Last updated 09 April, 2021.
“Stop selling tomorrow’s churn”.
This is one of the many golden pieces of advice we received from Derek O’Carroll in our latest Growth Hub Podcast.
Derek is CEO of Brightpearl, a retail management software company. In this episode, Derek shares how he and his teams went from near failure to +40% year on year growth and +15M ARR.
You’ll learn how Derek was instrumental in:
- Shifting the mindset of the entire company from losing to winning again.
- Redefining the Product Market Fit.
- Taking actions to reduce churn from 28 to 8%.
- Moving the HQ from San Francisco to Austin.
Derek also explains why failing early is important and how he learned to build a winning team from early failures.
This episode is definitely an invaluable listen for anyone working in a growing—or struggling·—SaaS company.
Escaping the Build Trap, by Melissa Perri
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Transcript of the episode
Edward: Joining us today on the show is Derek O'Carroll, CEO of Brightpearl. And today, we're talking about their incredible turnaround story from near failure to over 40% year on year growth. When Derek took over as CEO of Brightpearl about five years ago, he described the company as a distressed asset. It was burning cash, had very high churn and a culture where talented people were rowing in different directions. Fast forward to today, and Brightpearl is growing rapidly, and Derek has masterminded a successful SaaS turnaround story. Derek opens up about the three-pronged strategy he developed that was built around realigning product-market fit, growing ACV, and building a talented team where the right people are in the right place.
Edward: He talks about the impact the strategy has had and how they solve their big churn problem, reducing it from 28% to 8%. There's all this and a whole lot more, so here we go with Episode 67 of The Growth Hub podcast with Derek O'Carroll, CEO at Brightpearl.
Edward: Welcome to another episode of The Growth Hub podcast. And it's my pleasure to welcome Derek O'Carroll to the show, who is CEO at Brightpearl. So Derek, thank you so much for joining us today here on The Growth Hub podcast.
Derek: Thank you, Edward. It's a pleasure to be with you.
Edward: Yes. I am really looking forward to this episode as we're digging into your pretty incredible four-year turnaround story at Brightpearl. And I thought to kick things off before we jump into the actual turnaround; let’s get a feel for how things were back then. So, what was the situation like when you stepped in as CEO all those years ago?
Derek: I would characterise it almost like a distressed asset in terms of the financial performance of the business was very, very poor. It was burning cash, it had very high churn, it had a culture which essentially was characterised by very talented people, but all pulling in different directions. And it had a very poor product-market fit, was characterised by very poor churn, which was obviously causing major issues. So it wasn't a healthy business in any shape or form in terms of its financial performance.
Edward: Yeah, so I think almost everything you don't want as a SaaS CEO. So why did you want to take on that challenge of managing this turnaround?
Derek: Well, my background was startups in the 90s on my own, and then with colleagues from the US, and we sold the last one into a large company called Symantec. And I had my first daughter that year, and my wife asked me not to do more startups for a while. And I thought I wouldn't last long in a big company, but in actual fact, I ended up being the landing and launchpad for their acquisitions, running their security practice. I ended up being seconded out to Germany to be based in Munich to do a bit of a turnaround there. And then I ended up part of the team who took Norton Antivirus from CDs into the online sort of cloud delivery model that is now called SaaS. And at the end of the ten year period, I said to my wife, "Really want to get back into the cotton thrusts of the real world and go and apply the learnings over the last 20 years into a team and into a market that is undergoing disruption".
Derek: And I went out researching the market. I looked at telephony, I looked at present-based technologies. I looked at e-commerce, and my criteria were pretty simple. I didn't want to do a startup like blank sheet of paper, build product from scratch. I wanted to go into something that potentially had a high bar to entry for others. In other words, it was complex. It was B2B. It was in a sector that was right for disruption, which was obviously e-commerce. And it was looking for something that would get benefit from my skills around the go-to-market side of the house, in particular things like product-market fit and a maniacal focus on getting the unit economics right.
Derek: And I basically then messaged the guys at Notion, which are a very popular and successful SaaS specialist investor here in the UK. I called Chris Tottman there, a great guy and we got chatting, and he said, "Hey, you should have a look at Brightpearl. I think it fits your profile". And they were looking for a CEO and went through the process. And I decided that it fitted my criteria. And I joined in May, agreed in April 2016, and my first day was May 2016.
