Mastering Revenue Economics

Download our SaaS Revenue Economics Template to guide you through the process of finding out how much scale will cost your business step-by-step.

Meet Host, Mary Grothe

Mary Grothe is a former #1 MidMarket B2B Sales Rep who after selling millions and breaking multiple records, formed House of Revenue®, a Denver-based firm of fractional Revenue Leaders who currently lead the marketing, sales, customer success, and RevOps departments for 10 companies nationwide. In the past year, they've helped multiple 2nd stage growth companies between $5M - $20M, on average, double their MRR within 10 months, resulting in an average ROI of 1,454% and an average annual revenue growth eclipsing $3.2 million.

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Welcome to the House of Revenue. I'm Mary Grothe, Founder and CEO. I love scaling companies to their first 5 million, then 10, 15, and 20. If you've reached a revenue plateau and aren't sure how to get past it, you're in the right place. Listen in as we interview CEOs and solve their most pressing revenue challenges. If you want to be on our show or want to learn more, connect with us at houseofrevenue.com. 

Today's topic: revenue economics. What is that? Well, we'll get into it. But first, understand that most CEOs and founders dread spending their first quarter million or half a million on building a proven revenue engine, they are scared or potentially just unable to make the investment on their own. They can go through expensive cycles of hiring over-promising under-delivering salespeople. Maybe they get their cousins, brothers, uncles, former college roommate to come and do sales for them because it feels less risky. That person had a really great resume with a big company, but they bring in these salespeople that don't produce. And then we watched them go to their second salesperson, their third salesperson, their fourth salesperson, but they're not building a revenue engine. They're taking this path that they think is the less expensive way, the bootstrapped way. Well, it's not doing them any favors.

We're going to discuss the basics of how to develop a 12, 24, and 36-month revenue economics plan and it encompasses all facets of marketing, sales, customer success, and revenue operations, also known as rev ops. This is going to hopefully help guide you on your journey to scaling revenue. We want to make sure you do that holistically. And of course, avoid the most common pitfalls. My encouragement is for you to quit throwing away money on bad salespeople, or maybe they're good salespeople, but your environment for them to succeed is non-existent, so a good salesperson can't succeed working for you.

What is Revenue Economics? Revenue Economics is a term that we use at House of Revenue that helps our clients see the true cost for their growth or scale. That's right. Growth and scale aren't the same thing. Let's break that down first. Growth would be steady year over year, growth like we're by 10% year over year and that growth typically has the expenses in line with the revenue. Meaning, we know how to grow. We just carve out another territory. Here's the quota for it. Here's the products or services we're going to sell. And we're going to do exactly the same thing in that territory that we did in another. So we need the exact same head count. All of our expenses are going to go up the same way and year over year that growth, the revenue grows at the same rate as the expenses and so your profitability typically stays the same. And it's usually a slower year over year growth, steady Eddie approach, not bad. Some businesses really thrive with this model. We love scaling companies, which typically means, and you could see that hockey stick type growth, but we're looking at how to grow revenue independently of expenses.

So, whereas there may be an initial investment scale is all about efficiency, automation, systems, processes. You want to eliminate waste. The goal is to create that production line, if you will and be able to eliminate overhead and expenses. And so that the revenue can scale disproportionately from the expenses. Our hope is that the scale is wildly profitable for our clients. And that's the methodology I'll be speaking about today that I'm bringing forth as we discuss revenue economics. First, I like to carve out, I guess it's not really first cause I'm on like my third topic already. So sure. Third, why not? I like carving out the conversation into data, people and process. A nice simplified way and understanding when you go to scale, you're going to need data analysis, business intelligence on that data and understanding a way to convert your opinions, which are valuable, layer them on to the data, which is priceless. And together, you're going to be able to form a hypothesis with your opinion in the data to say, these are the trends in the business and this is where we need to go.

You can also look at the threats, the opportunities perform a little SWOT here. So you can look at what markets are we opening up in, or if we're going to go up market or down market and shift our market segmentation, maybe we're going to start working in a new vertical. Where is that growth going to happen? Or do you have a very specific niche, someone as your ICP, your ideal customer profile and your buyer. And you're saying we just have very small market penetration with this one ICP, and we'd like to increase market penetration on that increased market share. That's also fine. But you need the data to tell you the trends, the threats, the opportunities, and look at how you are going to outperform the competition, how you're going to differentiate, how you're going to compete. So there's a bit of competitive analysis. You have your own internal analysis and you really want to look at the data. So one word of advice, start tracking your data. We have the opportunity to scale companies. Typically, we come into the conversation for those service or technology companies when they're, I don't know between two and five million, more of our CPG or consumer brand companies, we tend to enter into the conversation at that fifty or a hundred million dollar mark.

