“When you go B-2-B, it’s extremely important you start with the benchmarks. When looking at performance, you start with the best parts of sales and marketing to revenue and then you look at the mix of sales and marketing as percent of total sales and marketing and then you look at your performance versus benchmark, higher or lower, and then you begin to dig in and take the next step. The point is the benchmarks help you focus and tell you where to invest your time. Benchmarks help me get the best return in terms of understanding the business performance,” Eric Mersch, partner at FLG Partners, an outsourced CFO firm in Silicon Valley, and speaker on SaaS Conversations: Benchmarking Your Company – The Why and How
Benchmarking Your Company – The Why and How
Lauren Kelley: Welcome everybody. Thanks for joining us today. I’m thrilled today to have a great discussion partner benchmarking the how and why. Eric Mersch who is a very experienced CFO. He’s smart, he’s strategic and really glad to have him on the show today.
I’m going to introduce OPEXengine for anybody on the line who hasn’t heard about OPEXengine. We’re an independent SaaS benchmarking platform and community dedicated to enabling companies to be able to recognize their strengths and their weaknesses in order to improve their performance. And also the drivers of performance. We’ve been doing this for over a decade and we’ve benchmarked hundreds and hundreds of companies, all B2B software and SaaS companies. We just did an analysis recently, and something like 70% of the SaaS companies that have IPOed in the past decade benchmark with OPEXengine. And a lot of them after they went public. We have about 500 CFOs who depend on our data for the budgeting and planning process and the analytics that we’re delivering. So I’m excited to have today one of our benchmarking community CFOs, Eric Mersch. He’s terrific. He’s smart, he’s experienced in strategy,he knows SaaS and he’s been working with CEOs and boards to get the metrics right. So I’m really excited to have him on this Webinar to talk about how he uses benchmarks and some of the metrics. Over to you, Eric, I’d love to hear a little bit more about some of the companies you’re working with.
Eric Mersch: My name is Eric Mersch. I am a partner at FLG partners. We are a team of about 25 senior CFOs. We work interim and full time CFO jobs in silicon valley, focused on a variety of different practice areas. I focus exclusively on SaaS and within SaaS, mainly B2B enterprise companies. I’ve been using OPEXEngine for about two years now and I’m a big proponent and like to be very active in the community in terms of extending its reach.
Lauren Kelley: Thanks Eric. Really and definitely appreciate your support. What I wanted to ask is you’ve done work with a number of companies and when you go into a company as a new CFO, how do you get a handle on the status of the company, their performance and what data they have? What are the first things that you look at?
Eric Mersch: I come in with a really good understanding of the SaaS metrics and so I look for two things. I look first for the consistency of reporting and that’s both non-gaap top line measures like bookings, billings, annual recurring revenue. Then I look at the financial P&L in terms of reporting. And then I look at the SaaS metrics to make sure that they’re being reported correctly. And once I have good understanding of how it’s been reporting, then that allows me to dig in and use those metrics to understand the business performance.
Lauren Kelley: And how do you find most companies in terms of how able are they to dig into some of the key metrics, particularly SaaS company metrics like CAC and customer lifetime value. Is that something that you see as being as easy to get as an income statement and balance sheet, which obviously every company has or how do you find that?
Eric Mersch: Well, I think there’s a real challenge in this industry because even though SaaS is 20 years old, there is a real lack of standardization among the application of the metrics. You mentioned LTV to CAC and this is a really great example because I see a lot of issues with how this is calculated on the, mainly on the customer acquisition cost side. I see everything from the struggle to understand what customer acquisition costs apply to new customers, particularly in enterprise customers where, or at any company with a long sales cycle, there’s a real challenge in how you apply the sales to marketing expense to new customers to get the CAC and the way in which you do that can drive very unusual CAC number and leaves it open to sort of manipulation if you will. The second piece I would say is calculating lifetime value.
Especially in small companies, I see issues such as the churn may be really low. So you start selling a lot of business into a lot of businesses, but your product terms are long and they not have time to churn yet. So you have a really low churn rate. So then I’ll see lifetimes of 10 years. And so there’s no real understanding and there’s no standardization on how long a customer lifetime should be and using just the math. There’s a lot of subjective input as well. And those are two great examples using LTV to CAC for me, and it’s one of the areas where I go to try to understand how a company is reporting those and then provide guidance on the standardization. Of course, the benchmarking is what helps me and gives me credibility in providing that data as well as seeing a lot of companies. But benchmarking essentially allows you to experience hundreds of companies that are doing this calculation.
