diagnostic framework. Consider the following tips to implement the MEDDIC framework in your SaaS sales process:

Qualification vs. Sales Methodologies

A sales process is a series of actions you must take in the correct sequence to achieve results. To give a customer an outstanding experience, place your actions into stages. Each stage includes a series of actions you will perform in the correct order. A proper sales methodology typically includes the following approximate stages:

• Identify
• Diagnose
• Assist
• Navigate
• Recommend
• Trade
• Commit

Typical lead qualification methodologies are based on the idea that qualification only needs to occur as a one-time event. However, the MEDDIC framework is a deal qualification methodology that operates on the idea that qualification should be performed consistently across every stage and action of the sales process.

Sales methodologies are meant to enable the buying experience that we create for customers. But if one methodology focuses on lead qualification, one focuses on deal qualification, and another focuses on deal closing — then this means that a revenue team would need to combine several methodologies at once, which can be quite challenging. It also ends up with different groups within the the same revenue team speaking different languages: for instance, the SDRs qualify using BANT, the AEs use the MEDDIC methodology, and Marketing uses the AIDA framework.

SPICED vs. MEDDIC

MEDDIC is historically based on the idea that growth comes from closing more new logos, which is of course true and cannot be ignored. However, this approach considers anything that happens after the deal is closed to be a much less important.

An alternative first principle that must be applied for a SaaS business is that recurring revenue leads to recurring impact. This means that helping the customer achieve their desired impact motivates them to continue buying more. If you continuously provide value to customers, they will keep buying from you. Because this method is impact-centric, it is automatically customer-centric. The more impact a customer receives, the more they continue to buy over time, and the more revenue is generated as a result.

SPICED is a diagnostic framework that allows for a uniform customer-centric approach, facilitating handoffs, and providing a consistent, high-quality experience for the customer. SPICED can help any AE, SDR, or CSM provide more impact to their customers by applying the diagnostic framework, which includes the following:

• Situation: Background facts or circumstances relevant to the customer’s world. These describe objective factors that determine whether the customer falls within your ideal customer profile and what is happening in their world. Factors such as size of company, number of employees, software they use, hiring needs, security needs, or revenue goals.
• Pain: The problems the customer has purchased your product or solution to help solve. This could include the need to conduct training or recruit, support a global team, pass a security audit, or stop errors to happen in a process.
• Impact: The results produced by solving pain. These are the outcomes the customer is trying to achieve by purchasing your solution. Impact can be both emotional (for individuals) and rational (for companies).
• Critical Event: Any particular deadline by which to the customer must achieve the desired impact or suffer negative consequences. Critical Events drive the customer’s timeline for a purchase.
• Decision Criteria: The people involved in the decision, the process they will follow to reach that decision, and the criteria they will use to evaluate the right solution.

The key difference between SPICED and MEDDIC is each framework’s focus and origins. MEDDIC originates from perpetual software sales and focuses heavily on the decision stage of the sales process. SPICED is based on recurring revenue, so it focuses on achieving continual recurring impact.

And yes, SPICED and MEDDIC can operate in the same world and work together. Let’s examine MEDDIC to see how this can occur…

MEDDIC (Ref. 7) consists of the following factors:

• Metrics
• Economic buyer
• Decision criteria
• Decision process
• Identifying pain
• Champion

MEDDIC is based on the concept that if you take the right actions, the desired results will automatically follow. It requires inspecting the actions of sales teams to ensure they take the right steps, rather than simply expecting them to achieve results. MEDDIC operates in the following ways:

• Functions as a common language
• Allows you to achieve adoption through engagement
• Manages activity instead of results
• Examines the deal primarily from the seller’s point of view rather than the customer’s point of view

MEDDIC focuses primarily on closing the deal; while winning the deal is an element of growth, it cannot increase growth on its own. Rather, growth increases when you sell based on impact. This means that SaaS revenue leaders need to measure impact-based metrics; the savvy SaaS revenue leader knows that it’s crucial to close the right deals and gain the customers who will stay with you long-term, so you can continue impacting them positively over time.

Application of SPICED for MEDDIC Alumni

If you are a MEDDIC alumni, applying the SPICED framework is easier than you might think. There are two key areas that must be supplemented: Impact and Decision Criteria.

How to sell on Impact

To make MEDDIC compliant with a recurring revenue business, you have to understand that MEDDIC looks at metrics with a focus on growing revenue and reducing costs. It highlights the importance of an economic, or rational, impact that a solution provides to a customer.

A rational impact is quantitative and measurable. However, experts have also discovered the importance of emotional impact. Emotional impact is qualitative, based on how a product or service makes customers feel.

MEDDIC directs sellers to focus only on rational impact, while SPICED looks at both rational and emotional impact. You can apply the emotional impact to MEDDIC, as long as you identify it. This guideline typically helps: a rational impact is typically the same or similar across all people involved in a decision, but an emotional impact varies by person.

QUOTE: A rational impact is typically the same or similar across all people involved in a decision, but an emotional impact varies by person.

In the MEDDIC framework, you can identify the emotional impact by identifying pain points. Then, when you move to the decision process, you can sell the emotional impact to the champion, and then provide them with the rational impact to take back to their boss or company.

Influencing the Decision Criteria

The decision criteria in the MEDDIC framework are based on priority. You must determine what the customer’s priority is so they can compare factors and rationalize their decision. This way, you can show the customer how your product or service surpasses what competitors can offer. Apply the MEDDIC framework by translating the decision criteria into impact in the following ways:

• De-prioritize: Clarify with the customer that the price has a relatively small negative impact on their budget, relative to the increase in revenue or productivity that they will see as a result. This will help them understand that price is actually the least important factor.
• Prioritize: Introduce a new element, such as adding a new criterion or pointing out the ability to unlock a new revenue stream.
• Re-prioritize: Educate the buyer by sharing current customer success stories or introducing them to a current customer.

Applying SPICED to Customer Success

The SPICED framework can be used across all stages of the sales process. For instance, during the handoff of an account from Sales to Customer Success, a strong focus (see ‘TRANSFER CRITICAL ACCOUNT INFO’ below) must be placed on reestablishing the impact that the customer is looking for (Figure 4).

Figure 4. The use of SPICED in the hand-off between Sales and Customer Success

 

References

Ref. 1.   2018 Expansion SaaS Benchmark (slide 30) – By K. Poyar and S. Fanning of Openview Advisors

Ref. 2. The SaaS Sales Method: Sales as a Science, by Jacco J. van der Kooij, via Amazon

Ref. 3. Seven Sales Qualification Methodologies  by Jeremy Donovan via Slideshare

Ref. 4. Solution Selling Definition and Research by Nadia Landman via blogpost on web-site

Ref. 5. SPIN Selling by Neil Rackham via Amazon

Ref. 6. The Challenger Sales: Taking Control of the Customer Conversation by Matthew Dixon and Brent Adamson via Amazon

Ref. 7. MEDDIC Definition by SalesMeddic

The data that drives the SaaS methodology model can be categorized into three types: volume metrics, conversion metrics, and absolute time metrics. Each of these work in systems to drive the different stages of revenue generation: customer acquisition, recurring revenue, and lifetime value.

Measuring Data

Many organizations are excited about the amount of data flowing into their customer relationship management (CRM) or marketing automation systems (MAS). Despite the influx of data, however, many organizations are also uncertain how to interpret and best utilize it. There is a tendency to compare apples to oranges, which results in either no action or bad action which has an adverse impact on the business. 

Most decisions in sales today are guided by data, so a company must establish the correct data model for itself. Companies must ensure they are measuring from the same point and comparing against the same criteria in the same way. Start by standardizing exactly what your company is going to measure. 

