Pandemic Pivot: Data and Metrics to Change Course
Sequoia Capital's note to founders and CEOs regarding the coronavirus pandemic advises "we should brace ourselves for turbulence and have a prepared mindset for the scenarios that may play out." The purpose of this article is to describe data-driven metrics and frameworks executives can use to guide their companies through these unprecedented and painful times.
The goal of the pivot strategies that follow is optimization of company financial health during this period of uncertainty and economic upheaval.
During a recent Growth in Turbulent Times webinar, Guillaume "G" Cabane, formerly VP Growth at Segment and Drift, articulated the concepts of first-order and second-order COVID-19 effects that will most likely impact your business. A first-order effect is a pandemic-driven action of customers or prospects that affects your revenue -- delayed deals in sales pipeline, downgrades or cancellations. A second-order effect comes when your customers’ customers eventually impact your direct customers’ ability to purchase your product.
In this historically significant time, business leaders need to make hard decisions based on trends and predictions before situations become dire. Decisive actions using the right metrics and predictive modeling can save companies as we navigate these turbulent times.
NOTE: The target audience for this article is Enterprise B2B software companies, but most of the concepts and metrics will apply to any business.
Why Read This Article?
This post can be used to stimulate discussion and achieve alignment between the CEO, executive team and the Board on metrics to measure pandemic threats to the company, and a corresponding interdisciplinary strategy to skillfully address these challenges. The measurement and response to coronavirus impact will likely require coordinated cross-functional actions, so agreement above organizational silos will improve the probability of success.
This article details a data-driven approach to group prospects and customers into pandemic impact cohorts, then walks through organizational approaches to apply this segmentation to differentiated actions. If significant budget cuts may be required to survive/thrive, guidance is offered to model scenarios in advance with performance criteria that modulate reductions in spending and/or headcount. The goal of this article is to help your company emerge from the pandemic as strong or stronger than you began the year 2020.
Prospect and Customer Segmentation Framework
The first step in the development of metrics and fresh data to pivot a company to optimal health is a pandemic-based prospect and customer segmentation. Assigning all prospects/customers to pandemic segments based on expected business impact will enable differentiated actions across functional organizations. For clarity, we can define this prospect/customer data element as a Pivot Segment. This article will explore pivot strategies for marketing, sales, customer success, product and finance. These functional organizations can take targeted and situationally appropriate actions for each Pivot Segment.
The assignment of customers and potential customers should be appropriate for your particular target market. The defined segments for a strategic COVID-19 pivot could look like:
Negative business impact
Neutral business impact
Positive business impact
As examples -- airline and cruise ship companies will quite likely be placed in your negative business impact segment. But companies like Zoom and Slack whose adoption is being accelerated by mandatory work-from-home, would be segmented as positive business impact. In some cases, all companies in a vertical will belong in the same Pivot Segment. But there can be wide variability within sub-segments of an industry.
With our customer/prospect segmentation framework in place, we have a foundation to investigate data, metrics and decision structures for impacted organizations in your company.
Considerations for a marketing pivot may include difficulty attracting new customers, increased focus on customer retention, value proposition changes, messaging overhauls, demand generation shifts, and the incorporation of Pivot Segments into Account Based Marketing (ABM).
For most companies, the percentage of new business revenue in 2020 will be decreased by the pandemic. Correspondingly, revenue from existing customers increases in percentage contribution and importance. Appropriate action could include shifting marketing investment from new customer acquisition to retention and growth initiatives. A marketing pivot example is redeploying some of your demand generation resources to customer programs that influence retention and upsell. Resources permitting, a marketing strategy for every customer could be developed using Pivot Segment and other customer scorecard metrics described in the Customer Success section below.
If you are turning on the television, it's obvious that most commercials are context sensitive to coronavirus. It could be a huge blunder to run ads, use messaging, and send marketing emails that were developed before coronavirus, no matter how much was spent in development. The marketing organization could set up a structured process to shift messaging to align tactfully with the current situation of buyers, and further hone messaging by Pivot Segment.
