The How SaaS Works series simplifies the complex world of software-as-a-service (SaaS) into the practical fundamentals for anyone involved in SaaS. These are the real-world lessons learned from founding a SaaS company from ground zero to growing it all the way to acquisition as well as case studies from other SaaS companies who have both succeeded and failed.

Introduction to Lead Qualification

You can tell your three-year-old son not to throw that toy at his sister … he will anyway. You can preach to first-time founders not to take bad investor money … they will still succumb to their near-term desperation. You can beg inexperienced sales people not to chase bad leads … they just won’t be able to resist the temptation.

Lead qualification is all about efficiency. There are only so many resources at your disposal (people, man-hours, etc.). You cannot afford to be inefficient by chasing bad leads. That is exhausting, demoralizing, and unsustainable.

Organizations that are great at lead qualification attract the best deal closers and grow revenue faster than organizations that marginalize the importance of qualifying leads before advancing them in the sales funnel.

Let’s go through the basic definitions then some interesting case studies.

What is a Qualified Lead?

A qualified lead is simply a lead that has been vetted to some degree and is ready to be advanced in your sales funnel. There is no universally accepted, formal definition of what is required to go from lead to “qualified” lead. Different companies have different criteria for advancing leads to qualified.

Examples of lead qualifiers used by SaaS companies:

• Someone who has expressed an interest in your product — This may sound obvious, but even the best lead generation techniques end up with leads that simply aren’t in the market for your product category.
• Decision maker — Does a lead have the power to make the final purchasing decision?
• Target market segment — Does a lead work for a company in your target market (e.g. SMB)? Does a lead have a job title in your target customer segment (e.g. chief custodial engineer)? Does a lead live in a country you sell to (e.g. North Korea)?
• Product interaction — Has a lead signed up for a trial of your service? Has a lead demonstrated high active use of your service?
• Marketing interaction — Has a lead repeatedly visited your website? Has a lead downloaded an ebook on your product?
• Pre-screened interviews — Has a lead talked with someone in your company and passed a set of criteria the sales team set?

MQL vs. SQL

Lead qualification itself can be broken down into its own funnel, specifically marketing qualified leads (MQLs) and sales qualified leads (SQLs).

A MQL is a lead that the marketing team has deemed more likely to advance in the sales funnel than other leads. This determination is typically based on that lead’s interaction with marketing materials such as the website, landing pages, content, etc.

A SQL is a lead that the sales team has vetted to determine they meet their sales criteria. This determination is often made by discovering certain characteristics of the lead such as job title, market segment, willingness to pay, etc. SQLs get promoted to the sales team.

The fact that there exists terms such as MQL and SQL means your marketing team and sales team cannot be siloed and still be efficient. Many SaaS companies implement a lead scoring system to help prioritize leads for the sales team. The criteria and tweaking of that scoring over time requires a tight interaction between marketing and sales.

Case Study: Fitbit Wasn’t a Good Fit

In a previous post, I talked about how we (Initial State) hit content marketing gold with a smart beer fridge tutorial. One of our subsequent content marketing efforts did not go quite as well and ended up more like fool’s gold.

On August 5, 2016, we released a tutorial on how to connect your Fitbit data to Initial State to create a dashboard that displays all of your historical activity data on a single screen. This was something you just could not get from your Fitbit app at the time. We thought it was a pretty good idea and so did LifeHacker, who picked it up as a featured article.

LifeHacker gets between 500K and 1M unique visitors per day. Getting on LifeHacker is a really big deal with lots of exposure. Premature champagne toasting commenced.

LifeHacker’s coverage gave us a really nice spike in user trial sign-ups, 451 in three days. This was big for us at the time, representing a 7x increase compared to the previous month’s three day span.

We considered a trial sign-up to be a qualified lead in our business model. These were the leads we nurtured and followed up with to convert into paid subscribers of our service. So far, so good. We had just stuffed our funnel and were ready to see those leads turn into ARR (annual recurring revenue).