Figure 1. The Recurring Revenue Model

The SaaS Methodology Data Model

The Recurring Revenue Model is a customer-centric model based on seven unique customer experiences during the stages of the sales cycle, as shown in Figure 1 above, and it is the backbone of SaaS Methodology. There are three types of metrics that contribute to the SaaS Methodology data model:

• Volume Metrics. These will measure how much volume, such as leads, deals, etc., your company has. 
• Conversion Metrics. These will measure how many inputs are needed to generate the desired output.
• Absolute Time Metrics. These measure how long it takes to convert input into output.

Figure 2. The SaaS Methodology is a scientific model that uses three types of metrics

Volume Metrics

Volume metrics are quantities of items (such as the number of leads, commits, or revenue) present or generated at any given step in the sales process. See Figure 3 and Table A for the different volume metrics and their respective definitions.

Figure 3. Volume metrics throughout the sales process

Table A. Volume metrics defined

The Order of SQLs vs. SALs

The typical diagram of a Sales Qualified Lead (SQL) in a sales funnel will depict a process whereby marketing delivers Sales Accepted Leads (SALs) and then sales qualifies them as SQLs. This is the wrong order. In sales, you should qualify first and then accept. When sales accepts a lead, it is held accountable for the win rate and the sales cycle. See Figure 4 for a visual representation of the correct order. To clarify the process, the figure uses an emergency room visit as an example because hospitals are analogous in that they expand the quantity and quality of resources based on the diagnosis. Table B shows questions to ask at each step of the sales process.

Figure 4. Correct depiction of Sales Qualified Lead before Sales Accepted Lead

Table B. Questions to ask at each stage of the process

Conversion Metrics

Conversion metrics measure the volume of the output of a process divided by the volume at input. They indicate the rate at which you are converting at each step. See Figure 5 and Table C for conversion metrics throughout the sales process and their respective definitions.

Figure 7.5 Conversion metrics throughout the sales process

Table C. Conversion Metrics defined

The Importance of CR3 and CR4

When looking at the conversion rates, CR3 and CR4 stand out. CR3 refers to how many meetings were set for the sales team versus how many of those turned into an opportunity (also known as the sales pipeline). There are two reasons why this is not 100%. First, there are no-shows, or prospects who commit to a meeting to get you off the phone but do not show up to the meeting. Second, there are unqualified leads, or prospects who upon further review cannot be helped by the company’s product at this time. 

In the case of a two-stage organization, the prospector (SDR) had a short conversation with the client who agreed to a discovery call with the sales manager or account executive (AE). CR3 and CR4 (win rate) are particularly important as they provide insights into team efficacy and where it can be improved. See Table D for suggestions based on these two conversion metrics.

Table D. How CR3 and CR4 conversion metrics can diagnose sales issues

Absolute Time Metrics

Absolute time metrics are defined as the delta in the time it takes to convert one volume metric into another volume metric. See Figure 6 and Table E for absolute time metrics throughout the sales process and their respective definitions. The length of time it takes to convert one metric into another is determined not by the actual activity in the process but by the waiting time in between the processes. For example, it may take five minutes to write an email invitation to an event,  but it can take days to get a response.

Figure 6. Absolute time metrics through the sales process

Table E. Absolute time metrics defined

Fast Response Times Can Backfire

One of the most common marketing mishaps involves an inbound lead or MQL. When a client reaches out, they generally have a pain that motivated them to do so. In that first conversation, the seller should make sure they are fit before scheduling a discovery/demo call. An inbound call is time sensitive, and the faster the response, the higher the chance of a successful outcome. 

Viewing it from the buyer’s perspective, they have finally found the product they want to purchase but they cannot get it until they “talk to someone” on the seller’s side. They leave their phone number, enter their email address, and wait for some to contact them. B2C metrics say that the majority of people spend five minutes (at most) waiting for a response or checking their inbox for a reply [Ref. 1]. 

Drift, a company that specializes in customer web chat, performed research which showed that as of mid-2018, only 7% of 433 companies contacted responded within five minutes. Even worse, 55% of the companies did not respond within five business days [Ref. 2].

Figure 7. Inbound vs. outbound processes: fit and pain are reversed, causing the wrong, time-sensitive response

In general, an inbound process consists of a series of actions such as sending an email, making a phone call, and leaving a voicemail. As an example, many people experience this process when reaching out to a dentist. 

However, this time-sensitive process is often used in the wrong circumstances. For instance, if a client provides an email address so that they can download a research paper from your website, in many cases, this lead will be miscategorized as an MQL. As a response, the sales development rep calls the prospect immediately, leaves a voicemail, and sends a follow-up email as if the client has expressed a pain – but they never did. Now, the client feels intimidated by the assertive follow-up.

Companies must learn that not every MQL is created equal. In this case, the MQL should have gone into the outbound process, during which research would have been performed to determine if this client had a pain the company could solve. See Table F for more examples of true inbound leads compared to quasi-inbound leads.

Table F. Examples of true- and quasi-inbound leads and appropriate responses

Sales as a Science

All sales leaders have been in situations where their sales team is falling short of its targets. In that circumstance, most tend to respond by thinking about how many more deals they must add to meet that target. The more sophisticated among them may also consider how many more incremental meetings, sales opportunities, or marketing qualified leads they need in order to achieve that goal. In other words, most sales leaders are thinking in additive terms, which is a result of each department working by itself with an individual additive goal. This is more commonly referred to as “operating in silos.”

Generating revenue is not a one-time event that happens in one meeting, performed by a single person. Rather, revenue is the product of connected events across a series of meetings, working together in a system that is run by several people. This system is based on connected revenue propulsion systems that operate during three different stages:

• Stage 1: Acquire Customers
• Stage 2: Achieve Recurring Revenue
• Stage 3: Extend the Customer Lifetime

Figure 8. Example of the Acquisition Process: a series of activities form the processes that work together as a system

Stage 1: Customer Acquisition & System Impact

During customer acquisition, there are typically four different processes at play, as depicted below in Figure 9. Each process is based on a series of interactions, and each of these interactions has a conversion. The end result of the entire Customer Acquisition process is the product of these conversion rates (CR).

For a practical example that illustrates these processes, consider a high-velocity prospect who visits your company website. Following some browsing, she likes a white paper and enters her email address to gain access. As she is reading the paper, she receives an invitation to attend a webinar with an expert in the field. She signs up for the webinar, and with that action, she becomes an MQL. Unfortunately, she is unable to attend the webinar. 

The day of the webinar, she goes back to the website where a chatbot welcomes her back. The chatbot knows she was unable to attend and asks if she would like to watch the recording. She likes this idea and watches the condensed version of the webinar. The chatbot then asks if she wants to set up a discovery call. She says yes and is linked to a live chat with Mike, the SDR. Mike learns her name is Nikki and suggests a few time slots to meet. Nikki picks a time and receives confirmation via email. She has now become a SQL. 

The next day, Nikki dials into the discovery call where Mike introduces her to Yuri, the AE. Yuri diagnoses Nikki and concludes the company can help her. She has now become a SAL. Yuri suggests a real-time demonstration. Nikki loves the demo and asks for the price. Yuri offers a range of prices based on her exact needs, and together they hone in on their options. Nikki asks for a proposal so she can take it to her organization. A few days later, both parties meet to review the proposal. Nikki has invited the VP of Finance who seeks agreement on a few terms. 

The next day, the agreement is executed, and a kick-off is scheduled. During the kick-off, Nikki adds the Director of Sales Ops who integrates the service into their cloud suite. On Monday, she and her team are live.