In the marketing domain of demand generation, the dynamics of customer acquisition are fundamentally altered right now. Cost per lead will likely be driven up by pandemic economics of supply and demand ... where the supply of new customers with willingness to pay is decimated. If metrics to track demand generation costs and ROI by channel are not in place, rapidly putting together a lightweight measurement structure could be useful. Frequent tracking of TOFU, MOFU and BOFU funnel metrics can provide insight into what's working and what is not in the era of coronavirus. Additional funnel metric considerations can be found in the sales section below.
The finance section includes a description of segmented LTV/CAC (Lifetime Value/Customer Acquisition Cost) analysis. If post-pandemic data can be used to calculate LTV & CAC associated with spending by channel, vertical, campaign, etc, this data could be used to rank order spending by expected return. Careful tracking of marketing investment performance with fresh pandemic data can inform prudent changes in marketing spend.
Prospect Pivot Segment is another data-driven means to focus dollars and marketing organization time. Marketing resources can be reallocated from prospects in the negative business impact segment to those in the positive business impact segment.
One approach to direct both marketing and sales resources towards accounts in healthy Pivot Segments is ABM. I had the opportunity to speak with Jessica Fewless, co-author of Account-Based Marketing: How to Target and Engage the Companies That Will Grow Your Revenue, and she said “companies with an ABM strategy can quickly realign to target the right prospects, and those without an ABM strategy can use these difficult times as the justification to get started.”
The selling impact of Coronavirus spans a wide range from extremely negative to highly positive. Adidas saw first quarter profits fall 95%. In contrast, Peloton, a maker of virtual networked exercise bikes cited 94% growth in subscribers and raised guidance in their most recent shareholder letter. Both of these companies are in the personal fitness market, but pandemic impact was at opposite ends of the spectrum.
What is the expected pandemic impact on bookings and revenue for your company? This question can be answered with data from your quarterly results in 2020. We can investigate coronavirus impact on the sales organization with metrics for bookings, revenue, sales funnel and sales compensation.
Let's start with bookings, which can be classified as new, renewal and expansion. Bookings of new customers in 2020 will be adversely affected for most companies. If your bookings quota has a New component, performance to that goal will provide data on pandemic impact. Renewal rates for existing customers are also worthy of deep inspection for pandemic effects. A baseline comparison to quota performance for the past 8 quarters can provide average quota achievement, variance, and minimum percentage of plan. As the data is analyzed, brace yourself for the worst performance in recent history as a possibility.
For software companies, revenue changes are generally slower than bookings changes. For annual contracts evenly distributed, 25% of them will come up for renewal each quarter. If the conditions of the pandemic will take out 20% of a SaaS company's existing annual contract customers, the revenue impact will take 12 months to fully manifest. Multiyear contract and second-order customer impacts will take even longer to arise. The possibility of a higher churn rate coupled with a dramatic reduction in new customers is a double whammy for sales performance to quota, and revenues in 2020.
Performance through the sales funnel from Marketing Qualified Leads (MQLs) to Sales Qualified Leads (SQLs) to Pipeline to Closed Won business is another significant area of data and metrics to quantify pandemic impact. Tracking the average time in each stage, and the percentage conversion through each stage will characterize deal velocity and enable revised forecasting in the current environment. As changes in funnel performance are understood, sales and marketing can coordinate efforts to stay in lock step. For prospects in the pipeline stage, Pivot Segment could be used to adjust deal probability and close date, as appropriate. A key data consideration to understand pandemic impact is to frequently analyze the data captured since the pandemic affected your business.
Mark Roberge, author of The Sales Acceleration Formula, said during the Growth in Turbulent Times webinar that with the advent of the current pandemic, all previous funnel metrics are out the window, future demand should be re-forecast, and sales goals should be reviewed. I've personally worked with sales teams that were given unachievable quotas and saw morale, motivation and performance adversely impacted. Once the pandemic effects on sales can be characterized with confidence, quotas can be changed appropriately. If your company is lucky enough to be positively impacted, quotas should not be reduced. But for many companies, downward quota adjustments might make sense. Since the pandemic effects are uncertain over time, quotas could be adjusted 1 or 2 quarters out, with future adjustments dependent on changes in the business environment.