Edward: That's incredible. And I think also fantastic that you were around when SaaS first came along, and there was that move from CDs and hardware to pure software. So for sure, a lot of things you could have brought to the table back then, and I know that one of the first things you did after becoming CEO was interview a lot of people. So employees, partners, customers, to kind of figure out what some of the real challenges were. So what did you find from those interviews? And could you identify say, the three biggest challenges?
Derek: Yeah. So I'm a strong believer in trying to get to the nub of the issue. And when you have a complex offering, like Brightpearl's capable software stack, it's very important for me to get to a point of simplicity where I can easily map the products, benefits, and features to essentially jobs of work that a customer would hire us to perform on their behalf. And once they hire us to do that particular job of work, we've got to be capable, we've got to be available, and we've got to add value to that customer in terms of some form of save time. So that's why I always, whenever I've been involved in companies, I go straight to the source and I created a bunch of questions, and I spent, I think it was about 90 days, I spent just talking to the staff, the customers and the employees.
Derek: And what I learned out of that was number one; there were multiple proof points that highlighted one simple fact was the product-market fit of the company was wrong. And when you have a solution, which is extremely capable, pointed at a customer set, that in those days was small online retailers, who are time-poor, you are never able to create a value proposition to a client that never has the time to understand the true scope of what you're offering them. And that was problem number one. The product-market fit was wrong. They were selling a very complex product, which was super capable into a small customer base that never had the time of day to understand the value of the product. So that was problem number one.
Derek: The second problem was the belief of the team in themselves. So when talking to the teams, they didn't believe that their product was suitable for any market. They thought that customers were churning high, they didn't like it. And so there was a real belief problem within the team. And when I actually started talking to them about the concept of selling to bigger customers into a customer base that would appreciate the value of the product, that was the second problem. I got to bring the whole team along with me.
Derek: And then, the third problem was capability mapping of the team. And what I mean by that is we had a team and team structure, which ensured that no one was able to participate toward a coalition of effort to go after a common goal because of the way the company was structured, where it was positioned, and how they were building software. So they were the three main areas of issue. And then the fourth one was obviously they were burning a lot of cash, which was causing problems with their investors. And their runway of cash was very, very, very, very small. So I had to fix that issue as well, but they were the three things.
Edward: Yeah. That's great to hear more about the challenges. So these were the bigger challenges that you identified. And from there, you built a strategy around three key points, which were realigning product-market fits, growing ACV, and then getting the right people in the right roles. So let's go through your strategy and go through these points one at a time. And let's start with the first one. So how did you actually go about realigning product-market fit?
Derek: So, as I said earlier, the interviews were the first part of that in terms of me validating what I thought was the case that we were selling to the wrong market, but then I needed to go and validate that for the investors. So I actually contracted with a firm called The Alexander Group that I'd done some work with in the past. They were based at the time in San Francisco. And I asked them to go and interview the customers, using the jobs of work descriptions that I'd created and interview the customers that I would like to sell to. So they weren't my customers today. They were the customers I would like to sell to. And I asked them to score us in terms of the perceived value that we would offer those customers for different areas of the product against the leader in the market, which at that point was a company called NetSuite.
Derek: And that exercise basically was almost like a blind tasting. The companies that they interviewed didn't know who we were, but they could easily understand the jobs of work that we would be hired for, and they would score them in terms of the value that they would get from that. And that resulted in a report, which basically said actually the Brightpearl offering is comparable to NetSuites. It is also capable of serving much larger customers because that was the key area that the team hadn't really realised, they didn't realise that they had very large customers using the Brightpearl platform. I remember one, in particular, was turning over 200 million a year. They're now a global brand, but they were being charged by Brightpearl about $2500 per year for the use of the whole system, right.
Derek: So that was the other key important point is that the products through that analysis was capable of supporting larger customers. So the validation point was there, as well as the opportunity point was there. And that was reinforced by a third party through that study. And it took about four to five months to get all of that information together and then present that back to the team. And they were all very surprised. And then the board were sort of delighted, and then the key metric for us back then was what was the percentage of our annual recurring revenue that we were getting from our customers as it pertains to their GMV, their gross merchandising volume. So their turnover. And back then, we were taking a very, very small amount relative to the size of business we were processing. If that makes sense. Hopefully, it does.