Figure 9. High-velocity sales based on web visitors

How to Calculate Acquired Monthly Recurring Revenue

Figure 9 displays the steps that prospects – who begin as website visitors – progress through during the sales process. These steps are accompanied by sample conversion rates, prices, and discounts that a company might achieve or create during the Customer Acquisition stage. The formula for calculating Monthly Recurring Revenue, known as MRR(New), based on website traffic is as follows:

 

By improving the performance of each conversion rate independently, the impact on newly acquired Monthly Recurring Revenue can be measured. Table G below demonstrates the impact of improving a single conversion rate, CR2, on MRR(New). This example is based on 1,000 prospects. CR2 is the conversion rate between MQL and SQL, which is the result of a call or email by a sales development rep in a high velocity sale.

Table G. Change in MRR(New) as CR2 increases

With this single percentage point improvement, the impact on MRR(New) is five percent. As an example, such an increase in performance could be the result of the use of an online chatbot. However, not every improvement creates the same results. Some improvements impact results in a much larger way. For example, with win rate and discount, their impacts are greater as they occur within a much smaller data set. 

Win Rate: In sales, there has been a big change in win rate since the once-standard 1 in 3 of Enterprise Selling. Today, the average performance is about 1 in 5, with the best in class operating at a win rate of 1 in 4 [Ref. 3]. See Table H as an example of the effect that an increased win rate (C4) has on new Monthly Recurring Revenue.

Table H. Change in new MRR(New) as CR4 (win rate) increases

Discount: Recurring revenue models were never designed for discounts. In a way, compared to the previously used Perpetual Business Model, they are already the discount model. To make matters worse, many companies have fallen into the habit of discounting prices at a set rate of 10% or 20%. Large increases in discount levels have a pronounced negative impact on the new Monthly Recurring Revenue generated by the company. Table I provides an example.

Table I. Change in MRR(New) as discount decreases

As you can see from these results, in terms of individual conversion rates, win rate and discount level have the most pronounced impact on newly acquired Monthly Recurring Revenue. This impact is displayed in Figure 7.8 below.

Figure 10. Discount level and win rate impact on MRR(New)

System Impact: Small Changes Equal Big Results

In this cohesive system which is impacted by a series of conversion metrics, the major realization and actionable lesson for companies is this: When you improve each conversion metric by just a small amount, the recurring revenue stream nearly doubles, even when using the same number of prospects (1,000). This is known as “system impact,” and the results can be seen in Table J and Figure 11.

Table J. Results of incremental changes in conversion rates (CR) on MRR(New)

Figure 11. System impact shows small improvements result in 2x MRR(New)

 

At the system level, revenue organizations work multiplicatively rather than additively. The effort and results of each link in the sales chain are magnified or diluted by the next. Therefore, massive changes in outcomes are possible by making marginal improvements across the chain rather than by simply improving any one link. 

Despite this fact, most sales leaders are of the mentality that they could not improve sales by 2x without increasing the top of the funnel, but they would likely sign up to improve their discovery call conversion rate by 10%.

 

Stage 2: Recurring Revenue & Compound Impact

After learning how to double the recurring revenue stream with incremental changes, companies should next focus on creating a compound impact from their revenue using Churn and Upsell metrics. The following examples begin with a monthly model and proceed to an annual model. 

Churn: In the Recurring Revenue stage, not every customer comes back. This is normal, and it is referred to as “churn” (CR6). Unlike the Customer Acquisition stage of business, this stage experiences a different growth formula, which is used in nearly all areas of finance, known as Future Value (FV). 

FV incorporates a compound element based on a period(s) of the interval measured over time, as follows

 

Table K shows the impacts of periodic churn on revenue based on a 12-month contract:

Table K. Impacts on revenue based on changes in churn rates (CR6)

 

Upsell: Companies not only experience periodic churn, they also increase periodic upsell, which is a situation in which the client increases the contract value every month. Table L shows the effect that different upsell percentages (CR7) have on revenue when combined with changing churn rates.

Table L. Impacts based on changes in upsell (CR7) and churn (C6)

 

Below is the growth formula for annual recurring revenue value in which the period is 12 months:

 

Because Customer Acquisition (Stage 1) and Recurring Revenue (Stage 2) are based on different growth formulas, they achieve different impacts on company revenue, as depicted in Figure 12.

Figure 12. Growth in Stages 1 and 2

Annual vs. Monthly Contracts

The growth formula for annual recurring revenue, known as ARR(Growth), requires companies to distinguish between two very different business models:

Monthly Contracts: For businesses that work on a monthly contract (such as a monthly subscription with an online storage company), churn is about 1 to 2% per month [Ref. 4]. Upsell can vary greatly, though it generally exceeds churn, and the period over which it happens may be anywhere from nine months to several years [Ref. 5]. For B2C examples, consider a monthly phone subscription or monthly Amazon bill, while B2B examples include a company’s storage, monthly leads, etc.

Dashboard Example – Usage MRR: This type of growth is primarily achieved by growing new revenue from existing customers based on usage (examples include companies that provide templates, content, storage, leads, etc.). In this case, businesses can grow a lot faster with the same amount of customers, but in turn, they are more prone to churn, as customers can turn off or downsize their usage overnight. In these types of businesses, revenue churn averages between -1 to -2% per month [Ref. 6]. As shown in Figure 7.13, most of the growth comes from usage/consumption rather than new customer accounts.

Figure 13. MRR dashboard usage shows most growth comes from usage/consumption

Annual Contracts: Businesses that utilize an annual contract function based on a number of seats. For example, Google Suite, Customer Relationship Management, or Marketing Automation System licenses. For these types of platforms, annual churn is 6 to 7% [Ref. 7]. The upsell is comprised of a lift or increase in the annual platform price, usually by 5 to 10% [Ref. 8] as well as growth due to an increase in the number of seats. In this case, the period is measured by the length of the contract (for example, three years) which is also known as Average Contract Length or ACL. 

When you calculate out this formula and then begin to make small improvements, the reduced impact that they have is noticeable, as shown in Table M. This is due to the reduced number of time periods, as they are now being measured in years rather than months.

Table M. Impacts on revenue based on changes in churn, price increase (lift), and growth

Dashboard Example – Annual Contracts: This type of growth is primarily based on securing new revenue from newly acquired accounts and renewing them at an annual increased rate. This growth chart is very common when companies sell a platform for which the price is based on the number of seats, as described above. Although the number of seats may grow, for most companies, it often grows at a relatively small percentage rate [Ref. 9]. Revenue churn for these types of businesses is between +5 to 7% [Ref. 10], but it is often related to Logo churn (the percentage of subscribers that discontinue their subscription) which is -6 to -7% annually. As shown in Figure 14, most of the growth for these platforms comes from additional seats and price increases.

Figure 14. MRR dashboard growth from platforms – most of the growth comes from additional seats and price increase

Stage 3: Extending the Customer Lifetime

Average Contract Length is a time metric that provides a key element for the third and final stage of revenue generation. In this stage, companies should measure the impact created by the length of the customer contract (ACL). 

By using the monthly growth formula and measuring the average length of the contract (in this case, p = ACL), you can calculate the expected annual lifetime revenues, known as ARR(LTV). With this formula, companies can determine the impact of increasing the contract length by a single month and then compare it to their previous pipeline. See Table N for the results achieved by increasing the ACL. 

Table N. Impacts based on changes in ACL

 

Extending the customer lifetime has a profound impact on a company’s total revenue. Figure 7.15 displays a comparison of the different impacts achieved across Stages 1, 2, and 3 of revenue generation.

Figure 15. Growth Stages 1, 2, and 3 show pronounced impact based on an extended customer lifetime

he results show that 3x revenue can be generated using the same amount of prospects with a monthly subscription model simply by making small improvements across the entire lifecycle of the customer. The biggest impact, however, occurs post-sale when $15,840 in monthly recurring revenue can be turned into $467,686 of lifetime value. Unfortunately, this is an area where companies commonly spend the least amount of quality resources [Ref. 11]. 