At that point of the conversation, we immediately ask for historical data and it is shocking how many companies don't track their key important metrics, track the data, figure out what those metrics are today, track the data. Then the people, the people is the second part. When you're looking at revenue scaling, people cost money. People have an output, productivity, they have a ramp to that output and ideal productivity. People are unpredictable, people can fail in the system and you have to build probability percentages around the productivity and the outcomes or execution around people because there's a higher fail rate than having an automated system or technology doing the work. Then you have the overall process. We talk a lot about building the revenue engine. There are many pieces and components. You should not be separating out marketing, sales, customer success, and revenue operations. They should operate under one house on an unshakeable foundation built for scale, but you have to be able to map these out. And again, it goes back to revenue economics.

So let's talk through some key points. What got you to this point is probably not what's going to get you to the next point of scale. Some of it may, but you need to be open to adapting, to bring in different talent or to training and leveling up your existing talent, like making real investments in your people to augment their skills. The technology stack is potentially not the tech stack that you need to get to the next level. And the processes are most likely not the processes to get you to the next level. We see a couple of inflection points when companies scale. One is the transition in the early stage. Most companies between one and 3 million, the CEO or founder is still selling and they need to make that first sales hire. They make mistakes and they give them the same quota equivalent to what they could sell. And that's not going to happen. CEO's have clout and credibility. They can speak about the company. They understand their buyer at such a deep level. I mean, they created the company to solve the problem the buyer has. They know that intimately and can speak in terms that resonate in a way that it will be very difficult for a salesperson to speak that same language and to have the credibility clout, the network that the CEO has.

I would start with a good metric of cutting it in half and giving them a decent 90 to 180 day ramp on productivity and build that into your model because it's going to be an outlay of cash in the beginning to afford the right talent, to give them the runway. Another missed opportunity in the initial 12 months when you've hit that revenue plateau, and you're ready to scale. So typically step one here was it's usually at the CEO. So you have to build out the sales team for the first time. And that's usually a challenge because they don't know how to hire the right talent. They over quota them. I don't know any other way to say that their quota is too big. It's unrealistic. The next component is they're also not willing to invest in inbound marketing. We've talked about the sales unicorn before, these CEO's want the sales unicorn, who can do it all. They want to pay one base salary and expect those one person to do all the marketing and branding for the company and be the social media arm, build the network, build the database all by themselves, send every email manually, keep track of all the data in a spreadsheet, build all their proposals manually.

They just want to make this tiny, tiny little investment and then they get a salesperson who isn't really up for that. They want to recruit the best of the best, but they're not willing to pay for the salary so they get someone middle of the road. But then you're asking them to really do the work of VP of sales or CRO and build out all this infrastructure. I'm sorry, it's just such a mismatch. Stop doing that. We go into inbound marketing. This is a huge miss by a lot of companies. When you start transitioning out of word of mouth and going into we actually have to build a marketing engine, don't just go sponsor a golf tournament. Don't send out an email newsletter to 2000 people. Those are tiny little facets and pieces of marketing, but you need a real proven inbound marketing engine. There are ways to do that. You can go to houseofrevenue.com, our full ebook and methodology is there. We don't hold anything back so just go read it. But you also have to invest in the tech stack.

As a HubSpot agency partner, this is a technology that we're very passionate about, especially for the size of companies we work with. We even recommend it for our larger companies in that 50 to a hundred million range, mostly in CPG and consumer brands. We do recommend HubSpot at the larger scale, but we also, heavily rely on it for our two to 20 million scale that we do with services companies and technology companies. When you look at getting your data people in process, you have to have the map built, the roadmap built for all those components. Now we're going to turn it into a 12, 24, 36-month revenue economics forecast. So bear with me here. You're going to create an Excel sheet or a Google sheet. You can go to houseofrevenue.com and actually download our sample template for this. We've built one for SaaS, tech SaaS, and it's more of a subscription-based model. It can be modified. We will most likely release another one for professional services or CPG so check back if you're not seeing the one that you want, but you have to understand your key metrics first. In order to know what your growth or scale is going to cost, you have to be able to put in the key metrics. Here are things you need to know, one, the average revenue per customer.

