Recent news from CNBC reports that tech giants such as Google, Microsoft, Amazon, and other technology companies have laid off more than 70,000 employees in 2022. This is probably the highest since the dot-com bubble of the late 90s and it seems these layoffs are not slowing down. Last week, PayPal announced that it will be reducing 7% of its global workforce. Other technology companies like Pinterest, Splunk, and Salesforce also made similar declarations. Why? Because of high inflation, a slowing economy, high interest rates, shrinking growth rates, and the fears of a potential recession.
There is another implication of this negative economic outlook. Up until the pandemic, revenue growth was considered the number one driver for the valuation of technology companies. Cost was often overlooked in favor of high growth rates. But now, investors are demanding evidence of a sustainable business model and a path to generating positive cash flow. Let’s follow the traces of this in the latest investor day of Salesforce. One of the main themes of the event was “Profitable Growth at Scale”. In that regard, the company announced its plan to cut sales and marketing costs to 35% of its revenue in FY26, down from its current level of around 45%.
“Investors are demanding evidence of a sustainable business model and a path to generating positive cash flow.”
You might say “just 10%?” Well, then, I can ask you, “how are you going to achieve it without compromising the company’s growth and competitiveness?” Do you know what trade-offs are involved? For a traditional software company that makes, sells, and ships a product, the typical way to increase revenue is by hiring more salespeople. How can you cut sales and marketing costs while growing revenue? Given that each year sales numbers start at almost ground levels, you need some people who can smell the air, hunt new customers, negotiate with them, and close deals. How can we keep growing while reducing sales and marketing costs? I will explain how this can be achieved shortly, but first, let’s examine the new economic realities of technology companies.
Consumption Economies Redefined
The business models of technology companies are undergoing a significant change. In the past, these companies primarily sold products with perpetual licenses that were implemented over a long period of time, often with significant customization. However, we have entered an era of subscription or consumption-based as-a-Service models, where value is expected to be realized as quickly as possible. This shift is transforming what is sold, how it is sold, and how the customers are served. Let’s read it from the following graph.
Figure 1 Revenue Model of Technology Service Providers
The traditional software revenue model typically involved the sale of licenses to use software products. This model was often based on a one-time purchase model, where customers paid a large upfront fee for a perpetual license to use the software. Therefore, around 70% of the revenue was recognized at the very beginning. The software vendor would also provide support and maintenance services, which would be another source of revenue over years, though much less with respect to the license fee. This is (being) redefined.
Now, the customer pays much less upfront, not more than 10-20%, and indeed sometimes nothing at all. Rather than being profitable from the moment the product is delivered to the customer, technology companies might not realize profitability on a deal for months. They only get to bill the customer when the customer utilizes the product. But then, as the customer starts to get the intended benefit, they stick to the product. This provides a more predictable and stable stream of revenue. This also makes your (once neglected) post-sales activities more and more strategic and vital.
Ladies and gentlemen, please welcome the new kids on the block: Customer success managers, renew specialists, expand professionals, professional services and managed services managers, and also your partners! What is the implication of this? If you need to maximize the revenue potential of a customer, all the efforts of these different people should be coordinated. Whose responsibility is this? Is it Chief Sales Officer? Negative, ghost rider!
Introducing the Chief Revenue Officer
Chief Sales Officer’s main focus is hitting the booking targets. S/he leads the sales team, manages the sales pipeline, and tries to meet (or exceed) the sales quota. Hence, his/her main focus is short-term and the initial revenue to be generated from the customer. However, if the goal is to maximize the revenue potential of a customer across its lifecycle, you need a broader and long-term focus. And, here, the Chief Revenue Officer (CRO) enters the ball scene. The CRO is responsible for driving revenue growth and overseeing ALL revenue-generating activities within an organization. Salesforce defines it as follows:
A chief revenue officer is responsible for every process that generates revenue in an organization. CROs work to connect different revenue-related functions, from marketing to sales, customer success, pricing, and revenue operations (RevOps). They focus on improving sales performance, creating great product and pricing strategy, and delivering customer satisfaction (which becomes especially important in recurring revenue models like subscriptions).
Let’s elaborate a bit on this. If CRO is responsible for all revenue-generating activities, then s/he should craft a revenue strategy that aligns with the company’s business objectives. This involves conducting a market and competitor analysis, doing a SWOT to determine the company’s differentiators, identifying various revenue streams of the company, developing pricing strategies for each of them, and as a result, creating a plan to achieve the revenue goals. To do this, he needs a team, which I call the “revenue team”.
The revenue team is composed of a wide range of individuals from multiple disciplines, like sales, marketing, customer success, finance, partner management, and even the product team. The role of sales and marketing is obvious, I guess. The customer success team’s role is vital because they are the ones responsible for customer adoption. If customer personas understand the product, they like it more, they use it more, and as a result, they renew more.