Such an improvement does not happen through a change in hiring practices, but rather through a shift toward approaching sales as a system and implementing processes that, with small improvements over time, will maximize impact. 

A Future Metric: Identifying the Customer Early On

There may also be a need for a fourth growth stage based on the fact that not every customer is created equal. Though there is no formula yet, when a successful business looks back to identify the moment it “took off,” it can typically categorize customers into one of three variants of a symbiotic relationship:

• Mutualism: Relationships in which both parties benefited. This is the lionshare of customers. From the beginning of the relationship, each party was committed to the success of the other. Not much occurred beyond the conveyance of revenue and perhaps the display of a logo on a website.
• Commensalism: In this relationship, the seller clearly benefited, but at no cost to the buyer. Examples of a commensal relationship might include a customer who spread the word about a product by mentioning it was critical to their success, a customer who helped the seller discover a new vertical market, or a customer who invited the seller to speak at an event filled with qualified buyers.
• Parasitism: Relationships in which one party significantly benefited at the cost of the other. Most commonly, it is the seller who benefited from financial gains, whereas the buyer never received the impact they were promised. These accounts often churn at the end of the contract.  

The most dangerous relationship for a new company is parasitism camouflaged as commensalism. Many CEOs make the mistake of thinking that a big brand name will act as a force multiplier, but research shows that large multinational customers often cause harm to a seller because they demand the most valuable resources of a company during the critical phase of rapid growth [Ref. 12]. These large customers often require long business trips by founders and knowledge transfers, which are followed only by the RFQ and an invitation to participate in a bidding war.  

For this reason, it would be beneficial if companies could recognize up front whether the seller-buyer relationship would result in mutualism, commensalism, or parasitism. With a system based on data in place, this could eventually be a reality. As soon as the system recognizes a specific marketing campaign results in huge success (for example, a SEO term), it could allocate more funds to that SEO term. If the win rate, sales cycle, and average contract value of a vertical market indicates improved effectiveness, it could prioritize lead campaigns or even prioritize SQLs to intensify efforts. This is referred to as a “closed loop system.” Figure 7.16 provides a visual display of sales as a closed loop system.

A closed loop system is a system that regulates itself based on feedback. These types of systems form the basis for every artificial intelligence system in the world. Their implications on sales the world of sales, however, will require much further exploration and research.

Figure 16. Sales as a closed loop system, a foundation for artificial intelligence

Summary

To get the most value out of data collection, companies should leverage an established data model for recurring revenue generation which provides three kinds of metrics: volume metrics, conversion metrics, time metrics. These metrics dictate three stages of growth:

 

• Customer Acquisition: This stage generates system impact, which consists of small improvements to the conversion rates across the board to create a bigger overall impact, as opposed to a great impact on a single conversion metric (such as win rate); often person-driven.

 

Formula: MRR(New)= Prospects n=15CR[n]Monthly Fee

2. 2. Recurring Revenue: This stage establishes a recurring revenue stream that creates a compound impact based on churn and upsell metrics. If the impact is felt monthly (versus annually), a more rapid increase or decrease is possible as the impact compounds over the number of periods (p).

Formula:

ARR(Growth)=MRR(New) (1+CR6+CR7)p

3. Lifetime Value: The later, post-sale stages of revenue generation, during which exponential growth provides a disproportionate amount of revenue. By extending the average contract length (ACL), a company earns a disproportionate amount of profit.

Formula:

 LTV=MRR(New) (1+CR[6]+CR[7])ACL

In many companies, most of the quality and volume of resources are applied to the customer acquisition processes, primarily to two conversion rates (CR2 and CR4). However, a company’s success depends on a system in which profits are generated due to growth of recurring revenue over an increased customer lifetime. In many cases, this is where the least amount of quality resources are applied.

The number of roles within the marketing, sales, and customer success teams at SaaS companies has become quite confusing in the last several years as organizations have embraced new org models of role specialization, and put their own spin on them.

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It’s further complicated by the fact that these roles are still being reinvented as SaaS orgs evolve along with the new technology they are using to power their teams.

Let’s review how to make sense of these roles: we’ll go through how we should think about these stages, and how to define roles and responsibilities across each stage. Teams may have slight variations depending on your business model, but these principles should apply across the board as you are defining your go to market organization.

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STEP 1. NORMALIZE STAGES

In 1898, Elias St. Elmo Lewis developed a model that mapped a theoretical customer journey from the moment a brand or product attracted consumer attention to the point of action or purchase. He created a four-stage process: Awareness, Interest, Desire, and Action (AIDA). This term was made popular when it was famously enacted by Alec Baldwin in the cult classic film Glengarry Glen Ross. In the AIDA model, revenue and profits are realized shortly after the client signs a contract. Many sales and marketing organizations still are based on a version of AIDA, which today is referred to as “the funnel”.

Figure 1. The Marketing & Sales Funnel, evolved from AIDA

With the advent of recurring revenue models, the conventional layered funnel depicted above became outdated – because it was designed from the seller’s perspective, not the buyer’s. To further complicate things, it created a siloed approach in which individual teams focused on their own narrow performance metrics at the expense of others in order to hit their targets.

Figure 2. Bowtie model with stages based on customer experiences

We visualize this new model as a ‘bowtie.’ The bowtie must cover two critical gaps: 1) the impact stage where sellers must ensure that customers achieve their expected impact; and 2) the critical activity of growing the business together with your customer. These two additional stages create a compound growth loop. In comparison, a funnel model was designed to achieve linear growth without a growth loop.

 

STEP 2. DEFINE RESPONSIBILITIES BY STAGE

As described in the book The SaaS Sales Method: Sales as a Science, a high-velocity business must operate as a system. This means that departments must operate with each other flawlessly, and not as siloes.

What this means is that every team has a role in each stage of the sales funnel; the amount of involvement of course varies in each stage. For example, Marketing must be involved throughout the entire sales process – not only in the awareness stage. And Customer Success should be involved before the customer commits, if you want to have a successful handoff from sales to CS and a great experience for the customer.

The exact levels of involvement will vary from business to business; you should determine how each department needs to be involved at each stage, and with what kind of action.

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STEP 3. ASSIGN ROLES ACROSS STAGES

The degree of specialization that you should have in your organization is generally a function of the Annual Contract Value (ACV). For example, at a lower ACV of $2,500/year, you would likely have a full inbound funnel with an online credit card transaction. Compare this to higher ACVs, say $50,000, may involve a response to a request for a proposal, discovery calls, and even a proof of concept.

This specialization is in response to what the customer values. At a lower ACV, customers value a seamless working product operating in a standard workspace (think of a Google Chrome plug-in). At higher ACVs, they value a high-touch service that helps with deep integration into the customized environment (think of a sales automation platform).

When well executed, job specialization can increase sales velocity and improve effectiveness. Organizations need to ensure that specialization is paired with a well-defined, cross-functional process and job training for each role, with proper handoffs.

Figure 4. Assign roles to match your GTM model, for each market segment. Shown in brackets is the number of accounts called on by role such as (100 accounts) or (less than 40 accounts).

 

STEP 4. DEFINE EACH ROLE

Having determined the roles, we can now provide some insights as to what each role does and how the roles differ from one another.

Group 1. Sales Development Roles

MDR – Market Development Rep. This role generates a sales qualified lead (SQL) primarily by having a conversation with an inbound marketing qualified lead (e.g., following up on demo requests or form fills to speak with sales). Other areas of responsibility include confirmation of attendance to events such as webinars and trade shows. This role is often most meaningful in inbound businesses, since the role reports to marketing.

SDR – Sales Development Rep. This role focuses on a region or vertical in which they develop sales qualified leads from scratch. This means they have to start a conversation and provoke a decision maker into action, handle objections, and close on a call-to-action such as meeting with an account executive (AE) or attending an event. Due to the sales-like skills required, this role should generally report to sales.