Lauren Kelley: I remember a couple of weeks ago we in the office were going back and forth with a CFO of a company on a couple of metrics. He was having trouble with his management team in terms of getting agreement on how that metric should be calculated. Just how it should be calculated was difficult, much less what it should be for the company. And by the end of it, he said he was really thankful and it was very helpful to have this community so that they could standardize it, then compare themselves against the benchmark. Whether they’re above or below. In this case they were below. But the original calculation of it, encouraged by the CEO, had put it way above the benchmark which stuck out to him because it was such an outlier, based on looking at the benchmarks.
It was something that just common sense said it couldn’t possibly really be that number. But that happens. Companies are made up of people and everyone comes to the table with a different perspective. And, that’s why we started OPEXEngine. I spent 25 years in the tech industry building up some fairly large businesses from smaller businesses and there’s a lot of judgment that goes into everything that you do. OPEXEngine is trying to provide a data-driven basis for companies to make their decisions by.
Eric, I think in the past you’ve told me about a couple of situations, and I know you have to be careful about how you talk about it, but where just looking at the data and using the benchmarking was helpful to get the CEO and the board to understand that some of the metrics for the company might not be ideal or where they should be. I don’t know if you want to add a little color to that.
Eric Mersch: Well, absolutely. And obviously won’t disclose any kind of details on clients, but what I’m really drawing from is an aggregate overview of my experience. There are lots of commonalities and the story you told is repeated a thousand fold throughout Silicon Valley. And a couple of examples I can think of it that pop up frequently when I evaluate Go-to-Market strategy, which is a very common project of my job I would be using OPEXEngine and the benchmarking data. I use a number of different sources. But using OPEXEngine’s data, I know how much sales and marketing expense companies should be spending at any given stage of its life cycle. So a $25 million ARR company shows that the sales and marketing spend should be about 60% to 70% of recognized revenue. And so when I go into a company and I look at that data, I will find that if it varies one way or another, then that gives me a real place to start looking.
And in one case in specific, I noticed that sales and marketing spend was almost equal to revenue. And as I started looking at the business, I could tell that the company was involved in a category creation play. This involves a lot of customer evangelism, a lot of account-based management, long sales cycle. And so there’s a reason, there was a true reason for a sales marketing expense being so high. But then I was able to provide valuable advice on how to define the financing strategy. So if you’re going into the category creation game, you need to spend more money on customer evangelism, customer marketing, customer education, and that requires a different financing strategy. And that’s one area. I think another area in terms of reporting, and this is a very common issue is how to define cost of revenue.
In SaaS, your cost of revenue is your hosting conductivity and customer support. I do think there, there’s a lot of confusion around the customer success function. And again, this is in every single customer. How many people in customer success are taking phone calls? The job of customer success of course, is to monitor the health of the customer, to touch base with the customer, build a relationship so that at renewal time they can sign the renewal and expand the company or extend the account. They are there to marshal R&D and product resources to address specific customer issues, specific customer errors and then they are able to, or they should be elevating Jira ticketsso that they can get the proper attention and finally taking the information they’re learning from the customer and the engagement of the product and feeding it to R&D. None of those activities are direct and all of those activities should reside in operating expense.
Another common example is a higher than average gross margin and, potentially due to there being very little customer success and having engineers take on customer success roles. So engineers working on the level one, level two and higher customer support, but their costs are in operating expense and it gives them abnormally high gross margin. Using benchmarking for any type of business model that you have, horizontal SaaS, vertical SaaS Enterprise, small, mid-market, business to consumer, direct to consumer, you should know or the data exists to tell you where you are, where your gross margin should be and you can use that to dial in very specifically to your gross margin.
Lauren Kelley: Those are a lot of specific examples that we hear over and over again. Customer success is always one of the biggest issues. We provide guidance on looking at customer successes comp plans and using the comp plan and how customer success people are paid to determine whether it’s an operating expense, whether they’re really tied to revenue, direct revenue, in which case, it’s an operating expense or if they’re more focused on customer support and customer engagement. Companies have different models. It’s not something that is black and white where Customer Success sits. Some companies have no renewal salespeople technically but all renewals are done by customer success. Some companies separate that. So it really depends and it makes it more complicated for people to figure that out.
When we were talking before, one of the other areas that you had mentioned that you have a lot of problems with is that companies define bookings, billings, and contracted ARR or contracted MRR differently and they technically should be pretty consistent from company to company. How would you define exactly what bookings are?