Edward: Yeah, absolutely. I think that was super valuable research and a great segue into the next point, which was addressing the pricing strategy. And one of your key goals was growing average deal size, and you spoke there about large businesses paying you about $2000 per year. So how did you then go on and convince customers and other people to actually pay more for your product?
Derek: Okay. So there were two parts to this. One was when you decide to compete with a larger company, you have to recognise the fact that once they see you on the competitive map, they will do everything to outgun you from an R&D perspective because they can throw a lot more dollars at the problem than you can. So it's important the approach that we took was through the interviews with the customers, we identified areas that the customers really didn't like, that we're not so much associated with the product, but more about the business model. And one of those issues was identified as being pricing. Customers told us, these were the customers that we wanted to sell to, by the way, that they didn't like the pricing structure in the market, whereby they'd sign up to a service, and then they'd guess essentially surprise bills as they tried to get a new feature built, or they asked for scripts to be built on top of the platform.
Derek: So there was a very big problem with transparency of pricing, and customers didn't like that. So we said, okay, as we go to market, we're going to have an extremely transparent based pricing model, which obviously is utility-based pricing today, as your listeners probably understand. And then in our market, there's a trend of automation. So a lot of SaaS companies of old have charged on a per-user basis, login basis. But for our system, one of the key parts of it then and now that we've really invested in is automation. And obviously, if a system is automating processes, there's going to be less people logging into it to check orders. And so that was the other key driver for us moving to utility-based pricing. And then the problem was, well, what's the optimum price point that you go to market with to ensure you drag along your customers and they see the value?
Derek: And we did some research in the market, a very good company in the States called ProfitWell, Patrick Campbell and crew, they do a great job of helping people break down pricing strategies, but in the main, it sort of boils down to a couple of key areas to look at. One is the cost of service, which is sort of a no brainer, how much does it cost to deliver the service? What's your margin on that? So that's one feed, and then what's the perceived value through interviewing customers of that service. And then what's the cost of the alternative, which is the competitive pricing. And by looking at those three points, you're then able to triangulate what you believe should be your optimum pricing point. And then you plug that into a utility model so that your smaller customers pay less when they joined the platform, but as they grow, they pay more, but they pay less per unit processed.
Derek: In other words, you can't be a tax on growth. You have to have a model where, as your customers grow, you're giving them more features and capability, but you're not perceived as a tax on growth, if that makes sense. And so that was the research phase of the pricing, which gave us the model. And then we had to do the contractual side of things, which I would say to anyone who's looking at changing pricing, don't underestimate how long it takes, because a company of the age I had inherited, there was a lot of deals that were done in the past where people had been committed or signed up to four or five years of committed pricing or caps on price increases. So there's a lot of noise, historical noise that we had to work through and put everyone on standardised contract where it was very clear that everyone was on utility pricing. I think it took me about three years to get 100% coverage on all customers and get rid of all of the non-standard deals that were done in the past if that makes sense.
Edward: Oh yeah, absolutely. And we're definitely seeing a move towards utility-based pricing in SaaS. So it's great to hear how you made that change and grew ACV. And then I guess we can move to the third piece, and that was about the team and making sure the right people were in place to move the business forward, which again is another pretty big challenge. So how did you actually make that happen?
Derek: Well, you've got to get people on board with the mission, but it had to be bottoms up. So when we did the discovery phase in the first 90 days, when we spoke to all of the employees, and I spoke to them all, I asked them questions like: how did decisions get made around you? How's your voice represented? Where do you spend your time? What are the feedback loops with other departments that you view are important to your success? Questions like that. And what came out of that was a list of barriers that the team told me really pissed off and slowed them down in terms of them moving forward and getting value in their working life. And we took an approach where we rolled those barriers up. We called them fitness projects, and we educated the team on a core principle, which is in today's world, anyone can copy our product.