ADR – Account Development Rep. This is a highly specialized SDR role. While the SDR focuses on going after a single role in thousands of accounts, the ADR is responsible for implementing account based prospecting and targeting multiple people inside the same account, across a few dozen accounts. The ADR is the most senior of the sales development roles. They often have to target executives using provocative sales techniques, and to be successful, they must have a deep understanding of use cases based on the impact achieved by clients. This role can report into the account manager (AM).

BDR – Business Development Rep (not depicted). This role generates sales qualified leads in volume from a partner such as Salesforce and the AppExchange. The role of the BDR is to provide lots of support to the partner, organize events, provide content, create a template quote, etc. It should be no surprise that originally this role reported to the business development executive, but today, it is more common to see this role reporting to the channel manager. In the past years, this title has sometimes been used to apply to the SDR role, to minimize the bad mojo from the “sales” part of the title.

 

Group 2. Sales (signer) Roles

SM- Sales Manager. This role is responsible for all business within a territory or vertical market. This role might cover a wide geographic region, and in that case, would be an inside role rather than a field role (not traveling to visit customers). Instead, they organize local events such as meet-ups to network with clients and mix them with existing customers.

ISR- Inside Sales Rep. This role combines the MDR (inbound) and SM (closing) roles. This role is commonly found in high-velocity sales, where the client can demo the product on their own online through an automatic free trial, and then approach the ISR with the intent to buy. As such, the ISR can manage up to a hundred clients a day (10-20 per hour). The primary role of the ISR is to field an inbound call, address a client’s concern, provide accurate pricing, and obtain commitment.

AE – Account Executive. This role generally will get a vetted list of 20 to 100 named accounts to focus on. They use both provocative and solution sales techniques to start a conversation, and they develop a deeper understanding of the client’s needs through extensive research and discovery calls. They develop multiple touchpoints in the client’s organization over a period of three weeks to nine months. Each quarter, a number of (disqualified) accounts are replaced with a series of new accounts. Whereas the sales manager calls on a territory or vertical market, the AE is calling on a distinct list of named accounts.

SE – Sales Engineer. This role is one of the key functions in platform sales, where the product has a higher level of complexity. The SE is responsible for the sales support before the client commits, and for the integration of the software within the existing tool stack after the client commits. A highly skilled SE can modify the product to ensure it works within the client’s environment. They are often the most qualified resource on the call, and both the seller and buyer often put a lot of trust in the SE. The SE’s role may expand beyond the commit, meaning that they are responsible for overseeing the implementation of what they recommended.

SA – Solution Architect. Although similar in nature to the SE, the SA is more focused on customizing the product to the client’s needs, and less on integration within their existing infrastructure. For example, the SA will setup the client’s dashboard to their specific needs, whereas the SE ensures the proper usage of APIs. Similar to the sales development roles, title inflation has sometimes faded the lines between SE and SA.

 

Group 3. Customer Success Roles

ONB – Onboarding Managers. These are specialists who drive initial deployment. Like a sales engineer, they support the initial setup of the customer’s account and support the enablement of key moments at the beginning of the customer journey. This role is critical to ensure the customer sees value early in the partnership, serving to drive adoption and net retention. Typically, a key milestone that the ONB is focused on is when the customer has gone live with their product.

CSM – Customer Success Managers. CSMs proactively drive adoption and net retention. Depending on the company’s maturity, the CSM may be initially responsible for onboarding, quarterly business reviews, support, training, and renewals. Over time as a company grows, a CSM’s role shifts to focus on strategic customer conversations. They typically are not responsible for technical work or support; rather, they build relationships with the customers and ensure the services they need are provided to receive maximum impact.

AM – Account Managers. AMs are typically introduced at the beginning of a customer relationship after the customer has committed to a partnership with your company. They are responsible for the commercial aspects of the relationship and work across customer success teams to identify expansion and other contract opportunities. Companies typically create AM teams to focus on customer expansion, so that sales roles can focus on new acquiring new logos.

Figure 5. Several areas of growth exist for the account manager (from the book The SaaS Sales Method – Sales as a Science)

 

TAM – Technical Account Managers. A TAM focuses on providing services to the customer such as custom integrations and migrations. They typically have a technical background and/or experience, as well as customer management skills. An increasing number of companies with complex product implementations are recognizing the need for a TAM across customer success teams, while others are hiring TAMs instead of CSMs.

Emerging Roles in Customer Success (not depicted)
There are a variety of new roles emerging in the customer success arena. These roles are not depicted in the above figure, but you may run into them in the field.

CSR – Customer Support Representatives are typically responsible for reactive support. They help customers who identify a software problem or don’t know how to use a particular aspect of the platform. They typically work through a support portal via phone, chat and/or email, and are responsible (often in joint efforts with the training team) to manage the knowledge base. CSRs serve as a liaison between the customer and the product and engineering team to ensure any defect is fixed.

CET – Customer Education & Training is used as a company matures to teach its customers how to use their product, as well as to educate their own team internally. Real-time guidance and learning management systems are typically used for this function.

CX – Customer Experience performs activities to measure and improve a customer’s overall experience. This may include the voice of the customer, health scoring, and managing focused programs such as the Net Promoter Score program.

CEM – Customer Engagement Marketer is an extension of Marketing, but purely focused on driving engagement within existing (rather than new) customers.

 

STEP 5. GO TO MARKET IN STAGES

GTM models will evolve with their level of role specialization over time, as the company goes through each stage of growth.

GTM Stage 1. Founder sales (getting your first 20-30 paying customers)

Figure 6. Founders (F1 and F2) split the responsibility (from the book How to Get to $10M in ARR)

At the start, the founder(s) is doing sales (F1) and customer success (F2) for the first 20-30 deals. As sales grow to about $10-50K in MRR, one of the first hires is often an AE who immediately manages the inbound and starts planning the outbound. The AE will need in-depth training and hands-on coaching by the founder on existing use cases, the market, and the product, in order to effectively sell.

GTM Stage 2. Getting to $1-2M in ARR

Figure 7. Splitting responsibilities into separate Sales and Customer Success teams.

The organization starts to specialize with roles around $100K in MRR. The AE is now focused only on closing, and you hire an SDR to generate pipeline by qualifying inbound leads and going outbound. You hire a CSM to cover existing customers – primarily to manage issues, but soon your board or advisors are asking for retention and growth metrics, which means the CSM will need to focus more on growth.

GTM Stage 3. Growing the Pipeline

Figure 8. Separation of inbound and outbound can increase velocity

The organization is ramping to an overall $3-4M in ARR, and it now starts to specialize with inbound versus outbound as it begins to run out of leads. SDRs need to develop and work on their own customer outreach, in tandem with marketing campaigns. On the other side of the customer journey, Customer Success starts to become overwhelmed by onboarding requests and isn’t spending enough time helping customers get the most value from the product.

GTM Stage 4. Scaling Growth Through Expansion Sales
Revenue is growing beyond $5-8M in ARR, and the organization starts to specialize by creating separate roles for Onboarding versus Customer Success. The Success team is helping customers use the product and is renewing monthly/annual contracts. But upsell activity is likely lagging – in particular from the big accounts that you had high hopes for – and your net revenue increase barely covers the churn.

 

Figure 9. The separation of Customer Success roles creates scalability

 

GTM Stage 5. Diversifying Across Markets & Verticals
You are now growing beyond $5-10M in ARR, and the organization has developed specialized go-to-market strategies based on deal size or vertical markets. We’re using the educational market as an example here: selling to individual schools versus school districts.

Figure 10. The $10M Organization with two go-to-market (GTM) models

 

GTM Stage 6. Grown-Up with Full Specialization

Figure 11. Specialized organization matching the GTM model to the business model

As you can see in Figure 11, we now have a highly specialized and scalable organization across three different market segments – for example, Enterprise (high ACV), Mid Market (medium ACV) and SMB (low ACV).

