Longer Sales Cycles
I was watching a great talk by Tomasz Tunguz at Theory Ventures talking about some research he and his company have done among SaaS startups. There was a lot to unpack from his results, but one thing that stood out was that sales cycles have increased really since the pandemic. Why has that happened? How much of a problem is it for founders? And what should you do to mitigate against it? That’s what I’m covering today.
One thing to note: the survey overall paints a pretty optimistic picture. Valuations are holding firm, founders are more positive than they were a year ago, ACVs are up. But the millstone around their collective necks comes down to Sales Cycle length: whether or not they realise how critical it is, it’s having the effect of making life harder for SaaS companies.
Increases in Sales Cycles
The Sales Cycle is the length of time it takes to convert a lead to a paying customer. Depending on the type of software you are selling, to whom and how much, that time could be anything from nothing to a couple of years.
If it’s a low consideration purchase: for example, you need a tool to convert some audio into text and you need it now and it costs $20, then the sales cycle is probably instant, assuming no free trial etc.
If it’s a high consideration purchase: something that is going to cost a lot of money and will require a high up-front investment in professional services, the sales cycle could be years.
What we have seen is the pandemic moved purchases from in-person meetings to remote ones. This in turn extended the cycle. On top of that, we have a global tightening of the purse strings and so, according to Tunguz, we are seeing a reduction in discretionary budgets.
This is particularly acute in mid-market companies. There are more hoops to jump as CFOs and procurement teams are under pressure to scrutinise spend more aggressively.
At the very top and at the very bottom of the market, the pressures are less marked. At the top end, if an executive really wants to buy the software they can bypass procurement. So, if you are selling to the C-Suite and they want your product, it’s going to happen in the same way as selling to the C-Suite would have done five or so years ago. Their attitude will be, “I know there is a procurement process but I need to make this happen.”
For Product-Led software, where there it’s a simple, ‘free trial and give us your credit card’, where people often just expense it because the costs are relatively low, the sales cycles haven’t grown that much.
But when selling to mid-market, about 70% of respondents say that the sales cycle has increased.
Does it matter?
OK, you might have to wait a bit longer for customers to commit, but does it really matter? Doesn’t all it do is delay growth by a few months?
Actually, it’s pretty devastating. More so than you might think. Increases in sales cycles create Pipeline Supply Shocks.
A few things happen simultaneously:
Increase in CAC - your Customer Acquisition Cost goes up because you still have to pay people to close the deal. If it took them 10 months and now it takes them 14 months, then your costs have increased by 40%. Longer Sales Cycles don’t just take longer, they require more effort, too.
Payback Period increases - if your CAC increases then it takes longer for each customer to payback the costs of acquiring them. If your payback period increases then effectively the point at which the customer starts to make a positive contribution to your business is increased meaning you have to fund that customer for longer. This is turn impacts your burn and your runway. Tunguz references a company he was working with whose sales cycle doubled and as a result their burn tripled in that time! Tripling burn means reducing runway to a third of what you’d budgeted.
For reference you calculate your payback period by dividing the total cost of acquisition by the monthly gross revenue (ie after costs of sales is deducted). Ideally you should be looking for a payback period of less than 12 months. Theory Ventures’ survey reports an increase of 12% across the board.Sales Team not making commissions - if your sales cycles increase then the sales team aren’t making enough sales and commissions. If they’re not making commissions then they are going to be unhappy. Unhappy people will leave. Replacing people, as we know, is expensive. The knock on effect of sales reps not being able to hit quota because customers are taking longer, shouldn’t be ignored.
Upward pressure on Quotas - if it wasn’t bad enough that original quotas are harder to hit, the increase in CAC and payback period will put pressure on companies to increase the quotas. In the survey that Theory Ventures ran they saw an increase of 14% on quotas. This is against average inflation of 4%.
Higher Conversion Rates - one impact of all of this is that conversion rates are improving. This is likely because sales teams are being more critical about what a SQL is, so they focus their resources in a better defined ICP. This means that they avoid wasting time on people who are less likely to convert and instead have gotten better at focusing on the ones that have the most potential.