In addition to that, a happy customer means, you can cross-sell and upsell much more easily. Therefore, the customer success team plays a critical role in driving revenue growth. Team members from finance backgrounds will be the ones crunching the numbers. Partner team members, or as some call them, channel managers will develop, onboard, and manage the partners, who are willing to sell or deliver the company’s products and services. Think of it like this: As a company, will you be able to expand and cost-effectively reach every single target market? That is when partners come into play.
And finally, the role of the product team: in the end, it is the product and the services bundled around it that generates the revenue. It is the product team that works on the product-market fit and evolves the product based on what they hear or observe from the customers. Therefore, they are the natural members of the revenue team.
All these may sound logical, but unfortunately, CRO and revenue team is not a common practice. Yet! My observation is that you can find that role in only around 15 to 20% of the technology companies. Just to name a few, Salesforce, Dropbox, Zoom, Fortinet, Slack, and Zuora are some companies that have CRO positions. Given that revenue growth is always a critical aspect of a technology company, it is common for the CRO to hold a key leadership position and report directly to the CEO. Indeed, in all these companies, CRO reports to the CEO.
I suppose the distinction between the role of a CRO and a CSO has become apparent by now. Still, I find it fruitful to provide the differences, as both have crucial roles in driving revenue growth but have distinct responsibilities. Below is a table that I use when I explain this concept to my clients:
The last row, i.e., the key lever of data and analytics, is utterly important. Indeed, I believe that it will be one of the main contributors to Salesforce’s 10% reduction. Therefore, I want to dig into it a bit.
The Role of Data and Analytics for a CRO
For CROs, data and analytics play a crucial role to drive revenue and make informed decisions. As an eagle without wings won’t be able to fly and hunt for food, a CRO without data and analytics is unable to make educated choices, identify new growth opportunities, or effectively drive growth. Here are some areas which may exemplify this thinking:
- Lead scoring: Based on the customer’s demographics (e.g., size, location, industry, employee count, etc.), engagement data, buying stage, and sales cycle length, CROs can grade and score the leads. This can help identify the likelihood of conversion, and accordingly direct teams to focus on the most promising leads.
- Determining customer lifetime value: Taking into account parameters like average purchase size, purchase frequency, tenure, and customer lifespan, CROs can estimate the customer lifetime value, and accordingly, focus their efforts on those who bring the greatest.
- Price optimization: By combining customer segment, competitor analysis, historical sales, and revenue data, CROs can estimate price elasticity and adjust the prices of products and services to maximize revenue and profitability.
- Spotting upsell and cross-sell opportunities: With customer profiling and segmentation, CROs can build predictive models to identify customers who are more likely to respond to additional products or services. This way, they can run more targeted campaigns and increase the revenue per customer.
- Churn propensity: By analyzing data from the system of records and combining it with the telemetry coming from the product, CROs can estimate the likelihood of customer cancellation, allowing them to take proactive measures to improve retention.
- Customer journey analysis: By analyzing data from sales, customer service tickets, satisfaction scores, product usage, and website behavior, CROs can gain insight into the customer experience and identify areas of pain and delight. This allows them to implement strategies to increase customer lifetime value and optimize their overall experience.
Think of CROs and data & analytics, like salt and pepper; they just belong together. The most successful CROs I have seen have sharp analytical skills and utilize data to uncover patterns, evaluate the effectiveness of their strategies, and always base their decisions on factual insights. Therefore, sorry if I have burst your bubble, but the role of CRO is clearly more science than art.
Does it sound difficult to achieve? Well, please remember the evolution of marketing function. Back in the day, marketing relied mostly on experience and gut feelings to make decisions. But now, with a sea of data and tech at their fingertips, can you imagine a marketing department that doesn’t leverage data and analytics? This shift has to happen, and it will. Is the transition to a data-driven business a cakewalk? Hell no. But with a solid strategy, a clear plan, strong leadership, proper training, and expert guidance, CROs can navigate the ship and reap the benefits. Trust me, the money spent on this transition will be a drop in the bucket compared to the huge rewards a top-performing function will bring.
A CRO can be likened to that of a conductor in an orchestra. Just as a conductor blending the different instruments and musicians to create a harmonious performance, the CRO brings together sales, marketing, partner management, renew specialists, and customer success teams to drive revenue growth and optimize business operations.
Continuing from the same analogy, the CRO must have a deep understanding of the different elements at play and be able to use that knowledge to lead the teams toward a shared objective. Just like a conductor uses his baton to control the tempo and dynamics of the performance, the CRO leverages data and analytics to make informed decisions and ensure the long-term success of the company.