“Where will our growth come from over the next three years?”
Every strategic planning cycle should start with some variant on that question. What sounds simple is in fact one of the most complex and fraught decision executives have to make, year after year. In this case, we’re leaving the product side out of the equation and just talking about account-focused sales and marketing.
Our subject is a small IT company currently with 50 accounts, and mean annual revenues of 100,000 per account: a $5M revenue business. There aren’t any super-large accounts, or super small ones; the revenue spread is clustered pretty tightly around the mean. The company was founded ten years ago, and has grown primarily via word-of-mouth. For the last few years, growth has been “anemic” in the words of the CEO—around 5% year-over-year.
With this in mind, the CEO makes a challenge to the executive team. He says that the company must break the magical $10M barrier in three years—equivalent to a 25% year-over-year growth rate. This seems pretty ambitious to the executive team.
The CFO has an idea. He goes up the whiteboard and draws a simple two-dimensional graph, with number of accounts on the x-axis and revenues per account on the y-axis:
It’s clear that there are really two ways to do it: 1) Acquire new accounts, or, 2) gain share of wallet within the accounts you already have. While they both sound admirable, they actually require very different investment models. To reach that goal the team can adopt one of two strategies:
- Acquisition Model: Expand from my 50 accounts and build clientele to 100 accounts at revenue of $100,000 per account.
- Share-of-Wallet Model: Add no new accounts and cross-sell/upsell to take every existing account from $100,000 to $200,000 in revenues.
The key is to think about the balance between the two. Clearly, most companies want to be someplace in between.
The Race to Acquire:
Acquisition is always a high-volume, low-yield effort. In most cases, it’s led by marketing, with a focus on generating qualified leads to hand off to sales. However, the effort required to acquire new customers is expensive. Studies show that attracting a new customer can cost 5 to 7 times more than retaining an existing customer. On top of this, it seems to be getting harder. Email open rates are dropping every year, and good luck trying to get through on the phone.
Once a qualified lead has been generated, getting to yes can be even harder. Navigating buyer and influencer relationships, writing proposal after proposal, and sitting in countless meetings can all lead to nothing. Typical new business close rates on qualified leads can range anywhere from 10 to 40%–but it’s very difficult to exceed that number.
Even considering these challenges, acquisition is a critical element of a long-term strategy. By focusing on building a robust, large pipeline of prospects—and not expecting instant success—it is possible to achieve success. The best acquisition strategies are constantly farming through the “no for now” conversations, to build a steady drumbeat of acquisition.
Key Analytics Questions (Acquisition):
- What are the unmet need(s) across accounts?
- How do industry-specific trends, terms, and tensions impact the marketing and sales stimulus to a given account?
- For inbound leads, how quickly can the right conversation be facilitated with a buyer-in-need?
So what is a realistic acquisition target for our case company? They currently have fifty accounts—what is a realistic target for three years out? At MarketBridge, we’d recommend a middle-of-the-road approach, aiming to acquire 25 net new accounts, for a total of 75. But not so fast; there’s a snake lurking in the grass—renewal rate.
Watch episode 5 of our Killer Slide Series, The End-to-End Strategy to Improve Customer Acquisition and learn how businesses need two things – predictive data and content – to increase win rates by greater than 40%.
The Race to Renew:
It’d be crazy to assume a 100% renewal rate; no B2B company achieves this. Every year, a certain number of accounts are bound to drop, for a variety of reasons. Some reasons are uncontrollable—for example, a true loss of budget, or a company truly no longer having need. However, when you get down to it, almost every loss could have been avoided. We use a phrase a lot at MarketBridge: “Buyers are liars.” This simply means that most customers are nice people, and don’t want to hurt your feelings. They’ll tell you they didn’t renew your contract because their budget was cut—but it wasn’t cut to zero. They made a decision, and your company lost.
Which brings us to a simple point: renewals must come first. Given a choice between acquiring 20 new accounts and losing 10 (net 10), vs. acquiring 10 and losing 0 (also net 10)—you should take the latter every time. First of all, it’s less expensive. Secondly, in the second case, you don’t have ten net detractors floating around in the marketplace. And finally, you’ve had another year to build goodwill in ten accounts.
A good target renewal rate for a B2B company selling services is 80%. Anything above that is very difficult, but it can be done. Companies with 90%+ renewal rates almost always grow at double-digit year-over-year rates, and end up being acquired at higher multiples.
Key Analytics Questions (Renewal):
- What are true sentiments in the account, across buyers and influencers?
- What are the account’s strategic priorities? Does your product / service fit with those priorities?
- Has usage / utilization been growing or declining?
The Race to Share of Wallet:
The second path might be an easier one to follow—at least over the short run. Expanding existing accounts requires either selling new products to the same buyers or finding new buyers for the same products. Either way, cross-sell requires an aggressive, proactive approach, while at the same time not crossing wires with existing buyers. See the above note about renewal—if faced with the choice of expand an account or lose it, stick with the conservative option.
Cross-selling is both easier and harder when trying to sell to a major company like ExxonMobil. On the one hand, you have multiple business units, multiple geographies, e.t. cetera with which to penetrate your business/service. But, at the same time, buyers and units may be so disparate, separated by distance, function, and even language, that leaping between buying centers may be almost as difficult as acquiring new accounts. However, pre-existing relationships generally mean a lower CAC (customer acquisition cost) and higher profit potential than the race to acquire option.
Another challenge is that salespeople tend to cover the people they know with the products they know. If you think they’re actually covering all the buyers in the accounts, and they’re doing it systematically and they’re selling multiple products, the typical answer is they’re not.
Watch episode 6 of our Killer Slide Series, Building a Scalable Cross-sell Intelligence Platform and learn four “decision steps” a sales rep or marketer must make to know who to target, what offer to provide, how to reach each target and how to report on results.
Key Analytics Questions (Cross-Sell):
- Are we covering all buyers in existing accounts?
- What are their product purchase behaviors?
- Are we executing omni-channel coverage?
Want to test this model with your business? Try out our beta revenue calculator >
Putting it All Together
Start by planning for a realistic renewal. Again, 80% is excellent for B2B service / product companies. 70% might be more realistic. In this case, 25% growth requires finding 55% new revenue across cross- and upsell and new account acquisition. It’s difficult to state how critical it is to call this out realistically—and ensuring that product, marketing, and sales all understand exactly what will be required to achieve this goal.
Product strategy is out of scope for this article, but it’s not enough to just say “we’ll sell these new accounts and buyers something.” Specific product plays must be interlocked with sales targets—adding up to a higher number than goal—to ensure that marketing and sales know, from January 2nd onwards—where dollars will be coming from.
Considering the Costs
We’ve estimated (in respect to this particular company) both conversion rates and costs to sell for each of these four revenue streams. Acquisition (on a good day) converts from qualified leads at a less than 5% rate. In the first year, customer acquisition cost (CAC) are almost 100%, if not more, of annual recurring revenue. Essentially, it’s a loss in the first year. For cross-sell, we typically see companies with a 20 to 30% conversion rate. And for upselling, a slightly higher 40% conversion rate is typical.
So what happens when more and more of growth is sourced from acquisition—in other words, when renewals are low, or cross- / up-sell are ineffective? We’ve illustrated three escalating scenarios.
This is pretty shocking—relying on acquisition for 10% of growth, CAC/ARR is 22%. That’s not cheap. At 20%, CAC/ARR goes up eight points to 30%. That’s almost at the point where, in most business, external funding is required to keep up with cash flow. At 30%, CAC/ARR rises to almost 40%. If you’re going to look for that kind of growth from acquisition, be prepared to spend money, or be disappointed.
Another way to look at this is to hold two of the three variables constant, and then plot the revenue impact of spending on acquisition (green line), SOW (blue line), or not spending on retention (red line), all other things being equal.
This is probably intuitive, but still a little shocking when plotted. The relative cost/benefit of not focusing on retention is extreme. While growth might be sexy, retention is simply critical, and not even in the same ballpark to SOW gain or new label acquisition.
To conclude, we’d like to emphasize three final points to remember when planning for growth:
- Start by Plugging the Leaky Bucket
It’s almost always cheaper to keep an existing customer than to acquire a replacement. Don’t you’re your customers for granted; focus on product and people. At the same time, identify signals on likely attrition, and ensure those signals are surfaced to managers who can make a difference in time—which is always well before the actual renewal date.
- Invest in Cross- and Up-sell
As shown above, cross- and upsell are the most profitable sources of growth. Make sure sales incentives are in place. Collect the needed signals to help sales cross-sell at scale: product purchase patterns, look-a-like personas, and market basket / next logical product. Finally, have a deliberate account-based strategy for expansion.
- Finish Off with Smart Acquisition
Be realistic about acquisition. Sales cycles take a long time; the most successful sales rep cultivate very large portfolios of “no for now” potential buyers, returning to them systematically with thoughtful interactions. It takes a while to build up this portfolio, but once it is in place, acquisition rates should stabilize. The key is patience—don’t give up after a quarter, or even after a year. Focus on the process and the results will come.
How would these scenarios play out at your business? Use our revenue calculator to test the above models yourself.