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Finally, Some Good Fads – Unit Economics and Capital Efficiency, Part 2

In Part 1 of this article, I took a shot at explaining unit economics for SaaS companies and drew the conclusion that there is only one question on the table:

How fast can you improve your sales performance to bring your unit economics in line with financial reality?

Since it is not right to pose a question without proposing an answer, here is the answer:

Get serious about applying the right resources to the parts of the job where they generate maximum value per unit cost.

To put it more simply, put all of your desires to scale to galactic size on hold for a bit and focus on sales efficiency and effectiveness.

In B2B SaaS, this means:

  • Stop worrying about developing your next massive cohort of future AEs.
  • Start getting a whole lot more real sales activity — the needle-moving kind that involves sales conversations between competent reps and intrinsically qualified prospects.

Rethinking the Situation

What? No farm team? Well, does your farm team of 22-year-old SDRs contribute to improving your unit economics? Try this thought experiment: if you replaced your hyper-green SDR team that have an average of five months’ tenure with a team half its size of reps with five years’ experience in having effective sales conversations, which team would produce more opportunities — measured in dollars?

To make it easy, let’s start with 10 green SDRs that generate 10 meetings/demos per month each and replace them with 5 experienced reps that generate 20 meetings per month each. Let’s pay those 10 green SDRs $5K per month for a total of $50K per month for their 100 meetings. And let’s pay your 5 experienced inside reps $10K per month — twice what you paid your green SDRs. You are still paying $50K per month for 100 meetings.

So you have broken even, it would seem. But you are really ahead, because it is much cheaper and easier to manage 5 experienced reps than 10 green SDRs. And you won’t have to start over every few months as the green ones either get promoted to their dream AE job, or leave for greener pastures, so you can actually count on getting your 100 meetings every month — not just every once in a while.

Hone Economics

Now, try a further thought experiment: use technology that provides your shiny, not-so-young, 5-rep team of 5-year players with 40 real conversations each, every day, instead of the 5 conversations you wish your green team was having. As a result of having 8 times as many conversations, the experienced team raises the monthly bar from 100 meetings to 800 meetings. If the technology were free, which would be a miracle, you are still paying $50K per month; but now you are getting 800 meetings.

Your unit economics improve from getting 1 meeting (your unit of output) for $500 to getting 1 meeting for $62.50.

Of course, we all know this is silly. Technology that could provide 40 conversations a day for a rep must cost a ton, so the unit economics must go bad in a hurry. Right?

Well, it turns out that this technology costs about $100 per meeting. So, when you combine labor costs and technology costs, instead of paying $500 per meeting, you are now paying $162.50 per meeting.

Given that revenue is a linear function of meetings, you have now improved your unit economics by quite a bit, from $500 per unit to $162.50 per unit, a savings of $337.50, or 67.5%. And that’s without counting your reduction in management costs and other headcount-driven expenses.

It’s Really Very Simple

Interestingly, this thought experiment can actually be executed in less than 1 month. So it turns out, it is possible to improve your unit economics materially by doing two simple things:

  • Shrinking your top-of-funnel sales team while simultaneously increasing the team’s experience level and, therefore, their yield per conversation.
  • Using technology to give each rep 8x as many conversations.

In 2015, you would rationally have scoffed at such a plan. After all, scaling, not unit economics, was the order of the day, and where were all your dozens of new AEs going to come from without your farm team? But it is 2016, and unit economics is the new sheriff in town. So maybe a 3x improvement in unit economics will make that pack of hungry money-wolves a little smaller in the rearview mirror.

Which leaves the obvious question:

With this new approach to unit economics, can we still scale?

The answer will have to wait for Part 3.

Link to Part 1, Part 3, or Part 4 of this four-part blog series.