Eric Mersch: What I see as standard in SaaS are bookings, billings, ARR and CARR. Is that defined by date? So these are non-GAAP measures but they do relate to GAAP once you get into annual recurring revenue. But non-GAAP bookings that is typically defined on the date the contract was signed. So that forms your bookings date. The billings date is the date you send the invoice, it’s typically 80% of the invoice. So that can be same date as bookings or it can be the following quarter because your customer wants it once the contract to show up in a different quarter, in a different fiscal year. So there are reasons why bookings and billings can be separate. It could be related to professional services as well as the bookings date. Then there’s the billing date and then you have the annual recurring revenue date.
And the annual recurring revenue date is typically based upon the revenue recognition date. And as we all know in SaaS, the delivery component of the five revenue recognition criteria is the one that drives revenue recognition in SaaS. And so when you record revenue, then you can report your annual recurring revenue. That’s typically what I see in companies. It varies more in enterprise companies where I’ve spent a lot of my time because there are large time differences between those three, but it happens in all companies.
On contracted annual recurring revenue. CARR is designed to carve out the percent of your monthly annual recurring revenue that is under multiple period contracts. So if you sell a product and you offer monthly subscriptions and you offer an annual subscription and you report your total annual recurring revenue per month, and then some portion of that is contracted as annual recurring revenue, sometimes it’s called committed in recurring revenue. And so that piece is on some type of multiple plan, typically one year, one or more years. And then the final part is bookings, billings should always be based on annual contract value. And this is a standard among the industry for reporting, but it’s also important because the ACV forms the basis for sales commissions and not TCV.
Lauren Kelley: That’s where the integration in the sales systems to finance systems that are feeding your metrics can be tricky. And is important to get right up front. We had a SaaS finance meetup here in the Boston area, just focused on BizOps. One best practice talked about at one of our SaaS Finance Meet-UPs by one of the big successful SaaS companies here in the Boston area, is to make sure every year that they sit down and they define all these things and make sure all the systems in the company support those definitions. Whether it is to define that contract values are based on specific definitions in the CRM or billings are determined by the invoice date, just define it upfront and make sure the systems support the definition you’ve agreed upon.
The point of CARR is that it’s contracted and it’s recurring. Less often in bigger companies, but more often in smaller companies, where there’s a desire to make everything recurring, they may include all amounts in ARR. But if the initial contract includes set up and installation and some other things that are NOT recurring, don’t put in ARR. The reason people add the “C” in CARR is to emphasize that it has to be contracted, and recurring in the contract.
Getting back to best practices, make sure that your company is clear about what the definitions are and that is what’s important. And what we find with the benchmarking, a lot of it is just helping companies be clear about how they’re defining the metrics in order to get a clear picture, because then you can compare apples-to-apples. Going back to what you said before, the point of the benchmarking is not necessarily to toe the line right down the median or toe the line right at the top quartile for every metric. The point is to know where you stand in relationship to the benchmarks and make a conscious decision that, okay, we’re in an evangelizing the market first mover advantage model right now so we’re going to be way over on sales and marketing and then have a good CFO who can help you transition back down to a more normal target, close to the benchmark. That’s got be part of the plan.
I want to bring up customer acquisition costs because that’s always another area that’s tricky for companies to benchmark. On customer acquisition, one area that we have lots of discussions sometimes about is freemium and the cost of providing freemium. You have the web development, the hosting, the development of that, the marketing of it, and typically hosting is sitting in cost of goods or cost of revenue. How do you see companies handling that or have you worked with companies that have a freemium model?
Eric Mersch: I have only worked with one company on the freemium model, that’s my experience with that, but the knowledge of other companies that do it, there is freemium and the self-provisioning in the Go-to-Market strategy can be very powerful. Freemium or free trial can be very powerful and can usually keep your cost of customer acquisition costs down. You want to get down to a couple of dollars of customer acquisition costs where for an enterprise it might be $25,000, right? Or more. The issue with providing freemium and pretrial there is just the hosting and conductivity, which anymore it’s just diminimous, too small really can make an impact. But don’t forget all of the marketing expense that you need to drive people, a customer behavior or education or also drive action. You get beyond the freemium and the free trial. If you look at typical B2C companies or direct consumer companies, the split between sales and marketing is about 25% to 75%. And that’s the direct inverse of enterprise. And it’s because you can’t afford some person calling, making cold calls, trying to sell a, say $100 ACV product. But you have significant marketing spend and this is typically freemium and pretrial companies, it’s typically search engine optimization, search engine marketing could be forums, influenced marketing, and local events. Those are the typical marketing expense of that. Make sure that marketing spend is included into your freemium and pretrial CAC.
