Inc - Don’t Hide in Zero Cost Marketing

So as growth decelerated rapidly for many in SaaS in 2022-2023, one of the first things cut was marketing.

It’s not always ideal, but I get it. It’s a variable cost. Cut marketing, you’re often cutting future growth. But it’s a “simple” place to cut to at least stabilize the ship and survive to fight another day. And it doesn’t require layoffs.

So be it.

If you cut your marketing budget too far, and now pipeline looks, well … light … that’s on you.

What did you expect?

But if nothing else, don’t expect Zero Cost Marketing to bail you out.  It’s not that Zero Cost Marketing is worthless.  No done right (which is hard), it works.  It’s just rarely enough.

My point isn’t to not do the Free stuff in marketing.  It all works, at least, if you do it really, really well.

No my point is just this: Don’t have “Free” Marketing be 100% of your strategy if you want to grow faster.   Or even just grow at all, really.

First, Free Marketing …  it’s not really free.  It takes a ton of time to do Free marketing that often has limited results.  And second, Paid stuff has reach. You need reach.  At least, do as much of it as you can afford, and believe in.  The best do both.  Not just the seemingly “Free” stuff.

Let me list some of the ones I see most often going from say $1m to $10m in ARR:

• Chasing the Shiny Penny. One of the biggest mistakes I see after $1m in trying to enter new market segments, new verticals, where you have zero traction. It’s one thing to invest in an area where only 5% of your business is today. But 0%? Leave the pipedreams for $100m in ARR.  Or at least, maybe $10m-$20m ARR. Then, you’ll have enough folks and experience to put a small team on a new initiative / segment / market.
• The “I Give Up” VP Hire. Hiring is >hard<. And at some point, you definitely have to compromise in some ways. But not on quality. Hiring a VP you don’t really believe in, to get the hire done after X months … never works. They will spend all your money, fail, and derail your growth.
• Micromanaging Your First (and Second) Management Team. I know you can do it all. But there’s a reason you hired managers. To manage. If you don’t let them do that … you’ll frustrate the heck out of the best ones. And stymie all of them.
• Bad operational model / misunderstanding the burn rate. Often, you can sort of intuit the business model up to $1m or $2m or so in ARR. After that, it all starts to change. It’s a ton of reps, higher absolute marketing spend, more CSMs, etc. If you don’t model it properly (and often for the first time) — your burn can creep up on you, no matter how carefully you think you are managing expenses.
• Getting too comfortable with yourself because of your High Win Rates. As you scale, your win rate — the % of deals you close vs. the competition — should go down. Because as you start to develop a mini-brand, you should start being considered for deals you never would have even been part of the selection process before. If your win rates stay extremely high, that means your are doing a pretty terrible job of getting into more and new deals. More on that here: Beware of the Confidence of High Win Rates
• Not being 100% laser focused on NPS and CSAT (and driving down churn). Your happy customers beget more happy customers in SaaS. Measure your NPS, and then have the whole company align on raising it every quarter. If you don’t … you’ll stall out somewhere around $5m, or $10m, or maybe even $20m ARR. But you’ll stall out if your customers don’t recommend you to others, and if they only reluctantly buy more from you. More on that here: I Was Wrong. NPS is A Great Core Metric.

The #1 issue I see is not understanding what investments really are accretive — and which aren’t. And so the money goes far, far faster than anticipated.

Venture capital, if you raise it, is there to invest. You don’t need ROI in sixty minutes, you can be a little patient in getting the returns. But … but:

• A sales rep that can’t hit quota in a few months = cash drain.  You gotta move on.
• A VP of Marketing that can’t get you leads & opportunities = cash drain.  They spend so much on stuff that doesn’t really work.
• A customer success team that can’t drive down churn and drive up NPS = cash drain.  They have to tilt the curve on retention.
• An engineer that can’t ship a core feature or upgrade on time-ish = cash drain.  The best engineers are so cheap.  The rest?  So expensive.
• Etc. Etc.

I.e., hiring just to fill an org chart drains all the cash – fast. This is what I see all the time.  Mediocre hires drain all the cash, often in just a few months.

Hiring reasonably quickly … but where the hires, at least as a group, pay for themselves over the next 12 months or less … burns nothing net. And so that’s a great use of your precious, expensive, equity capital.

If you don’t understand how the next few employees are accretive, take a pause. You always know for the first 5, 10, 15, 20. But as you scale, after 40 or 50, sometimes you don’t know.

You should.

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So just a little while back, Lenny Rachitsky had me on his hyper-popular podcast to talk about scaling sales, from the perspective of a founder who hasn’t really done sales.

It ended up being super popular, and a fresh take on a lot of topic we talk about a lot on SaaStr.  I still regularly get emails about it, and the full deep dive is above. It’s great.

What I missed was Lenny’s own summary of his Top Takeways from our deep dive.  They really are a great checklist when you are starting to scale sales in SaaS:

#1. Hire your first salesperson when you have closed the first 10 customers and are spending more than 20% of your time on sales. Don’t be swayed solely by impressive resumes or acronyms; instead, seek out those individuals who you would personally buy your product from.

Does the advice to always say no to sponsored features would also apply to a SaaS startup selling to mid-market (ACV 20k to 50k+) and has relatively few clients? No. This is not wise advice, it is bad advice in many cases. As long as the deal size is big enough.  At least, in the earlier days.

If a potential deal, is > $20k-$50k-$100k+ in the early days, you should consider one-off features if:

• the paid feature would also benefit other similar customers, now or in the future;
• the feature is or should be on your roadmap for the next 24–30 months or so; and
• your gut and experience as CEO tells you it’s a good, high-value feature that adds to the value of the company and worth building.

If all 3 criteria are met and a customer is willing to pay up to push out a feature early, I would suggest at least strongly considering it.

Because in that case, it’s no longer a custom feature. Instead, it’s getting paid to learn about the future of your company. Early.

Having said that, do NOT build an “early”/”custom” feature if:

• The customer won’t pay up. It’s not important enough for them, or just as importantly, you, if they won’t.
• If the customer won’t be one of your largest customers. It is too distracting otherwise.
• You don’t think other similar customers will also pay up for the feature down the road.
• Your gut says it is just too distracting. Any “one off” feature is a distraction. But your job as CEO is to know when it crosses the line.

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Move on.  Especially, if you’ve only raise one VC round or so.

This is telling article re: Bill Gurley, one of the best VC investors of all time:

“I give Bill a lot of credit because Bill said, ‘I understand, this happens,’” Tolia recalled. “[Bill said] ‘most startups do fail, so the odds were that Fanbase would fail, not succeed. But you have a great team, and I feel that you guys have a lot of talent. Would you be willing to take a few months to see if you could come up with another idea?’

Let’s back up.

A VC fund will typically do 30-ish investments per fund.

and

And it will only start with say 1%-1.5% of the fund, on average, per investment.

So, if you “fail” after the first check, it’s really not the end of the world. Especially if you truly gave it 110%.  And didn’t hide things.  

If a VC has say a $200m fund, their job is to turn that into $600m (3x) or better. If they invest say $2m into your start-up and it fails, that’s a bummer. But not the end of the world. It’s not really going to materially impact if they turn $200m into $600m. It’s just one “at bat” that didn’t pan out. It’s OK as long as a bunch of the others do pan out.  The fund will make $598m gross instead of $600m after the $2m loss on your start-up.

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