Conversations about the state of the SaaS market in 2022 are everywhere, and it can seem overwhelming for entrepreneurs and business leaders to make sense of everything. In the first session of the eye-opening CRO Confidential series, SaaStr CEO Jason Lemkin interviews Founders Fund Partner Sam Blond about the current economic climate. Blond drills down to the critical points founders need to know to stay successful and attract investors.
A New SaaS Playbook
In 2021, there was much less focus on efficiency and more on revenue metrics like ARR. However, the 2022 economic climate has sharply steered investors in the opposite direction. Says Blond, “Unit economics broadly matter much more today. In 2021 there was a lot of emphasis on top-line revenue growth, what percentage year-over-year was the business growing, and less emphasis on things like gross margins and quality of revenue.”
However, in 2022 investors are much more interested in a company’s efficiency, so Blond advises that founders make a tactical change: Rather than prioritizing ARR and top-line revenue as your ultimate objectives, focus on gross profit and improve your margins. Investors will take notice, and you are more likely to win in a competitive environment.
This focus on margins and efficiency forces SaaS companies to adjust the tried-and-true playbook. Still, the good thing is that companies have the power to use levers to help improve their efficiency metrics: “There is the ability to control that gross margin on the expense side,” says Blond. And at the same time, you can adjust your sales strategy to boost more top-line revenue while still keeping gross profit front-and-center: “If you are hyper-focused on some form of gross profit or gross margin dollars versus top-line, it can manifest in driving behavior in the company, such that you improve gross margins and ultimately, improve the value of the business.”
Leadership must communicate this objective to the entire company and ensure everyone works toward improving efficiency instead of simply bringing in more dollars. However, don’t this doesn’t mean that your sales teams shouldn’t bring in more revenue –– quite the opposite. Blond says, “You are going to need to figure out how to drive more revenue per sales rep if you are a lower-margin business.”
The 2022 Economic Climate, Barriers to Growth, and Recruitment
Since the business landscape is very different this year, what strategies should sales prepare for 2023? Blond mentions that sales teams are not having trouble selling from what he has seen. The ability of a business to sell its product and acquire customers has not suffered, nor have there been massive budget cuts from clients or customer bases. However, one significant change affects SaaS companies, particularly B2B: Hiring has slowed down, which means that net dollar retention is slowly decreasing since organic usage in a company has also decreased. Organizations are simply growing less quickly, so it is reasonable to expect reduced top-line growth in 2022 for most companies.
To help strengthen your sales strategy for the future, you must dig deeper beyond the buyer or the decision-making stakeholder. You need to understand your client’s entire company objectives to effectively make sales: “I think today, more than ever, understand what business priorities of the companies you are selling to, not just your buyer.” Blond continues, “The messaging that resonated in 2021 may not be the messaging that resonates in 2022.”
And recruiting excellent sales leaders is critical this year, but be sure to pay attention to two essential qualities:
- The Profile: Don’t get caught up in seeking candidates with domain experience as your top qualifying attribute. Talented leaders are hard to find, so focus on performance and career trajectory instead of industry.
- Priorities: Understand what your sales leader will focus on during their tenure. Firstly, they must be able to hire an excellent team. And ask them about their goals and plans during the recruitment process.
Ultimately, it’s important to remember that efficiency and smart strategy win. The right investor will notice significant margins, gross profit, and high efficiency, so make those your goals for the year.
- Focus on gross profit, not just ARR.
- Re-center your sales strategy to align with an entire organization’s goals, not just the individual buyer.
- Recruit sales leaders who share your vision and can hire a great sales team.