Derek: So the number one differentiator is actually the organisation and how the organisation works together. And we got them educated on that core tenant. And then we rolled out these projects, 34 projects there was at the time, covering a whole bunch of aspects in all parts of the business. And we asked the team to volunteer outside of normal hours, to volunteer to those projects and then take a role of either being a driver or being a contributor or an approver. And by doing that, we allowed teams to have access to the problem. And then they were part of the solution. But also because it was managed in terms of planning and outcomes over a 24 month period, because obviously these things take time, we very quickly got to see the capabilities of the team relative to their roles and who was a good fit for what we were trying to do and who wasn't.
Derek: There's that old saying when the tide goes out, you see who's swimming naked, and essentially that platform approach and the continuous improvement project approach with an eye on fitness, organisational fitness, got us to... People left because they felt “this is too much for me”; the pace at which we expected everyone to work really shot up, and people left. And then we came to agreements where people who were not right for roles moved to other roles. So we had a lot of career movements within it. And then we went out and hired a set of new people to join the business. And I'd say one key area that was the US market. When I joined, the US was a small part of our business, but I wanted that to become a major part of our business, but our office was in San Francisco, downtown, Market Street in San Francisco. It was very expensive. And everyone in the office, their skillset was really focused at the old customer base. And I needed a team that had experience to sell to bigger customers.
Derek :And so we took the decision to close the San Francisco office in the first year. And we restarted the business in Austin, Texas, in 2017. And that was a pretty abrupt thing to do, but the team bought into it. They understood the logic, and it resulted in a whole bunch of benefits to the team and to the business. And today, we have a highly performance engaged team, and the culture is one of transparency and accountability, but it's their culture, I'll just help create it, but it's come from the team. And the values that we operate on has come from the team. And that's really, really important.
Edward: Yeah. That's great to hear. And I've also heard you speak about the importance of competing on culture. And I think finding the right talent obviously is super important for any SaaS company to grow, but it's not easy. And you spoke about building the team up in Austin, Texas in the States, as well as here in the UK, in Bristol. So in terms of recruiting people, how do you actually go about hiring great people to join the Brightpearl team and make sure that they are that perfect culture fit?
Derek: Well, it's the number one challenge. It's the hardest thing to do, I think, as a CEO. So it's not easy, there's no silver bullet, but I think the concept of tenacity with regard to holding out for the right founding member for me is the key thing. So what I mean by that is top talent attracts more top talent. But if you're in a situation where your company is more about vision and less about performance, you obviously can't attract top talent easily. You have to sell them on the vision, and you have to convince them that you've got the chops and the skills and the board of the chops and the skills to see it through. And with that sort of maniacal focus, you have to take your time on the founding, do not rush your foundational team. Because if you get that wrong, you will attract mediocrity thereafter.
Derek: You have to get the founding team right. And if it means that you fail fast, which is a principle I would encourage, you should do that. And that's what we did. So our first round of hires in the States was an absolute disaster. I would say that. But we understood quickly we got it wrong, and we got it wrong for a number of reasons. We failed fast and we changed really quickly. And we went to the board, and I apologised, got the mea culpage, but reinforced the need that I just knew that we'd made a mistake. We needed to stop it and start again. And we didn't get it all wrong, but I'm just talking about key roles we got wrong in the States.
Derek: And that approach and that openness to fail fast allowed us to ultimately secure an amazing foundational team. And once you have that foundational team in, they attract other A-players, and that's what's happened. And that's why now today, the US is over 60% of my business and is the fastest-growing part of my business. And that's fantastic, but it took me about a year and a half to get the whole team set up. And now we're off at the races, and the team are excellent, and they're all having fun, winning and evolving their careers as the company grows, which is our number one job to do on their behalfs.
Edward: Absolutely. That's fantastic to hear. And I think one final thing I would like to ask you about your challenges is churn. You spoke earlier at the beginning of the episode; that churn was a big problem when you took over. So how did you actually solve the churn problem as that's, I think, one of the fastest ways to drive your SaaS business into the ground.