And if you have different verticals or market segments that you work that cause that average revenue per customer to be very different, then you need to build the model with multiple averages. So if you serve the small employer space, so up to 50 employees, your average revenue per sale on your product or service might be $2,500 a year. But when you get into the up-market, let's say in that 100 to 500 employees space, your average revenue per sale could be 25 to $40,000. You don't want to blend the 40,000 with your 2,500, because you're probably looking to acquire more units of the smaller and fewer units of the bigger. So make sure that you break those apart. But when you're looking at your average revenue per sale, be kind to yourself and honest about your different segments, divisions that you have, lines of business. You're also going to want to know by product. So one of our clients, they sell machinery, small machines, and they have service packages that go with it that are subscription-based and those are two different lines of business, two models and there's a theory here for every machine sold. They sell a service package and then they sell a detergent package. So those are two additional line items that are triggered by the sale of a machine and they each have their averages.

The next thing you need to know is the length of time, like lifetime value of your client. On average, how long does your client subscribe to you? Whether it's contracted term or it's month to month, but you can look at the average life cycle of your client and you need to build in the average time that your clients with you. We have a client in Kansas City whose average lifecycle is 17 quarters. And so we have the model built for 17 quarters. We have an initiative internally to decrease churn, increased retention snd so that will change over time in the model, but that's the next, what's the churn rate. And you also then want to look at the expense of your marketing, your sales, your customer success, and your rev ops, because you want to know how much it costs to service that revenue. Let me break this down in a great revenue economics forecast sheet.

You've identified your average revenue per sale, by market segmentation, vertical or geographic area, line of business, product sold. Then you have your length of time, so the average lifetime value of a client would be how long your average client is with you multiplied times that what they're spending, then you're looking at a key metric that's very important, the length of time to close. Then you're going to do what we call a reverse funnel. Let's say you have a two months cycle to close business from qualified discovery meeting. Well, then you have to back it up before then go into your marketing funnel. How many touch points? How many outbounds? How much marketing spend? How many activities are required to get enough conversations that meet your minimum qualified discovery call that then turns into that two months sales cycle to close? How many of those discovery meetings, qualified discovery meetings do you need in order to close X amount of business? Meaning what's your close rate?

So backing up into the funnel and just take a regular funnel and turn it upside down. And then do you write this out. Now in order to close one deal how long does it take? What's my conversion rate through each step and stage of the sales process of the funnel of the sales cycle? And then how did we get that lead? What are all the different attraction methods through sales and marketing? What are outbound? What are inbound methods? How much does each one of those costs look back at the data. Remember I said, data, data, data, data, what is your most profitable lead source? How much volume do you get from those lead sources? How much do they add into the pipeline by how many units what's the close rate on that specific lead source and the length of time to close. And when you start looking at your most profitable lead sources through any marketing channel, through any sales channel, any inbound or outbound, how are these conversations coming to your team, map that out and understand what your client acquisition cost is. So the easiest way, take all those numbers, blend it together. You're looking at the expense for sales and marketing, and you'll be able to say, Hey, if our average sales $15,000, it costs us $2,000 to obtain a $15,000 client. You've got to get to that client acquisition costs number.

Once you know that, you can start building out your revenue economics forecast, you'll build in the base salaries of your salespeople, you'll put in variable compensation, benefits, overhead, load, and then you'll map out over 12, 24, and 36 months their quota. The way you want to map this out is on a conservative number. Do you remember back when I was saying that people are expensive, unpredictable, we have bad days, they are a higher point of risk and failure in your revenue engine than your automation and your technology and your systems. And so don't forecast them at a hundred percent of their capability. CSO insight says, and I need an updated stat here, but this was back, I think in 2018 or 2019, that only 54% of people hit their quota. I'm sure that number tanked in 2020, thanks pandemic. But when you look at that, if only 54% of your team members are going to hit the quota that you assign, why would you and your revenue econ projections put every salesperson at a hundred percent of the quota in a forecast? No way. You wonder why you miss your number? You're not forecasting correctly.