Punchline: we converted one. Only one #@&!’ing qualified lead out of all of those hundreds of leads converted to paid.

Why did this fail? Our service was built for engineers and DIYers. Our tutorial attracted a bunch of non-engineers and non-DIYers. Our on-boarding experience, UI, UX, and documentation was a terrible fit for a non-engineer/non-DIYer. We ended up just pissing off a lot of people who really wanted an awesome fitness dashboard but had no desire to learn our tools.

We inadvertently put junk leads in our sales funnel and got junk out. The biggest lesson we learned was how coupled our lead generation strategy (content marketing) was to our lead qualification and sales strategy.

side note: There was clearly a market for an awesome, single fitness dashboard for Fitbit data. We contacted Fitbit who politely told us to go away.

Case Study: Missed the Target Mark(et)

A long time ago, in a galaxy far far away, we (Initial State) created a product prototype to go after a very specific market vertical. Our investors enlisted the help of an outside consultant to figure out if they wanted to invest in this particular product and take it to market. We will call this consultant Bob to protect their identity.

We did quite a bit of research to determine pain points and target market segments. The data from these conversations painted a clear target market picture for this particular product — small to medium sized businesses. There was clear resistance to this particular type of cloud-based product in larger companies, mainly due to IT governance.

With our investors’ eyes closely on this particular initiative, we were ready to roll out a Beta of our product. Bob decided the best way to determine a single “go” / “no-go” was to test the market with a set of leads and measure interest and actual Beta product usage. This certainly sounded reasonable.

Bob hands us 27 leads and says “go”. I look over this particular short list of leads and quickly realize that over half of these leads are Fortune 2000 companies. Very few leads appear to be decision makers. At the time, I just took this as a challenge and an opportunity to learn even though I was really uncomfortable drawing any strong conclusions from these particular leads. I thought a great product could overcome anything. Big mistake!!

Basic sales funnel theory (something I was not fluent in at the time) is going to tell you that of those 27 leads, let’s call them MQLs, about 15%-50% were going to convert to SQLs. 10%-30% of those SQLs were then going to convert to users. If I had applied that math, I would have calculated something like the following:

27 MQLs * 30% conversion to SQL * 15% conversion to paid = 1.2 users.

Even the math above was challenged because a lot of those 27 leads were clearly junk.

The end result of those 27 leads was exactly one lead who became an extremely active user and loved the product. If I had framed the experiment into the mathematical context above to our investors, we might have concluded this phase to be a success. Unfortunately, I did no such thing, which is why I am writing this so you do not repeat my mistakes.

Bob wanted to try one more thing before drawing a final conclusion. Bob wanted to travel and spend face-to-face time with a new lead (i.e. outside sales technique). Our previous 27 leads were all nurtured through remote communication (emails, phone calls, and remote demos).

Bob scheduled a visit with … a Fortune 50 company. What?!? I expressed my concern that this was absolutely not our target market. My objection did not matter, our investors’ eyes were now on this particular lead. The visit went exactly as I thought it would — not a good fit b/c of IT governance. Complete waste of time and energy.

Bob concluded to our investors that “this isn’t a compelling enough product” to continue because we had 26 of 27 leads that failed to close via inside sales and one lead that failed to close via outside sales. Product initiative killed by our investors.

This was extremely poor SaaS business analysis. I should have known better to let anyone draw that type of conclusion from that data. We needed more data (leads) and better lead qualification. The data we had suggested we were onto something, but we got completely derailed by a bad take on that data.

What I learned from this experience was that I had been so focused on the product that I failed to understand the impact of lead qualification on our process.

*side note: Bob is no longer around.

You are Screwed if You Don’t Qualify Leads Well

Your SaaS engine has to run efficiently, which is exactly what lead qualification does. If you fail to filter leads before advancing them in your funnel, your entire business is at risk of sputtering and failing. Things change too quickly in SaaS for silos to exist between marketing, sales, and product. Do not take the lead qualification step for granted! It takes careful thought and execution to get right.

Up Next … SaaS Sales Models (coming soon!)