 

STEP 6. KEEP GOING!

We hope this helps you navigate the alphabet soup that the market has created of these roles, and that it provides you with a staged approach on how you can look at your organization. If you would like to keep going, we have a number of resources available for you:

Resource 1: Series of books on a more scientific approach to sales

• Book #1 The SaaS Sales Method – Sales as a Science. Provides the methodology behind SaaS sales and the growth model that fuels it.
• Book #2 Blueprints for a SaaS Sales Organization. Provides insights into a process driven approach to sales.
• Book #3 How To Get To $10M in ARR and Beyond.A scalable growth model is the result of proper design and architecture. This book provides the blueprints for each phase, with best practices from industry experts.

The specialized roles described above each have a textbook aimed at delivering value to the customer. By having your team work on each textbook, they use the same lingo and customer-centric methodology aimed at providing a client with impact, not just usage.

• Textbook Fundamentals – How to Have Customer Conversations
• Textbook Prospecting – How to Prospect for Customers
• Textbook Sales – How to Win Customers
• Textbook Customer Success – How to Grow Customers

Resource 2: A YouTube channel with 100 videos

Those wishing to start right away can find a series of explanatory videos, example role plays, and skill training on our YouTube channel.

Resource 3: Detailed LucidChart templates

There are many common processes that go along with each of these roles. We’ve defined these processes and made them available through LucidChart.

For the past several decades, most companies have used a traditional model typically referred to as the “sales and marketing funnel.” According to this funnel, the marketing function is responsible for generating a certain volume of leads at the top of the funnel, sales development is responsible for qualifying those leads into opportunities, and sales is responsible for converting those opportunities into becoming paying customers. Leads go into the top of the funnel, emerge as paying customers from the bottom of the funnel. This model does apply, but only for companies that earn most of their revenue when the customer makes that initial purchase, such as a one-time hardware purchase.

Why the funnel doesn’t work for a recurring revenue business

But there is a fundamental problem with this model: Recurring Revenue takes place outside the purview of this conventional funnel. Why? Because the funnel ends at the point when the deal converts to a paying customer…which means that the funnel does not show the recurring revenue that takes place in the months and years during which that customer uses the product they purchased, when they renew their contract, and when they expand their usage. In a recurring revenue model, 72 to 93% of the lifetime value that we get from a customer happens after the initial deal.

If you use a recurring revenue model, the funnel only leads us to the halfway point.

And further still, it often leads us to the wrong conclusion, which is the idea that “in order to grow, we need to win more deals…and to win more deals, we need to have more leads.” Many companies then decide to rely on a volume-based strategy as a result: just get more (leads) into the funnel, and more (deals) will come out.

What recurring revenue businesses need instead is a model that covers the entirety of the customer journey. This model needs to account for the actual growth loops that take place in recurring revenue, and account for them in the right place along the customer journey.

For this, companies need to apply The Recurring Revenue Bowtie. The Bowtie is already being used by hundreds of high-growth SaaS and recurring revenue companies. Instead of stopping at the halfway point, it accounts for what happens after the initial deal is made: onboarding, getting to first impact, renewal, and expansion.

Figure 1. The Recurring Revenue Bowtie. The Bowtie and associated frameworks from the Recurring Revenue Operating Model are all available open source, at www.thescienceofrevenue.com

Because of this recurring revenue model, we have to think about the customer buying process much differently than we did in the past.

Figure 2. Figure 2. Visualization of the types of sales methodologies.

Traditional Sales Methodologies

In traditional sales models, the funnel always looked the same but involved a range of different types of sales methodologies: solution selling, consultative selling, and strategic selling.

Solution Selling. The original methodology was called solution selling. A customer comes to your sales team already aware of the problem and the probable solution. The sales rep only has to assist the customer with selecting the right product. This is the shortest of the methodologies, as it involves only the first part of the funnel.

Consultative Selling. This methodology is used when a customer knows that they have a problem, but they need help understanding potential solutions. In this method, the sales rep has to educate the customer on the options as well as help them select the right product. Consultative selling typically focuses on identifying and influencing the company’s key decision maker.

Strategic Selling. The above methodologies worked well until about 2003, when the dot-com bubble burst. Cash-strapped customers suddenly weren’t interested in buying new technology. Sales teams had to get more creative, pushing innovative solutions even if a customer hadn’t identified a specific problem. One of the classic indicators of strategic selling — also known as provocative selling — is an on-site workshop for leaders of a company looking to optimize or overhaul their business. This methodology often requires executives from the seller to reach out to executives from the buyer.

The SaaS Sales Method

The SaaS Sales Method is a modern sales approach, developed to serve the unique needs of the SaaS business model. With a SaaS methodology, profit generation shifts from soon after closing the deal, to months or even years in the future, at the point when the solution provider delivers the impact that the customer was promised. In many cases, persistent use of the service and growth of the account are needed for the SaaS company to achieve profitability on that account.

The SaaS Sales Method involves all customer-facing employees (Marketing, Sales, Customer Success). It emphasizes the importance of discovering, communicating, and delivering business impact consistently across the entire customer journey. In addition to the traditional steps along the funnel — awareness, education, and selection — the SaaS Sales Method adds onboarding, use, and expansion. It looks ahead to the lifetime value of a customer, rather than only what happens before the initial contract is signed.

Marketing and sales have traditionally operated in silos, which resulted in hand-off points where qualification criteria were used. For the SaaS Sales Method to be successful, we have to transition from qualification-driven sales (usually limited to a one-time event) to impact-driven sales (happening anywhere during the relationship with the customer).

Figure 3. The difference in qualification criteria based on budget (one-time) vs. priority (anytime).

Of note here is that the SaaS Sales Method doesn’t replace all the other methodologies; instead it combines and leverages all the previous methodologies. Teams may use a provocative technique for prospecting, a consultative technique for qualification, and a solution-oriented technique for selling. That essentially is what happens today with many high velocity sales organizations.

The Seven Key Moments that Matter

There are a few specific moments in sales that require special attention. If you and your team perform well during these moments, they will work in concert to generate success. We’ve identified seven key moments that are crucial during the SaaS sales cycle.

Business results, not fit. In the SaaS Sales Method, the concept of fit is reframed as impact. For example, the sales team at a car dealership must understand that they are not just selling a car — they are selling the ability for their customers to get to work and to provide for their family. Uber realized that impact could be unbundled from the car itself. Now Uber now sells pure impact (the ability to get around) to its customers, eliminating the need to actually own or even rent a car.

Conversation, not qualification. Instead of determining whether a prospect is “qualified” for your solution, focus on the fundamental skill of conversation. Conversation is a more natural, human activity. It helps you connect with the prospect on an emotional level and uncover real, pressing pain points. Have a clear idea of whether, when, and how your solution can have an impact on the customer’s business.

Figure 4. The difference in qualification criteria based on budget (one-time) vs. priority (anytime).

Diagnosing, not pitching. Keep this in mind: “Prescription before diagnosis is malpractice.” A salesperson must first understand the customer’s pain and what they want to achieve, before recommending a solution that will benefit the customer’s business.

Trading, not negotiating. This single change in wording and emphasis can have one of the greatest effects on your cumulative sales. When two parties negotiate, typically both parties come away with having given up things that they want; both parties walk away with something they were hoping to get, but compromising on other things so that a deal could be struck. That’s not a win-win scenario. Instead of negotiating, think about what you’re doing as trading. For instance, if you’re asking for something of value from the other party, what are you going to offer to them that is of equal value. This mentality forces the seller to think from the customer’s point of view, not just their own.

