There are a lot of blog posts with “10 simple tips to accelerate your sales cycle.” Some of those are helpful for discovering tactics and tools, but they gloss over why. It seems obvious that shorter sales cycles are better, but the benefit goes far beyond pulling a few customers forward from next quarter into this one. Faster sales cycles have shockingly large impacts and understanding why will help you realize them.
With the increased challenges of raising venture capital and the associated re-focusing on cash-efficient growth, this is a lever that should be top of mind for founders. Sales cycle length has always been important, but its urgency has never been higher.
How big is the impact?
Stop for a moment and estimate the impact of shortening your sales cycle by one month, say from four months to three. Maybe jot down a note of what you’d expect would be different. Have it?
Before I ran the numbers, my guess was way off. Even if you assume that win rates stay the same, over a two-year period, going from a four-month to a three-month sales cycle increases annual recurring revenue (ARR) by 46%. If you can bring it down to two months, ARR is 143% higher than four months.
Speeding up sales cycles also tends to improve win rates, so the numbers are even larger in practice.
Recycling cash and compounding faster
The core of the benefit of cycle acceleration is recycling cash more frequently and compounding your business’s growth faster. That compounding allows you to increase customer acquisition investments without sacrificing runway. Inversely, you can hold spending constant and extend your runway with shorter sales cycles.
As with other types of compounding growth, changes that look small in the short term grow surprisingly quickly. This is tricky to visualize for an entire business, so let’s look at it one customer at a time. Many industries, including SaaS, have customer profitability trajectories that form a “J curve”:
- You spend money upfront on customer acquisition
- After a successful sale, the customer starts paying and you start recouping their acquisition cost
- The longer the customer stays with you, the more profitable the relationship is
After the customer has returned the cash you used to acquire them, that cash can then be used to acquire new customers, each of whom has their own J curve.
Accelerating sales cycles shrinks the width of J curves. There are a wide variety of ways to make sales cycles faster, including better sales enablement, product-led growth, and more refined prospect qualification.
One of the most powerful levers is shortening contract negotiations. Negotiations go faster if you sell on an industry standard, start-in-the-middle contract like Common Paper’s Cloud Service Agreement, rather than something biased to your side that elicits a sea of redlines in response.
Other factors that influence the width of the J include how quickly you collect on receivables and billing terms. Regardless of how you accomplish it, the narrower your J curves, the more customers you can acquire in a given period with the exact same starting capital.
J Curves to Companies
Ok, let’s move from abstract J curves to modeling an actual SaaS company. My main assumptions are below, and you see the full model here.
- $1 million is budgeted for spending on customer acquisition
- Customers pay annually in advance
- Annual contract value for new customers is $20,000
- New sales opportunities require a $5,000 marketing investment
- Sales opportunities have a 25% win rate
The leadership of this company immediately re-invests its cash into acquiring new customers as it becomes available from existing customers (when the J curve gets back to zero). Let’s look at ARR for two versions of the company, with sales cycles of four and three months respectively.
This shows a 78% lift in a three-month sales cycle versus four, but something is fishy in the chart. Notice how ARR growth is flat and then has a big jump every few months? That’s because of the assumption that the company immediately invests its whole customer acquisition budget as the cash becomes available. In reality, it’s not practical to deploy 100% of your available cash on customer acquisition at once and then drop spending to zero until the next batch of customers converts. Rather, you spread out spending to get leverage on fixed resources and maximize ROI.
The number of months you spread the spending across is dictated by how quickly you can recycle your cash, which is a function of your sales cycle. Here’s a more realistic view of ARR, again comparing a three-month to a four-month sales cycle.
This yields the above stat – 46% greater ARR in two years. Things get even more powerful if you project out further. Acquiring more customers in year one means investing more in year two, which allows investing more in year three, and so on.
All of this is multiplied if you have healthy upsells. The model defaults to 110% net revenue retention (NRR), but if your NRR rates are closer to industry leaders like Datadog (143%) or Twilio (155%), the benefits of shorter sales cycles are even larger.
There’s another factor that plays a big role as you model longer periods of time: Faster sales cycles protect you from cutting investments in growth when runway is limited.
In our model, as cash is burned and the overhead account is down to three months of runway, the team pulls cash from the acquisition budget. This is what causes the lumpiness starting around the 16th month in the chart above. It doesn’t move the needle much in years one and two but plays a much larger role in years three and beyond. In the three-month sales cycles scenario, there’s a brief pause in customer acquisition spending, but with a four-month sales cycle, the pause is 60% longer.
This last chart shows what happens when we extend the model out to three years and adds a two-month sales cycle. The gap gets huge.
You can make a copy of the model and modify the assumptions to match your business here.
Standard Contracts Accelerate Sales Cycles
At my last company, Stitch, our sales cycle was between three and four months long. 25 – 50% of that time was spent on contracting. The biggest lever we had for speeding up contracting was increasing the proportion of deals on our contract template rather than on our customer’s.
Common Paper users have found that using standard agreements allows them to reduce the proportion of deals on customer paper by 48%. If you’d like to use standard contracts to accelerate your sales cycles, try Common Paper for free.