Derek: Yeah, it is. It is. So there's no silver bullet as your listeners will know, to solving churn. It's a multifaceted problem, but we broke down the journey of a customer from beginning to end on the platform over a life cycle of seven years. And we basically focused on building up the data set to really understand why we were losing customers at each stage in the journey, right? And there was a couple of key things that I would share with your listeners that really helped us turn the dial. The first one is to ensure that you map the product's capability to the target market that you're going after with an eye on optimising the fit. In other words, don't fall into the trap of trying to sell to customers that maybe you should be selling to in two years time. Avoid a situation where salespeople are selling tomorrow's churn at the outset.
Derek: And that means be maniacal on focusing on who are the ideal customer profile, get quantified about it, really focus on the metrics, and then build playbooks which are training playbooks into the sales teams on how to sell, how to sell value, but also when to know to walk away. Because that was the number one driver of the improvement in churn, was stopping selling tomorrow's churn. And so, for example, we sell to retailers now from no less than 1 million up to 250 million. When I joined, the sales team would be quite happy taking a customer on who was $500,000 in turnover, and they'd sell them for $4,000 or something like that. But obviously that's a huge source of churn because the bankruptcy levels in that size of business, they're very, very high, and the product-market fit wasn't right, back to my earlier point.
Derek: So we stopped that. We said no one's allowed to sell to any customer that doesn't have more than a million dollars in turnover and has been in business for more than two years. And then we also put a cap on the size of customer they could sell to. So in year one, we said, you're not allowed to sell more than a customer turning over 30 million for year one because we knew we had some product issues that had been identified in the discovery around scale. We knew that when you got to a certain size, the product would slow down and piss people off, piss customers off. So we said, don't sell to those customers until we fix those problems. So in year one, we didn't allow anyone to sell bigger than 30 million. Now we sell up to 250 million cause we've removed those barriers, but controlling who you sell to and avoiding churn is the key thing to start the journey on improving churn. So that was point number one.
Derek: And then the second one is to recognise that the risk of churn appears if you're in B2B in the first year. So a maniacal focus on adoption and investing in customer success so that you have a very tight playbook from when the contract is signed, and the customer goes through the onboarding process. That has to be extremely well laid out. It has to be very tight in terms of the contracts that you use to ensure the customer knows what they're getting and that you manage their expectations at a contract level so that they don't try and ask you for more, that actually you didn't deliver because it's a cloud platform and it's not customisable, it's configurable.
Derek: And then the final point is, keep an eye on past value delivery. So when you've got a customer up and running, and they've been deployed, look at your organisational structure and make sure you're investing in the first year and subsequent years to roll out value-added services that, for example, do a health check on a customer, a serious health check using data that you have, that they don't, and give them information that allows them to see where they could be more efficient, how they could improve their shipping time, or their invoicing time, or their forecasting to make better use of cash being tied up in inventory. So on and so forth.
Derek: So don't underestimate the importance of post-contract adoption services and customer success agents who are focused on one key metric, which would be dollar retained revenue, which is the measure of how much your customers buy in subsequent years once they're deployed. And when you look at the economics of that investment, you'll get much, much more bang for your buck in the retention side of the house by investing in that area because obviously investing in new businesses is expensive, but obviously very, very necessary. So I'd say those three things you should target on if you want to get churn down, that's what we did. And it's worked to where our churn now is below 8%. And when I joined it was 28%.
Edward: Wow. That is quite the drop. And I think those were some really good points. And I think it takes a lot of discipline to focus on selling to a certain segment and not sell below or even above a certain size. So I think great, you were able to implement that. And I think one other thing I'd like to ask is that you raised from a company called Sage a few months back. So why did you decide to take on funding?
Derek: Well, so we got to the point where the unit economics, the SaaS metrics, were all green, and we're clipping along at a very good growth, 35 to 40% growth. And we got to the point where we weren't burning any money, right? So we were cashflow positive, which is a great thing to get to, but you're in a market that's extremely hot, right? There's a lot of growth occurring in our market, and we're really well-positioned. So we run the risk of winning the battle and losing the war by not investing heavily enough in the business at a period of growth. So we decided last year, let's go win the war. Let's not just be in a position where we win the battle, and winning the battle, by the way, was staying organically growth orientated, and using our profits to invest in the company.
