When is the right time to accelerate investments in the SaaS B2B space?
This is the question.
It keeps entrepreneurs and CEOs awake at night, especially in the technology sector. The path is clear: innovate faster, develop more products, acquire more clients, increase your TAM, expand into more territories, and take over the competition. If you don’t do it, someone else will. At that point, it’s either game over, or forever being labelled a ‘me too’ company. The bottom line is that media and investors reward companies that grow fast as result of their cash and attention.
So, in essence, the question is not whether to grow, but how fast to grow. The investment community offers many different efficiency metrics that provide industry benchmarks and help you see how well you are (or are not) managing the company. For example, they might teach you about the Rule of 40, CAC payback period, cash flows, the ‘magic number’ and suchlike. Those are very good metrics, but they do not guide you to the decisions you need to make. If you’re sticking to simple P&L’s and cash flow statements, you’ll sacrifice the future to secure a safe present.
The struggle revolves around how much risk to take. Should I invest in more AE’s, hire more engineers and bet on this product, or invest more in demand generating activities? What will happen if my ‘bet’ doesn’t pay off? What happens if it does? Can my services, operations, and back office keep pace with the speed of growth and keep clients happy?
We at Emarsys have struggled with these questions for many years. Every time we took a step further with our investment, we waited (potentially until it matured) before pumping more gas into the engine. It’s a responsible strategy, but we have paid a price for it. While we were growing fast, we could have been growing faster.
In this blog, I would like to share with you a tool that helps us in making growth decisions, while minimizing risk.
Your Go-To-Market Arsenal
Subject to your product, target market, and ACV, you have the following organic tools that enable you to grow:
- External Sales/Account Executives: They are responsible for closing new business sales, and new business sales only. The more mature your company, the more the AE focuses on managing opportunities rather than creating them.
- Sales Development/Inside Sales: This team focuses on lead generation, lead qualification, opportunity creation, and, in some cases, also closing deals.
- Client Success: This team focuses on maintaining and growing existing MRR (Monthly Recurring Revenue).
- Marketing: The responsibility of marketing (apart from branding, of course) is on demand generation of qualified leads.
- Partnerships: An extension of your sales team that focuses on generating demand and leads through strategic alliances.
In terms of process, these teams are the drivers of the go-to-market strategy, but some departments can be more efficient than others. As a business leader, you should be prepared to pump more money into a specific area when the economics show that it’s working.
The ‘When to Invest More’ Formula
CAC – Your Payback Period
Traditionally, SaaS companies look at CAC as the ultimate metric to explain the efficiency of a customer acquisition strategy. It can be represented by how many dollars of investment it costs you to acquire one dollar of revenue. Or looking at it from a timing perspective; how long the customer needs to be retained before you break even on the acquisition.
The weakness of CAC measured in isolation is that it can drive you to make investments that cover the initial acquisition cost, but it doesn’t provide any indication of the net gross value that is represented by LTV – the lifetime value.
LTV is the gross present value of the recurring profit stream of any given customer.
The magic happens when these two are combined. The rule is simple: invest more money in any of the departments and/or geographic locations that provide returns more than three times higher than the cost of acquisition. And improve acquisition efficiency or retention if your acquisition yields less than three times your investment.
In other words:
If: LTV > 3 x CAC = invest more money.
If: LTV < 3 x CAC = optimize acquisition and/or retention strategy.
At Emarsys, we measure LTV for every function and for every region where we operate. It is a valuable insight to guide investments (or fix problems) in specific departments and locations.
So what’s my point here? Growth is essential, but I would highly suggest refraining from making future investments if you have not figured out your economics, and are not clear on whether your metrics are telling you to invest and expand or fix problems in acquisition or retention.