Orchestrating, not onboarding. Rather than just onboarding the customer to get them to start using the product, consider this to be an opportunity to orchestrate the entire business relationship going forward. Guide how the relationship will develop, set milestones for success, and ensure the relationship is set up to provide real impact to their business.

Results, not usage. Product usage isn’t a proxy for success. You should be looking at the success of the product itself. A more impact-focused approach would be to explore whether the customer is getting the results they need from the product.

Growing, not upselling. “Land and expand” implies that the customer is like a territory that should be mapped, flanked, and conquered. Instead, expansion teams should be thinking about growing the customer relationship. It’s the impact that matters most to the customer.

Jacco J. van der Kooij, Founder Winning by Design, Palo Alto, California

Traditional B2B marketing and sales frameworks such as the sales funnel, lead qualification and sales methodologies do not achieve the desired results in SaaS businesses.

Definition of the Frameworks

A sales methodology describes the process of how to acquire revenue, and a qualification methodology describes what you are going to measure. When you combine lead generation, lead qualification, and customer acquisition processes you get a system. In marketing and sales, this system historically has been referred to as the funnel. Recurring revenue models such as SaaS leverage a client’s success to create compound growth and need their own framework.

SaaS Sales Has Outgrown the Funnel

In 1898, Elias St. Elmo Lewis developed a model that mapped a theoretical customer journey from the moment a brand or product attracted consumer attention to the point of action or purchase. He created a four-stage process Awareness, Interest, Desire, and Action, or AIDA [Ref. 3.]. This term was popularized when enacted in a scene by Alec Baldwin in the movie Glengarry Glen Ross [Ref. 9.]. In the AIDA model, revenue and profits are realized shortly after the client signs on the line which is dotted.

Many sales and marketing organizations still use a derived version of AIDA today: Namely, the marketing and sales funnel. The lines between marketing and sales have blurred over the years, but the funnel and its shape remain the way how we describe and visualize the process. Around 2008, a new business model became popular, in which the upfront purchase and profits were exchanged in return for a recurring revenue stream.

Up to this point, software was sold using three to five-year contracts, measured in hundred thousand to millions of dollars, and often paid upfront.

The recurring counterpart of this model, which we now know as SaaS (Software as a Service), offered the exact same impact at a fraction of the price by replacing the perpetual revenue with a usage, monthly, quarterly or annual revenue. In the years that followed, a refined version of the opportunity stages became the basis of the sales funnel [Ref. 7].

Historically, there has always been a gap between the strategy and sales implementation [Ref. 4], but never more so than with a recurring revenue model. As you can see in Table 1, with the perpetual B2B model, 60% of the total revenue on a deal is secured on the win and the remaining 40%, from automatic upgrade and support renewals in future years. What is more telling is what happens in the recurring B2B model, where only 18% of the revenue is secured on the win.

Table 1. Distribution of revenue across five years of a perpetual sales model

Perpetual		Year 1	Year 2	Year 3	Year 4	Year 5	Total
Purchase price	$120,000	$120,000
Upgrade & Support	20%	$24,000	$24,000	$24,000	$24,000	$24,000
Annual Revenue		$144,000	$24,000	$24,000	$24,000	$24,000	$240,000
% of total revenue		60%	10%	10%	10%	10%

 

Table 2 shows that with a recurring model, 82% of the total revenue of a single deal comes from future revenues. The lion’s share of profit in this recurring B2B model has shifted beyond the original win [Ref. 10]. As a result, recurring sales have outgrown the traditional sales funnel. Businesses that are based on a recurring revenue stream require a new model. This model is referred to as the bowtie model.

Table 2. Distribution of revenue across five years of a recurring sales model

Recurring		Year 1	Year 2	Year 3	Year 4	Year 5	Total
Annual Price	$24,000	$24,000	$25,200	$26,460	$27,783	$29,172
Annual Expansion*	5%	$1,200	$1,260	$1,323	$1,389	$1,459
Annual Revenue		$25,200	$26,460	$27,783	$29,172	$30,631	$139,246
% of total revenue		18%	19%	20%	21%	22%

*The different models provide a very different growth model. The perpetual model is for low volume/big deals, whereas recurring models grow at an accelerated rate due to its lower price and shorter-term contract.

 

The Bowtie Model

The origins of the bowtie model lie in the travel industry, where it has been used since its inception in 2009 [Ref. 20.]. In the bowtie model, the knot of the tie is the point at which a ticket purchase is made. To get to this point, the traveler has narrowed down the destination, date and price options, and made a purchase.

What follows is growth from ancillary revenue streams such as seat upgrades, baggage, rental car, and hotel but also credit card fees. Before 2009, there was no model for this, and thus no process to capture the ancillary revenues. Today ancillary revenues from credit card fees alone have become a billion-dollar business, and for many airlines, an important profit center [Ref. 5.].

A similar situation occurs in SaaS subscription businesses. In SaaS, the majority of the profits often occur 12 to 18 months following the original commitment [Ref. 1.]. Similarly, the traditional sales funnel does not model how to capture this future revenue.

If you apply the bowtie model to SaaS, it must cover three critical stages beyond the original commit: The installation stage aimed to achieve first impact; the impact stage where customers achieve the desired impact and the recurrence of the impact; and the activity of growing the business together with your client to expand the impact beyond its original scope.

The last two stages create a loop resulting in a compound growth engine. In comparison, a funnel was designed to achieve linear growth. To achieve compound growth, we differentiate between two different methodologies that are often confused with each other:

• A sales methodology – How to acquire the revenue
• A qualification methodology – What to measure and identify qualified opportunities

Let’s start with explaining what a sales methodology is.

 

Sales Methodologies Governing B2B Sales

There are a number of B2B sales methodologies that govern B2B sales focusing on acquiring revenue. Mapping each of these methodologies against the bowtie model provides insights into how they differ.

Transactional Sales (TRX): A price/shipment-based sales methodology where the client prefers to have as little human involvement (preferably none) as possible. Think of buying something on Amazon. Price, simplicity, and speed of purchase are key decision factors.

Solution Sales [Ref. 14]: The client understands the problem very well and identified two to three options. The client is looking for a seller to answer a few pointed questions, one of which can be the decisive differences over competitors. When a company invested in a unique feature, feature selling is a must!

Consultative Sales [Ref. 15]: The client realizes they have a problem but does not understand the full impact the problem has on the business. Through a series of diagnostic questions, the seller establishes value across the organization and develops a sense of urgency to free up more budget and/or prioritize the budget.

Strategic Sales [Ref. 16]: Client does not realize they have a problem, and a seller – a true expert in this field – provokes a senior executive by reframing the problem or highlighting an immediate opportunity. The key is to get an executive buy-in early on, and to work with the client to identify the impact it can have on their business.

Account Based Marketing [Ref. 2]: When selling a commonly known solution to a commonly known problem (think of a CRM, ERP or MAS), the seller targets a number of decision-makers, influencers and advocates at hand-picked companies with personalized messages and content through marketing and advertising campaigns. It is key is to be relevant to each individual person.

It is important to realize that none of the aforementioned B2B sales methodologies actually address the compound growth engine which is critical to the growth of recurring revenue businesses. Instead, many revenue leaders maintain a maniacal focus on winning more deals, which ironically prevent them from growing the business at a fast rate.

Over recent years, there is one specific methodology that has actually leveraged the growth engine with great success and benefited from the compound impact it creates:

Product Led Growth [Ref. 12]: This is a B2C like methodology that can be used with a high-quality product and/or service experience in B2B. It encourages customers to contribute to marketing the product by using their own social networks to share and amplify the product. A basic example of this is giving a free month of service to an existing user if two of their friends sign up as well. The Product Led Growth (“PLG”) methodology applies to a business that is based on a high amount of deals per month with a low contract value. Key to this methodology is to have a high-quality product, and it further helps to have a very unique feature. Products such as Slack, Zoom, and recently Superhuman, are experiencing the benefits of this methodology. The downside is that this requires the momentum of 100,000s of users which doesn’t apply to most B2B applications and platforms.

