At a board meeting, a board member may ask about sales and marketing productivity.
But, the question is essentially ignored. S&M productivity is a very distant priority to driving growth. Cutting sales and marketing expenses means cutting the growth rate. That is heresy.
Ultimately, the sales and marketing investment must be sustainable.
What is the Minimum Sustainable Sales and Marketing Productivity for SaaS companies?
A SaaS company’s spending in sales & marketing is sustainable, if its Billings-to-S&M expense ratio exceeds 1.8x.
A 1.8x ratio means: (1) Every $1 spent on sales and marketing generates $1.8 of billings for that quarter, or (2) 55.6% (1/1.8) of billings is spent on sales and marketing.
The 1.8x number was determined by comparing the Billings/S&M expense ratios for some successful public SaaS companies (Salesforce, Workday, Marketo, Box and Zendesk), as they crossed $20m/quarter in revenues and beyond. Please see the chart below:
Box’s billings productivity ratio was only 0.84 when crossing $20m/Q — clearly below 1.8x. However, Box demonstrated an exceptional ability to raise large amounts of money for breakout.
In contrast, Workday achieved an astonishing 3x billings productivity. The ratio was helped with a high percentage from professional services — around 33% for Workday compared to 10% for Salesforce.
When did the public SaaS companies achieve sustainable Sales and Marketing productivity?
The public SaaS companies achieved the sustainable sales and marketing productivity number (1.8) prior to crossing $20m revenues per quarter.
Marketo achieved and sustained that productivity number many quarters prior to $20m/Q. Others probably did too, but were not required to disclose those quarters in their public filings.
Why is Billings/S&M expense the right GTM Productivity metric?
This GTM productivity metric is an intersection of how the sales leaders manages their sales team and how the public financial markets can track the company’s performance. Please see the chart below:
Sales Management. The GTM productivity metric should be closely related to the commission plan, since sales leadership drives their sales team primarily with commissions. If not, the company is tracking a GTM productivity metric which is ignored by the sales team — the most important element of any GTM strategy.
Public Reporting. At the same time, the GTM productivity metric should be easily computed from publicly reported financial information, since the public markets (and private investors) value the company with the financial information. Every company wants to appease the investors and raise its valuation. Using public financials also simplifies benchmarking and shortens the time to reach consensus on the right targets.
Revenue based metric works for finance but not sales.
Many sales and marketing productivity metrics are based on revenues, such as the magic number. Financial investors can easily calculate this number from the public financials. But, sales teams are not commissioned on revenues but on some variant of bookings or billings. Since there is usually a major difference between revenues from bookings or billings, this GTM productivity metric results in a divergence between financial reporting and sales management. Also revenue is a trailing indicator, while bookings and billings are leading indicators.
Bookings based metric works for sales but not finance.
Using bookings has the opposite impact to using revenues. A bookings based productivity number tracks sales and marketing performance, since many companies base commissions on signing the customer contract, which are bookings. But, public companies generally don’t report bookings. Also, the definition of bookings varies significantly from company to company. So, this GTM productivity metric also results in a divergence between financial reporting and sales management.
Billings based metric works for sales and finance.
Some companies base commissions on cash collections from the customer, which are billings. The public markets can easily calculate billings from the financial reports, since billings = revenue + change in deferred revenue. Both revenues and deferred revenues are reported in the financial statements for public companies. Some companies even report billings. Also, for companies basing commissions on bookings (rather than billings), billings are generally close to bookings. As a side note, it is critical to understand the differences between bookings and billings in determining commissions.
For more discussion on bookings, revenue, billings and deferred revenue, please see Leo Faria’s post: