By Alex Wittenberg, COO, airCFO.
You’ve finally found your product/market fit. Now, you’re ready for growth mode — and you have investors and other stakeholders with high expectations.
However, when your marketing, sales, and customer success functions sit in siloes, you hamper your ability to generate revenue as effectively and efficiently as possible. In recent years, the revenue operations discipline has become a holistic solution for generating and optimizing revenue by knocking down those barriers and aligning your teams around customer acquisition and retention.
In this article, you’ll learn:
- What RevOps is and why it matters
- Who’s responsible for the RevOps function
- The four phases involved in building your RevOps function
- Various metrics to track within your RevOps function
What is Revenue Operations?
Revenue operations, or RevOps for short, is the end-to-end process of driving predictable revenue across the entire customer journey through new business and expansions.
A successful RevOps function improves cross-team collaboration, creates more predictable growth, lowers your CAC, and enhances customer retention, among other benefits.
But success in this area requires deep collaboration across functions within your organization. In particular, your finance and operations teams are the ones that build and manage your RevOps strategy. Meanwhile, your marketing, sales, and customer success teams are “on the ground” to execute it.
It’s more than making one team out of these separate functional areas, however. The key is to ensure everyone’s working together well by knocking down silos between teams.
There are four phases involved in building a high-performing RevOps function:
Let’s look at each one in detail.
To set yourself up for success, you must spend time up-front thinking through your RevOps strategy. You have to build out a framework so that when you hire new team members, they’ll know their roles and get ramped quickly.
This starts with the Growth team.
Growth teams have three components:
- Top-of-Funnel: Marketers and sales development representatives (SDRs) who generate qualified leads. These team members bring more potential deals into your pipeline.
- Bottom-of-Funnel: Account executives (AEs) who close those leads and generate new business. These team members bring you those initial sales.
- Post-Sales: Customer success agents (CS) or account managers (AM) who work to ensure customers are happy, minimize churn, and secure expansions or upsells. These team members help increase revenue while lowering acquisition costs by keeping customers around longer.
Your Growth team’s most important metric here is Annual Recurring Revenue (ARR), which includes ARR from new customers and new ARR from existing customers that you upsell. It also subtracts out any ARR lost from downgrades or cancellations.
The formula for Net New ARR looks like this:
Net New ARR = New ARR from new customers + New ARR from upsells/expansions – churned ARR
A common benchmark for ARR growth that VCs generally want to see startups follow is 3/3/3/2/2. That means you’re tripling your ARR each year for the first three years, then doubling it in the latter two.
For the sake of a simple example, say you start with $333,333 in ARR. Here’s how your ARR would look at the end of each year with the 3/3/3/2/2 model:
Once you understand your targets based on this model, you’ll want to create a hiring plan to meet them. Here are some questions you should consider:
- How much growth can you expect to come from new business vs. expansions or upgrades?
- How many AEs do you need to hit these goals, factoring in quota, attainment, and ramp-up?
- How many leads do your SDRs need to drive to support your AEs, factoring in projected conversion rates?
- How many CS reps will you need to support your new customers, factoring in the amount of revenue or number of customers each rep can support?
The last item to plan for is your Growth team’s compensation. Here are a few general rules of thumb for compensation for each functional area of the growth team:
- AE: 50% variable @ 10-15% commission rate. Therefore, an AE’s quota should be at least 10X their base salary (or 5X their total compensation).
- SDR: Base salary with added variable comp based on the number of qualified leads.
- CS: Based on a combination of milestone-based variable comp & commission on upsells.
Commission structures will vary based on company stage & industry, but a reasonable benchmark for a venture-backed startup is paying out ~20% of new ARR to your Growth team.
With your plan complete, it’s time to launch your RevOps function. The most important objective of RevOps is maintaining transparency and alignment across teams in its earliest stages.
Here are some questions you will need to keep in mind at launch:
- Do we have enough AEs — or in other words, quota capacity — to support our target ARR growth?
- Do we have enough pipeline coverage to support next quarter’s revenue forecast?
- Is our CS team buildout synced up to support our future growth?
Once you build your team and start collecting data, it’s essential to closely monitor key metrics to help you understand your team’s performance and adjust course as necessary.
You should collect this data from the various teams involved in RevOps, and aggregate it into one cohesive view of your pipeline to identify and address weak areas.
Here are some key metrics to monitor for each of the functional areas within your RevOps function.
- Ramp-up Time: An assumption of the amount of time (typically 4-6 months) a new AE takes to become fully productive in their role. It includes all coaching, training, and other onboarding activities. You must consider this when looking at your new AEs’ quotas.
- Quota attainment: An assumption of what percentage of each AE’s quota you expect them to hit.
- Win rate: The number of all potential deals in your pipeline that converted to sales.
- Average sales cycle: The average time it takes to move a prospect from the first touchpoint with your company to the sale.
- Annual contract value (ACV): The yearly revenue you generate per customer contract. If a customer signs a 2-year deal with you for $20,000, the ACV is $10,000 ($20,000/2 years).
Sales Development Representatives
- $/Sales qualified leads (SQLs): How many dollars you spend to acquire each lead ready to speak with your sales team.
- Pipeline coverage: The dollar value of all leads in your pipeline against your revenue targets. If your sales pipeline coverage ratio is 4, you need to close 25% of your leads to hit your targets.
- Gross churn: The percentage of customers you lose through either cancellation or downgrading.
- Renewal rate: The percentage of customers that extend their contract or relationship with your firm.
- Net revenue retention (NRR): The percentage of revenue you hold onto over a given period. Adds in new business and upsells while subtracting downgrades and cancellations.
So far, the entire RevOps process has involved building a single, functional revenue-generating unit consisting of AEs, SDRs, and CS people.
Once you finish creating that unit, you have the building blocks you need to scale. From there, it’s a matter of hiring a management team that can replicate this unit as much as is needed to scale your desired amount.
Streamline and Optimize Revenue Generation With RevOps
There is a lot of truth to the statement made by serial startup founder Justin Kan, “First-time founders are obsessed with product. Second-time founders obsess over distribution.”
A well-run Revenue Ops function can make or break a startup as you iterate towards a sustainable distribution strategy.
It’s crucial to put systems and processes in place early that support this end goal. Doing so helps your team get into a predictable rhythm and build habits that they can maintain as you scale the company.
AirCFO’s Finance team has helped dozens of companies think through the entire process of developing their RevOps functions and built tools to help monitor key health metrics. If you’re just getting started with RevOps we’d be happy to help. Book your call today to learn more.
Author Note: Alex Wittenberg is airCFO’s COO and serves as fractional CFO to 6 high-growth startups, primarily in the B2B SaaS space. He has a background in management consulting, startup finance and as founder of a social enterprise startup called CoffeeQ