Back it down, take the number, take it down and do something like a 55 to 60% of what you want at optimal, and then make sure for your new hires, you have a ramp period. What's the ramp period for a new salesperson to be able to produce, 90 days, 180 days, a year? Look back. I mean, how technical is your product or service? How specialized is your industry? How complex is the buyer's buying process? Are we talking about only shifting on calendar years? Is it a heavily contracted service you're chasing these five-year contracts and waiting for them to get to a point of buyout or renewal? Is this red tape? Is it a government sale? I mean, what's really the sales cycle? And that's why that length of time to close was so important because you have to build that in, in addition to a salesperson's ramp. And at first it might be scary, like you're building this out going, Oh my gosh, we're never going to make any money. Well, yeah. That's why you build this out so you can prepare and plan accordingly and so you're not setting yourself up for disappointment or a freak out moment when you're nine months into the plan and you haven't hit break even, don't let that be a surprise to you. Build the revenue economics plan the right way, the first time.

You have to know the key metrics, you have to know the milestones, you build out each of the salesperson's activity, the costs of all of that. They're networking, their seat on the CRM and any other automated tools that you have. Then you go into marketing. You want to build out your marketing personnel, their base salaries, their variable compensation. You also want to break out expenses for marketing so your full marketing budget should go in here. The cost for your website, the cost for your paid organic media, the cost for every person on your team. Keep in mind, if you're subcontracting for items like graphic design, any sort of creative, or if you're using an agency for paid or other methods of digital advertising, content writers, technology in the background, like a Moz or SEM Rush, you have to keep all of these in mind, build out all the expenses so you can truly understand your costs for marketing.

Then get into customer success because the customer success component so often overlooked, like why do people think revenue generation stops when you get a signed contract? Like there's this whole other majority of the life cycle of the client. Most of the engagements that we get to work in, we start talking about customer success and they're like, no, no, no. We'd like for you to focus on marketing and sales, like, great. Let me just do an audit of your current client base because I'll probably find millions of dollars sitting in here unsold because you have no plan for revenue expansion, your account managers, or customer success team isn't trained to have upsell, cross-sale conversations. They don't know how to solicit and ask for referrals. I'm guaranteeing, well, maybe not guaranteeing, but I'm guessing that your marketing department isn't doing your customer success team, any favors, meaning marketing is meant to be brand awareness and top of funnel for you, but you haven't figured out how to extend marketing into the world of customer success and client experience and delighting your customers, creating brand ambassadors. That's a critical component.

In your revenue economics sheet, you have to map out your expense for customer success. You need to be able to map out all of your clients, their penetration into the product set or suite of services, or if you have potentially opportunity to go up in user count or add another piece of technology or whatever your revenue expansion opportunity is, map that out. You should have a plan by account manager or customer success team member that has what their current base is worth, what the expansion opportunity is, so growth on that base. They should be compensated based on performance of that growth, and there's most an expense for them. But you have to look at extending this model into retaining revenue, avoiding churn, expanding revenue, creating delighted brand ambassadors, who then help fill your funnel because they want to refer. They make great testimonials, case studies and futures for marketing. So all of this put together, you should be able to have now a clear understanding mapped out for three years of what your revenue scale is actually going to cost you.

Then you have some decisions to make. Do you have the available cash to fund it? Do you need to seek capital? Do you need to find alternate options? Like you don't like the data in the plan? Okay. Maybe you can figure out how to augment some of those key metrics like increasing your average revenue per sale. Maybe you can look at ways to fine tune your sales process to increase your close rate, reducing the cost of acquiring a customer. There are ways that you can work that plan in that forecast to get the numbers in your favor, the way that you want it to be, but you can't make any of those decisions if you can't map out the data and have something to look at. Revenue scaling, you can create a clear path to do it and the only perfect plan is the one still on the shelf. So no, even when you put this in place, it's going to take constant monitoring, evaluation. You're going to need to report against those metrics every single week, month, quarter, year, and alter the plan as needed. Hopefully, this is going to set you on your path to scale. Don't forget to download the template.  Read more on this topic by checking out our blog and downloading our Revenue Economics Template. 

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Thanks for listening to today's episode. If you're interested in being on our show or want to learn more about how we can help you scale your company, connect with us at houseofrevenue.com or with me Mary Grothe spelled G-R-O-T-H-E on LinkedIn, Twitter, or Instagram.

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