How we built our first operating model

I just got out of recording an episode on The Revenue Formula podcast about how we first built an operating model, and I wanted to share it with you. We’re not releasing the episode for a couple of weeks, but you can check it out early here.

For those who want more tactical advice on how to start the operating model yourself, I wanted to go into more detail and fill you in on how it came about.

The original model came out of a crisis. We weren’t hitting plan, and AEs were underperforming.

What did we think was the solution? Focus on AEs because that’s what most other people are doing as well.

Guess what happened? It didn’t work.

Despite all our work, the AEs couldn’t hit quota. What took us a little bit too long to realize was that they simply didn’t have enough opportunities. If we can’t feed them, they can’t be successful.

The question became, ok so how many opportunities do we have, and how many do we need?

Next, how did they convert? For how much money? And how long did it take?

We ended up with a way of modeling revenue with this formula:

Number of Opps x CVR x ACV x Time (Sales cycle) = Revenue

This was kind of easy.

As a next step, we needed to cut down a ton of costs. But how to do that without also cutting your revenue?

The rationale went: well, if it’s all about opportunities, then shouldn’t we pay roughly the same per opportunity? Regardless of whether it came from outbound, marketing or self-prospecting?

What we found was the SDR opps were much cheaper, and the channel was super scalable (we later also realized they performed a bit poorer compared to inbounds, but it worked regardless … hehe).

So then we started to take money from marketing and put it into SDRs. That gave us X-many more opps.

Next, we looked at the AEs. How many Opps could one AE realistically work on?

We quickly realized that we had too many AEs. And we took those costs and again put them into SDRs.

At this point it became very confusing. Playing around with inputs and outputs, having the time delay (sales cycles) etc. You just couldn’t solve this on a whiteboard anymore.

So we built a model.

This next part is different for every business; we learned this as we built Growblocks and serving our customers. But the model of this story was split according to inbound & outbound and the regions.

So we looked at monthly historic numbers on how many opps in Nordics for inbound and how many in that region for outbound. Same for the other regions.

We then used the conversion rates, sales cycles, and ACVs for each of those pairs and calculated when how many of those opps would become how much revenue.

And then we added more opps in the future based on how many SDRs we could hire.

We also had similar assumptions for marketing (We now know that those were really flawed).

We could now say how much money we would be able to close in the coming months, and we confidently could re-configure the revenue engine (yes this is a euphemism for letting go a bunch of people) to go down in costs (CAC) drastically but increase in revenue production.

Discussing those sweeping changes made up by a SalesOps Manager (me) and his side-kick (Olafur) with the CFO & CEO was surprisingly easy. Sure, we had a full-on crisis on our hands, but the rationale of the model was sound, and we had the numbers (historical data) to back it up.

We ended up growing A TON faster and much more predictable, and we were able to cut down CAC Payback from the high 20ies (that was a really big number back then) to the low teens.

In other words, we absolutely nailed it.

If you have any questions or just want to follow up, email me, and I’ll be happy to chat.