In these times, renewals and customer retention are more important than ever. Theoretically, sales compensation design should align the incentives of the sales team with what is best for the company. If you consider renewals to be of extreme importance, sales compensation could be temporarily increased for renewals. Optimal compensation design will not give away additional dollars to sales for expected results, but rather reward them for exceeding the likely outcome. If baseline probabilistic renewal rates can be calculated for the pandemic environment, temporary incentives can be used to strongly reward performance above this baseline.
Customer Success Pivot
Customer retention is a critical metric the customer success organization can influence. In normal times, net retention measured in dollars is generally more important than renewal rate, the percentage of logos retained. But the importance of these metrics can be flipped in the pandemic, where holding onto as many customers as possible is of top importance. Accepting this premise, the number one metric for customer success becomes retention of every possible existing customer.
What can we do to proactively retain customers in these difficult times? Customer success expert Danielle Juson, in her blog post Customer Success in the midst of a pandemic advocates deep dives into customer health metrics, engagement data and usage reports to assess the well-being of every account.
Customer health scorecards can be created for every customer by selecting and calculating a handful of the most important pandemic metrics. Pivot Segment indicates the current financial health and posture of the account. An engagement score is a proxy for the value of your product, and is a leading indicator of churn risk. Usage reports can show pandemic changes in product importance. CSAT and NPS scores are also great candidates for your scorecard. Support ticket count is another option. A cross functional group could debate and choose the most important health metrics, and add a weighting factor for each. With defined metrics and relative weights, each customer can be grouped into green, yellow and red buckets for each scorecard attribute, and receive an overall customer health score.
Playbooks can be developed with the specific goal of keeping at-risk customers during the pandemic. For subscription businesses, playbook timing can be coordinated with upcoming renewals with specific actions and goals for 90 days, 60 days and 30 days before renewal. Both scorecard results and Pivot Segment can drive choices from a menu of tactics in the playbooks. The efforts to understand and improve the health of each account ultimately drives renewal success. The options for pandemic renewals can be worked out in advance by coordinating with marketing, product and finance. An example of tiered renewal options follows.
Tiered Renewal Strategy Example
First Choice: One-time bundle of free additional services at the same subscription price. Benefit of this approach is opportunity for upsell to the additional services on next renewal
Second Choice: Modification of payment terms. Examples are moving from annual payment to quarterly payments, or changing Net 30 to Net 90
Third Choice: Pause service for a quarter. This maintains revenue, but pushes out revenue recognition of unused services. Costs of providing the product are avoided during pause
Fourth Choice: Free extension of subscription. This keeps the customer active, and moves the renewal date out to potential financial recovery of the customer
Fifth Choice: Additional discount. The reason this is last is that raising prices after a discount has been given is very difficult
Customer Success performance in the pandemic can be measured using both net retention and renewal rates. CS actions taken can be correlated with scorecard data and outcomes to determine what works best, and optimize customer retention through the end of the pandemic.
Achieving and maintaining product-market fit (PMF) and optimizing profitability are two key objectives in a typical product organization. In a global pandemic, customer needs and budgetary calculus can shift dramatically from a pre-pandemic steady state, affecting both PMF and company revenue/profits.
Key questions to answer in formulating a product pivot might be:
How have the dimensions of customer value generated by our product offerings changed in the pandemic?
Has willingness and/or ability to pay shifted with COVID-19 impact?
Engagement is a key proxy metric to quantify customer value and PMF. For a software company, user engagement metrics are a data-driven means to track customer activities that correlate with value and ultimately profitability. The most important engagement metrics are unique to every company, and can be developed by a cross-functional team.