So in answer to the question, “does it matter?”, you should conclude that yes it really does. It can have a big impact on cash.
Is AI the answer?
You may be thinking that AI that drives leads for you, without the need for a human SDR might be the answer. According to the data, AI has been great at driving more leads into the pipeline, but it hasn’t had any effect on driving revenue growth. In other words, it hasn’t driven more sales. It might be that it’s just too early to understand how this is going to work, but right now, it’s not having the effect that we might have expected.
My suspicion is that we’ve not quite worked out how to counteract the less targeted nature of prospecting at scale, with the more critical targeting that a human would bring to the table.
If we focus on reducing Sales Cycles, what things should we look at?
Assuming you agree that a) Sales Cycles are increasing and b) it’s not a good thing, what things can you focus on? Here are some suggestions:
Streamline the sales process - do you have any unnecessary steps in the process? Do you have to always have your VP Sales or even your CEO in the closing call, for example? Is there a level of discounting that can be up to the sales rep’s discretion (within reason, of course)? Can you give them a trial version of your product, or send them a video of a product demo instead of setting up a specific session to demo the product?
Fine-tune the sales funnel - there is no value in having a bloated sales funnel that will never convert. You have a finite amount of resources so make sure you strip out prospects who really should have been closed out months ago and save your sales execs the tedious task of continually reaching out to them. A weighted pipeline that is inaccurately high may look good at the next board meeting, but it doesn’t help anyone in the long-term.
Be more critical about your ICP - I mentioned earlier about how we’re seeing an increase in conversion rates of SQLs. This is because companies are doing precisely this. You have to revisit your concept of an ICP and make sure it really is tight enough that it represents your best prospects.
Address objections proactively - anticipate and address potential objections upfront. If you know that training is going to be an objection (“we don’t have the time right now to retrain our team on your platform”), make sure that you address it at the beginning. Another good tactic is if you know that you always get held up at the contract stage, look for ways in which you can get the legal department brought in earlier so they can be off reading your Master Services Agreement now. Often customers will get their tech team to do due diligence first and then once everything is ready to go they announce that their legal team need four weeks to go through the contract. They could easily have done that at the same time they were doing the technical due diligence.
Automations - if you’re doing product-led growth you almost certainly will have all of your automations in place, but for enterprise sales, figuring out how to borrow some of the efficiencies that self-serve companies use will potentially eliminate some of the steps.
Content - don’t think of content just being about the top of the funnel. Instead make sure your content is as compelling at the Consideration stages too. What types of questions will they have when they are making a final decision? Will it be about onboarding, support, security, training, something else? Whatever it is, it’s really important both to produce that content and also to have a plan about how it is shown to prospects.
Simplify your pricing model - more choice just means more analysis paralysis. Sometimes it’s better just to keep things simple.
Reduce free trial periods - for Product-Led Sales, do they really need 30 days to evaluate your product? Can you shorten it to 14 or even 7? Try and see if it has any impact on conversion rates?
Speed to Response - there are loads of stats out there about the relationship between speed to follow-up on a lead and conversion rates. Some saying that you can pretty much double your conversion rate if you respond within five minutes. If you use this as a metric to measure and work out ways to improve it, it should pay dividends.
Urgency Incentives - some buyers might game SaaS companies by dithering at the end of the quarter or year to get a better price, knowing that the sales rep might be under more pressure to close the deal even if it is at a massive discount, in order to hit their quota. But you can use it to your advantage too. Explain that you are in a position to either give a discount or (ideally) give them something in addition they will see value in, for free. But only if they respond within a certain timeframe.
In conclusion
The outlook is good for SaaS, but Sales Cycles continue to drag companies down. Looking proactively at ways in which you can reduce the cycle will result in:
reduced CAC
happier Sales Reps
reduced Burn
faster Growth
What’s not to like about any of those?
