SaaS businesses can lose revenue measurement in the shuffle
Building a healthy revenue machine in SaaS is a delicate balance between sustaining existing revenue and growing it month over month.
The compounding nature of recurring revenue and increasing customer acquisition costs (CAC) implies that SaaS businesses need to streamline their base for retention and expansion from existing customers as they continue to add new revenue at the top of the funnel. Without this base, businesses run the risk of having a “leaky bucket” problem. They have to continuously swim against the tide by adding new customers just to offset the loss from churn.
Revenue operations (RevOps) aims to achieve strategic alignment throughout all revenue-driving functions to drive uninhibited growth. The SaaS Quick Ratio, a powerful indicator of business health, measures the rate at which a business is able to fuel growth while sustaining its current revenue run rate.
For example, consider a company that started out with an internal billing system that stitched multiple tools together. As the company grew beyond its first 500 customers, they realized that their internal processes and billing systems were no longer sufficient.
The sales team wanted to issue discounts and extend trials. The finance team needed a way to accept and manage different payment methods. The support team needed information on specific subscriptions — all at the click of a button. It came to a point where every department at Freshworks had to tinker with the underlying billing engine almost every day, causing human errors and unnecessary process delays.
The law of diminishing growth rate explains a constraint most SaaS businesses face as they start scaling up their revenue. At a certain point of scale, doing more of the same activities across departments no longer offers the same growth in the revenue.
Excluding external functions like market changes, there are three reasons why businesses hit a ceiling on their revenue growth.
Information silos. Within most startups, individual departments are loosely defined. With nascent processes, information across members and teams is free-flowing. As the business matures and functions get bigger, they also grow further apart.
Infrastructural gaps. The tools and workflows at a startup just trying to establish product/market fit are markedly different from those at business with a million dollars of recurring revenue with a few hundred customers. Without infrastructure that allows for rapid flexibility and room for growth, businesses get stuck in workarounds that eventually nibble away at growth.
Systemic dependencies. Multiple departments within the organization do not scale at the same rate and time. As the business starts scaling up, sales processes tend to evolve more rapidly compared to other functions. At a certain stage, accounting and compliance regulations require the finance team to upgrade its workflows. Having multiple teams bound together by systems and processes gets in the way of each function scaling independent of the other.
Revenue growth, especially at scale, is never an accident. Successful, high-growth SaaS businesses invest in dedicated cross-functional teams to focus on RevOps or end-to-end revenue operations. The RevOps team drives strategic alignment across revenue-driving functions by obsessing over plugging leakage and identifying new opportunities.
By cutting across sales, marketing, success and finance functions, the RevOps team is able to bridge data gaps across the revenue cycle of an organization.
While RevOps aims to plug inefficiencies across the revenue cycle, it is also responsible for identifying opportunities and setting up systems to capture that.
The biggest constraints to growth strategies in SaaS fall into three broad buckets:
Process constraints: Inability to adapt to new workflows, regulations and compliance requirements as the team matures from spreadsheets to point solutions and enterprise-grade ERPs.
Model expansion: Inability to service customers across multiple business models like product-led strategies for the SMB and complex sales motions for the enterprise.
Market expansion: Inability to replicate success from one geographic market to the next, due to local compliance, taxes, language and currency barriers.
Each team has been able to expand and scale independent of other functions in the organization. And the company services a wide array of customers ranging from one-person startups to thousands of larger businesses.
RevOps brings together a coherent insight with deeper contextual knowledge of these teams’ success metrics from an efficiency standpoint and helps drive decisions for the future. With it, any company can iron out these wrinkles, put leakproof processes in place and remove internal bottlenecks to capitalize on its growth potential.