In the blog post Product engagement: the most important metric you aren’t tracking for your SaaS business, Intercom outlines a process for creating a product engagement score. The steps include defining engagement specifically for your product, tracking the associated event metrics, weighing each event, normalizing the scores, and making the data actionable.
Engagement scores can be used by the Product organization to inform development priorities, by Marketing to choose retention and acquisition tactics, and by Customer Success as a customer health indicator.
Pandemic pricing strategy is another consideration. For customers with a neutral or positive pandemic effect, current pricing is likely appropriate. But for customers with negative pandemic business impact, the product organization can coordinate with sales, marketing, customer success and finance to develop temporary pandemic product bundles and short-term pricing policy changes that align with Pivot Segments. The product organization may need to create new SKUs to support the pandemic strategy.
The development and consistent tracking of pandemic-tailored data can be used to inform a strategic pivot of product features, roadmap priorities and/or pricing.
For CFOs, the pandemic pressure is on and financial seas are in a 100-year storm. Context sensitive metrics coupled with anticipatory decision criteria can help navigate the incoming set of huge financial waves. Bookings and revenue discussed in the sales section can be segmented by Pivot Segment, geography and anything else relevant in these times. With segmentation, bookings and revenue trends can be connected to historical data to reconsider revenue and cash flow assumptions. Finance should play a key role in pandemic-driven pricing changes, product bundling and/or increased discounting, and consider the expected effects on revenue, gross margin and other financial metrics.
Recalculating LTV and CAC metrics using fresh pandemic data can guide a variety of tough decisions. The ratio of LTV to CAC indicates the viability of your business model. Many VCs want to see this ratio at 3:1 or greater. New levels of segmentation may be appropriate for CAC and LTV to rank order budget cuts and/or resource reallocation by channel and/or Pivot Segment. For example, marketing spend and sales attention could be diverted from segments of customers that are fighting for survival.
Payback Period is another key financial metric that warrants recalculation with fresh pandemic data. The SaaS CFO defines the CAC Payback Period as “the number of months required to pay back the upfront customer acquisition costs after accounting for the variable expenses to service that customer”. This metric predicts the cash consumed by investing in sales and marketing to acquire customers. Generally it's time to step on the gas when Payback Period is less than 12 months, and wise to go easy on the accelerator if it's greater than 24 months. A significant change in Payback Period resulting from coronavirus could warrant modification of sales and marketing growth plans.
For a startup that does not comfortably have 2 years of operating cash in the bank, a realistic revenue and cash flow model with attention to burn rate and revised revenue growth assumptions can guide pandemic strategy. Revenue effects lag booking performance, especially for SaaS companies selling annual contracts. A key output of this financial model is the duration of remaining operating cash in months.
With fresh pandemic metrics appropriately segmented, and an updated financial model that predicts cash runway -- scenarios for mild, medium and deep cuts can be defined in advance. Pandemic-focused financial models can be updated with each month's performance, and the company can make periodic financial pivots as necessary.
Summary and Executive Perspective
Sequoia Capital wants its founders and CEOs to have a prepared mindset for the pandemic scenarios that may play out. The goal of this article was to offer structure and considerations for the impact across functional organizations.
We began with the concept of Pivot Segments, grouping customers by the negative, neutral and positive pandemic impact. With a categorization of customer impact, functional organizations can take situationally appropriate action that is tactful from a communication perspective, and deterministic in resource allocation.
From a systems thinking lens, a company can be viewed as an economic system of interconnected organizations seeking revenue growth from target market segments. Every company is different, yet every company is facing unavoidable external impact from an upended global economy. Redefined metrics and predictive modeling of your company’s “economic system” can inform pandemic decision making. Furthermore, the pivots made by functional teams can be coordinated with each other and finance to make sure the best decisions are made across the board, and that optimization occurs at the company level.
It is a time for true leadership in these turbulent times, and the survival and eventual thriving of individual companies can collectively help to pull us out of this tragic period in history. I hope this article has offered something useful to navigate your company and employees back to all the health and prosperity that is possible.