Do You Have the CRO Mindset?
If you’ve been following our blog, you know we’ve been writing for a while about modern sales and marketing techniques (aka Account Based Marketing (ABM), Nurturing Marketing, or Marketing 2.0). Describing core trends such as the need for greater sales and marketing cooperation, implementation of deep marketing analytics, the importance of customer success and low churn, and the growing urgency for the associated cultural changes.
Over the last few years these disparate trends have been coalescing among leading companies, and are giving rise to a new role: The Chief Revenue Officer (CRO). Now even companies without a formal CRO seem to recognize the need for what we call the “CRO mindset”. The trend is especially prevalent in fast growing Silicon Valley cloud software companies.
We think the CRO mindset is here to stay and is worthy of a longer discussion.
These are the three key questions CEOs and Boards should ask themselves, especially if they didn’t achieve their desired 2019 revenue growth or 2020 is looking soft:
- Should we have a CRO?
- If yes, why?
- And if we do so, what will make that CRO successful?
Silicon Valley software companies are increasingly employing CROs
An analysis of LinkedIn data for a little over 2,000 San Francisco Bay Area sales leaders suggests about 15% of all sales leaders in January 2019 were CROs. The software sector is leading this trend with about 20% of sales and marketing organizations being led by CROs, compared to between 10% and 14% for other verticals. Or put another way, nearly three quarters of San Francisco Bay Area CROs are in software companies and the supporting marketing agencies.
Our analysis puts numbers on a trend that’s already been discussed locally and nationally for a few years now, most notably in this Venture Beat article. So, is this just another Silicon Valley trend that will come and go, or is there more to it?
Our experience and analysis suggests it’s very much the latter. Investors and CEOs alike would benefit from a structured approach to thinking through whether a CRO can be the right answer for their organization. Especially if last year was soft or growth wasn’t where it needed to be, or if this year’s renewal rates and / or sales and marketing pipelines aren’t looking too promising.
Heuristic analyses do indicate that software companies employing CROs are the who’s who of the Silicon Valley, forcing a strong hypothesis that the presence of CROs is correlated with higher growth rates. Now, that’s correlation and not causation. It could be, for example, that trendsetters grow faster and one of the trends they’re setting is a shift to CROs, whether or not that’s a causal driver of their growth.
However, when comparing CRO-staffed organizations to more traditionally run sales and marketing organizations, our research suggests that the ~300 companies with CROs in the San Francisco Bay Area are on average growing more quickly than the 85% conventionally staffed companies.
Additionally, the CROs’ greater span of control over sales, marketing, and customer success can result in greater organizational efficiencies, and we’ve 10% improvement in efficiency cited in the literature.
Why should you be switching to the CRO mindset and model?
To understand why software companies are leading the adoption of the CRO model, it’s important to understand why the market and investors are flocking to cloud-based, on demand software companies compared to legacy, on premise ones. And why at this point the growing momentum of the shift to cloud software is beyond dispute.
Some reasons are inherent to different technical architectures for cloud software, but the compelling financial reasons arise from the associated changes in software business models such as conversion rates, scalability and churn. And those are precisely the factors that are driving San Francisco Bay Area software companies to transition to the CRO role.
Very few examples of legacy, on premise software companies exist that have successfully relaunched cloud versions of their products. Those exceptions include names like Adobe, Apple, Intuit, and Oracle to some extent (if we count NetSuite), but then the list of successful transitions thins out.
Besides often being saddled with calcified organizational structures, these legacy companies compete against new entrants that are building their software on code bases that are 10 or 20 year more modern. They leverage key benefits of the SaaS model such as the comparative ease of API integrations with other cloud software products into suites of offerings. That way they can offer the clear benefit of their software being available anytime, anywhere in a simple browser, without big compatibility issues and upgrade requirements.
As compelling as these technical advantages are, cloud software’s impact on underlying business models is what makes the transition to the cloud financially more appealing. It is also driving the underlying organizational changes in software sales and marketing. Buying cloud software essentially is a lease or rental model vs. a license purchase as in the on premise model. The financial consequences are profound because software providers are launching a recurring revenue stream with each purchase vs. a one-time transfer of funds.