Derek: In other words, not burning any investment cash anymore, but that has its issues with regard to growth. So we decided to go out to market and look for fundraising to accelerate growth, both in the product, go to market expansion in known areas of return, and then obviously looking at inorganic opportunities as well through acquisitions. And we looked at the sort of private equity, growth equity type of providers of cash out there. And then, we also looked at a couple of strategics, and it got to the point where there was a lot of synergy by us choosing Sage over the private equity people. In particular, access to the technology that they've got, not only in Sage, excuse me, but also in Sage Intacct, which is a cloud-based accounting ERP solution they purchased a number of years ago.
Derek: So it would give us access to tech, give us access to distribution. We really liked the team at Sage. We felt that these guys we could work with, which was a key point in terms of cultural fit, and it's a minority investment. So we still have control over our objective to become a category leader. So that's why we chose Sage. We raised $33 million, but we're investing about a third of that in the business, a third of it into acquisitions and a third of it will always be there for a rainy day. And that's how we're going to build value over time.
Edward: Yeah. That makes a lot of sense. And you spoke there about going on to win the war. So a final question, what's next for you, and where are you going to focus from here?
Derek: Well, so our number one area of focus is, we spent so much time getting the product-market fit done and getting the unit economics into a place where we know if we put a dollar in, we know what we're going to get back, and that's what all SaaS leaders are after. So now we're going to expand. So it's a focus on discipline execution, on executing the playbooks that we've got and each department to expand the business and get to 50 million ARR by 2023, which is a sustainable growth profile of about 40%, our growth every year up to 2023. And in doing so, become what we believe we're well-positioned to be, which is the number one digital operating platform for retail. And when I say retail, I do include wholesalers as well. And that's very much our goal. And to work with our strategic partners like Shopify, we do a lot of work with Shopify.
Derek: They are obviously one of the leaders on the sort of front of house, so to speak, the e-commerce platform, we plug in nicely and handle everything after the buy button for Omnichannel plays. And that will be a big area of focus for us. I mentioned earlier on automation; it’s interesting about automation because consumers out there who buy stuff online when it goes wrong, and you track that back to, well, why did that order get screwed up. You usually find that it was human error.
Derek: So by rolling out more automation and removing the number of times a customer or sorry, an employee touches an order, if you're a merchant, the better chance you have of getting better positive reviews and return business. So automation is a big, big area of focus for us. And then obviously with the partnership with Sage, our customers are... We sell to very large customers now, global brands doing direct consumer plays and manufacturers doing direct, direct consumer plays. So, therefore, we need to be able to offer multi-company accounting, which is what we're working on with our partners, particularly the recent deal that we did with Sage. We'll be announcing some cool stuff the middle of the year.
Edward: Awesome. Sounds good. Quite the climber, I think e-commerce is definitely a good space to be in right now. So yeah, I think this was super good, and we can actually move to our closing questions and our fast five challenge. So Derek, to wrap things up, I will ask you five questions, and all you need to do is answer as quickly as possible. So are you ready?
Derek: I hope so.
Edward: All right. Let's give it a shot. So the first question, what's the one book you would recommend others to read?
Derek: Avoid the Build Trap by Melissa Perri.
Edward: Nice. Second question. SaaS company you love and why.
Derek: Have to say Shopify because the amazing culture, amazing product growth is off the charts, and they're a key partner of ours.
Edward: Yeah, their story is phenomenal. That's for sure. Third question. Favourite place to learn about marketing online.
Derek: Oh, I have to say, I know it's very bland, but I just use Google all the time. I know that's not the answer you want, but I just have questions all the time, and I go straight to Google, and I just go from there. There's no particular marketing resource. I look at my own team as well. I've got an amazing marketing team, but yeah. Sorry, Google on my team.
Edward: Oh, that's a good answer. And just goes to show the importance of SEO, so great to hear. Fourth question, most important growth metric?
Derek: Well, for me, it's definitely lifetime value, customer lifetime value.
Edward: Perfect. And then fifth and final question. Best piece of advice for fellow SaaS CEOs.
Derek: Don't underestimate the importance of managing expectations with the board, don't overshoot and be conservative in your plans. And beat them.
Edward: Nice. Awesome. Well, Derek, I have to say this was absolutely awesome. And thank you so much for coming on The Growth Hub podcast.
Derek: No worries. It's been a delight. Thank you very much.