Combining the above best practices, a new methodology can be designed for companies that sell B2B applications and platforms, at a much higher contract value, and are based on a recurring revenue business model.

SaaS Methodology: This methodology applies to B2B applications and platforms where a large percentage of the customer lifetime value is realized after the initial sale [Ref. 10]. This methodology modernizes and extends prior marketing and sales methodologies but does not replace them. It does so by adapting these methodologies to higher velocity sales cycles. The methodology includes the processes for demand generation and prospecting as well as post-sales processes such as customer success and account management. A hallmark of the SaaS methodology is to not only make a customer aware of an innovative way to solve the challenge they are experiencing, but to show the impact of the solution in a way that is coordinated and ongoing.

In recurring business, by definition, if a client churns before a profit is established, a loss is made. This makes calling on the right client extremely important. The process of calling on the right client historically is referred to as qualifying. Next, several qualification methodologies are described and how they differ compared to sales methodologies.

Qualification Methodologies That Govern B2B Sales

Think of a marketing and sales methodology as a treatment prescribed by a doctor. When you have an allergic reaction to poison oak, a doctor may prescribe you with a treatment to take two pills per day, right after a meal, for the next five days. In this example, the qualification methodology would be to establish if a) the treatment will have the desired impact, and b) if your body is able to deal with such a treatment.

The actions taken to qualify will likely include measurement of blood pressure, but also a response to a previous treatment. Today, qualification in the marketing and sales funnel happens mostly in two particular situations: lead qualification, and opportunity qualification.

BANT is one of the most frequently heard qualifications methodologies [Ref. 6]. It was originally developed by sales teams at IBM during the 60s. They used BANT to recognize buyers for their mainframe computers versus those who only wanted to see a demo of these enormous machines. BANT is an acronym for Budget, Authority, Need, and Timeline of the decision. Historically, BANT and other qualification methodologies such as ANUM, which stands for: authority, need, urgency, and money, match up well with the solution sales methodology [Ref 14].

CHAMP and FAINT [Ref. 8] are qualification methodologies that add qualifiers around the ability to identify challenges a client experiences and make it line-up well with the consultative sales methodology [Ref 15].

MEDDIC is perhaps the qualification methodology that is found the most common in recurring revenue businesses is MEDDIC [Ref. 11]. And for good reason, created by Dick Dunkel and Jack Napoli during the 90s, MEDDIC differs in that it adds a qualifier in identifying if an impact can be made on a client’s business.

There is no qualification method that is better or worse; what determines the success of any given qualification methodology is how it is applied. For example, using BANT to qualify a CEO in a provocative first-call is doomed for failure. In a similar vein, peppering a client with a series of questions while they are ready to buy is not going to yield the desired result either. What is missing is a qualification methodology that matches up with the subscription business. In particular:

#1. Does the client have an opportunity that can positively be impacted by the seller?

#2. Can the seller help the client achieve the impact in the timeframe the client needs it?

#3. With reasonable certainty, will the impact for the client result in a profit for the seller?

#4. What’s the growth potential beyond the original impact?

It’s clear to see what ties these four questions together: impact. Impact is the standardized qualifier that matches up with the SaaS methodology. Where recurring revenue is the result of recurring impact for the client.

The Impact Framework

There are two ways that impact is perceived: 1) Rational Impact, which is measurable using facts and figures, and 2) Emotional Impact, which is mostly about feelings and experiences. Research shows that people tend to make an emotional decision then validate that decision with facts and figures [Ref. 18].

Emotional impact benefits an individual first, whereas rational impact benefits a corporation first. For example, if a decision results in one-million-dollar savings per year for a company, it is unlikely that the savings are going to find its way into the pocket of the decision-maker.

However, an automated dashboard will directly reduce headaches for the person manually creating reports every weekend. This means that sellers must not only identify their ideal customer profile, but also the type of impact that is most important to each person they are working with, and customer success must ensure this impact is achieved over time.

Organizations have to extrapolate the impact across all parts of the business using an Impact Framework that acts as a qualification framework across all stages.

 

Findings

Finding 1. The traditional B2B marketing and sales funnel and its qualification methodologies were built for a perpetual business and do not address the needs of a recurring business model (SaaS).

Finding 2. In SaaS, growth comes from recurring revenue. Recurring revenue is the result of recurring impact the customer experiences and is not the same as recurring usage as commonly measured by sellers.

Finding 3. To help customers accomplish a recurring impact, additional stages must be added to the process. Recommended stages to add are: Achieve Recurring Impact and Growth of Impact. This is depicted with a bowtie.

Finding 4. All customer-facing roles must work of the same uniform methodology across all roles and departments, not one that is dictated by one department or is based on the use of a specific software tool.

Finding 5. Qualification is not something that should happen once but throughout the entire process. The qualification methodology must match the sales methodology. For businesses dependent on recurring revenue, an impact-based framework is recommended.

Suggested Actions

Here are a few suggested steps:

Action 1. Bring together a team of representatives from all customer-facing roles to help identify the Rational and Emotional Impacts

Action 2. For each department, create a plan to qualify based on the impact and what action to take.

Action 3. Create a hand-off process between departments based on Impact

Action 4. Codify the agreed actions for each department into your tool stack.

Action 5. Measure and report the number of new leads generated by existing clients.

References

Ref. 1. 2018 Expansion SaaS Benchmark (slide 30) – By K. Poyar and S. Fanning of Openview Advisors

Ref. 2. Account Based Marketing by Wikipedia

Ref. 3. AIDA Definition by Wikipedia

Ref. 4. Aligning Strategy and Sales: The Choices, Systems and Behaviors that Drive Effective Selling by Frank V. Cespedes via Amazon

Ref. 5. Airlines Make More Money Selling Miles Than Seats, by J. Bachman, June 2017, via Bloomberg

Ref. 6. BANT Opportunity Identification Criteria by IBM

Ref. 7. What is a Sales Funnel? (And How is it Changing?) via The 360 Blog, salesforce.com 

Ref. 8. FAINT – The New Definition of a Qualified Prospect by Mike Schultzs, via RAIN Group blog

Ref. 9. Glengarry Glen Ross, An examination of the machinations behind the scenes at a real estate office. Released Oct. 2, 1992 by Newline Cinema

Ref. 10. How Adobe, GoPro, Microsoft, and Gillette Saved Their Businesses Through Subscription Revenue by PriceIntelligently via blogpost

Ref. 11. MEDDIC Definition by SalesMeddic via their website www.salesmeddic.com

Ref. 12. Leading with your product is the most effective GoToMarket Strategy by M. Alon via Slideshare

Ref. 13. Seven Sales Qualification Methodologies by Jeremy Donovan via Slideshare

Ref. 14. Solution Selling Definition and Research by Nadia Landman via blogpost on web-site

Ref. 15. SPIN Selling by Neil Rackham via Amazon

Ref. 16. The Strategic Sales: Taking Control of the Customer Conversation by Matthew Dixon and Brent Adamson via Amazon

Ref. 17. The Power of Habit: Why We Do What We Do In Life and Business by Charles Duhigg via Amazon

Ref. 18. The Power of Persuasion: How We’re Bought and Sold by R. Levine published in 2003 via Amazon

Ref. 19. The SaaS Sales Method: Sales as a Science, by Jacco J. van der Kooij, via Amazon

Ref. 20. Updated Bow Tie and Lead Time Numbers by Martin Collings via Shearwater Blog May 14, 2009

Ref. 21. Why CHAMP is the new BANT. – By InsightSquared, via Blogpost.