The cloud model delays available revenue in the early years of a sale, which is why many CFOs initially opposed launching cloud products. But now, years into the transition into cloud, the early pioneers are reaping the benefits of recurring cashflows where the name of the game is holding on to the existing customer base to not threaten the future cashflows of the later years.
Another byproduct of renting software instead of buying it is that customers are not willing to pay as much per year as they would for a full software license. A typical heuristic is that buyers are willing to pay up to 40% of the comparable license purchase price for their year 1 rental. This creates cost pressure on cloud companies’ sales and marketing organizations as the fat enterprise software prices of old are long gone, and with them the associated lavish sales and marketing budgets.
A second major change is that by renting vs. buying software, power shifts from the software producers to the buyer because “renters” have a choice every month or every year to renew their purchase agreement or to switch to a new vendor. Which is made easier by the less onerous implementation requirements of browser-based consumption of cloud software.
On top of that, the emergence of cloud-based sales and marketing tools like Eloqua, Hubspot, Marketo and Salesforce have enabled organizations to re-invent the way they attract customers and build sales pipelines. These applications create a shift in the way software sales and marketing organizations need to be set up and managed.
What is the CRO mindset? What are CRO best practices?
We talked about how sales and marketing budgets are now tighter given the lower, initial cashflows for cloud products. And not only are gone the days of collecting the licensing fees with an automatic 20% annual maintenance contract, the buyer is now king, forcing the software vendor to re-earn their business and to manage renewal rates extremely carefully; 95+% is best practice.
Delivering and experiencing the product are now mostly done through browsers or mobile apps, creating immense possibilities for reinventing the online customer journey from initial awareness to purchase and support. Customer success roles are even more crucial to a company’s growth and indeed survival.
Legacy software companies’ organizational models of separate marketing, sales, professional services and customer support organizations have turned out to be too siloed to manage these simultaneous trends we described. Trends like greater cost pressures, new cloud technologies to create and manage pipelines, and seamlessly needing to manage the customer journey from initial contact to ongoing use.
Most importantly the financial need to hold on to customers is of paramount importance. Most cloud software sales don’t recoup the initial marketing and sales until sometime in year 2 or even 3 of the customer’s purchase. Losing those customers is costly. Conversely if a cloud company continues to delight those customers for 10+ years, the cost of acquisition will decrease.
The need to integrate marketing, sales and customer success into one, seamless customer journey is what many software companies find themselves struggling with. And with it some very fundamental cultural challenges. Addressing these needs and challenges requires a new mindset and is the organizational vacuum that a CRO steps into.
So, what makes a CRO successful? Based on my own experience having performed this role, it boils down to these common traits:
- The CRO’s span of control mimics the end-to-end customer journey, ensuring there are no organizational gaps through which the customers can fall, resulting in higher customer satisfaction scores and renewal rates.
- The CRO combines and consolidates a clear focus on sales, marketing and customer success, being the one-stop arbiter of revenue generation, be that new, upsell or renewal revenue.
- The CRO owns the revenue and growth goals, and partners with the CFO and CTO for the short, medium, and long-term financial health of the organization.
- Successful CROs are not only good at selling and marketing, they are literate in the capabilities of modern demand generation technologies that allow an unprecedented degree of transparency and accountability, and they’re usually highly analytical and operationally focused.
- In this partnership with the CFO and CTO, the CRO frees up the CEO from day-to-day operational monitoring of revenue attainment to elevate his or her focus on long term strategic goals such as funding further growth, M&A, international expansion, and managing the board and investors.
There is a growing body of material being written on the emerging role of the CRO and the need for a CRO mindset, especially for cloud software companies, and articles are proliferating by the day.
Some great articles, if you are interested in reading more, can be found here:
- The rise of CROs in the Silicon Valley
- A good post by the former CEO of Marketo
- A classic article on the key attributes of a CRO by Marketo’s former CRO
Generating revenue and profits is what private enterprise is all about, because it is evidence that customers find useful what the organization offers. It stands to reason that someone with the right mindset and skills should own that number end-to-end.
What do you think? Send us your comments.