Lauren Kelley: I want to dig in a couple of specific areas. Obviously, like you said, go to market is one of the first areas that most CFOs dig into unless there’s an issue about the margin overall. And looking at sales and marketing expense, when you look at the benchmarks, it tells you whether you’re spending too much or too little. And if you look at your magic number, then you get a sense for your Sales and Marketing productivity – is it good, is it bad? If you look at your CAC payback period, things like that, you can get an initial view of a company of where their weaknesses and strengths might be. So how do you use that benchmark information to make changes at the company?
Eric Mersch: It’s important thinking about that through the use of benchmarks in your financial reporting and performance as well. And on the performance side I can give you some examples on the sales expenses and head count. There are a wide variety of company business models, and what I will say is as companies move into enterprise, the labor percent of in sales and marketing expense goes up exponentially and so it’s very important being able to track the head count and understand how to staff your direct sales force. When you go enterprise it’s extremely important you start with the benchmarks. When looking at performance, you start with the best parts of sales and marketing to revenue and then you look at this mix of sales and marketing as percent of total sales and marketing and then you look at your performance versus benchmark, higher or lower, and then you begin to dig in and then you take the next step down and say, okay, let me give an enterprise SaaS example, you look and you say, okay, how many direct salespeople do we have? Okay and what is their productivity? And you begin to use all of the sales metrics. What are your sales rep productivity? What is your days to close? What is your sales velocity? Is the time to ramp for a typical AE long enough or too short, how long do we give the AE’s to reach a hundred percent productivity before we take some action? And then you look at that and then you do the same into marketing expense. The point is the benchmarks help you focus your time and tell you where to invest your time. Benchmarks help me get the best return in terms of understanding the business performance.
Lauren Kelley: That’s a great way of putting it. I appreciate that because every company’s got a million things that should be worked on. Obviously people use benchmarks for the budgeting and planning process, but then a lot of our community members say, we could use it throughout the year when there’s a specific question or specific issue that the board or the CEO or the management teams identified. We need to work on our CAC. We need to work on retention. We need to work on X, Y, Z , and the people in finance have to work with the appropriate people in sales or in marketing and have a data-driven discussion about, we need to hire more salespeople, or maybe we need to have less expensive salespeople and more of them. And it’s hard to have those discussions just based on general ideas as compared to having very specific data comparisons.
Part of what we do here at OPEXEngine is that all of us in business tend to spend a lot of our time networking and talking to people, how do you do this, how do you do that, what’s your company doing in this? But it’s all kind of anecdotal. And then now, on the web, there’s a thousand blogs. There’s loads of information out there, but the point is that’s kind of time consuming and also a little bit hit or miss in terms of gathering that information. So that’s really what we spent a lot of time on doing here. There’s a couple of questions that just came in and one of them was about freemium strategies, which we had just talked about. Somebody saying, I haven’t seen a lot of recent SaaS businesses utilizing a freemium strategy, is that consistent with your observations? Actually, it’s funny that you say that because I was thinking that as we were talking about it. I think that’s true, particularly in the B2B space. It still exists obviously in with Spotify and B2C. But I think in the B2B space, and in particularly in the enterprise space it’s, you’re seeing less and less of this. Is that what you’re seeing, Eric? And, are you seeing investors in silicon valley promoting the idea of freemium?
Eric Mersch: I think it depends heavily on your business strategy. So when your ACV dropped below $10,000, maybe $7,000, it is very difficult to grow if you have a person in the loop. If you have somebody either fielding inbound calls, you forget outbound, but fielding inbound calls or handing out promotions at some local place you just have to take labor out of the equation and use marketing to drive people. But in those cases you really need to have a free trial and freemium. Maybe the question though is more related to more related to enterprise customers and companies and is there a freemium or pretrial in the enterprise? And I would say much less common. And the only time I’ve seen it done, and it’s not very often, but the only time I’ve seen it done is when a company is involved in some type of category creation. Wrike is a good example. It’s a work tool that people were using as a substitute for excel spreadsheets and Microsoft products. Basically free products that are free services that people are consuming. So there is having a free trial or a freemium makes a lot of sense if you’re trying to educate customers on why they need a certain project. And that again is category creation. And I think in that, so there is a place for it in that type of company. I can’t think of another company or another reason why a company would have a free trial or freemium.
Lauren Kelley: I did want to talk about the budget process a little bit because it’s so important and this time of year, a lot of companies, sometimes the end of summer beginning of September, to get their ducks in a row and make sure that they’ve got everything that they need for launching the budget process in the fall, if you’re on a calendar basis. And I’ve worked with some really terrific CFOs over the years that are Incredibly smart and strategic about how they use the benchmarking.
Lauren Kelley: Here’s some great examples, I’ll describe one process that one CFO told me in great detail. Typically, in the budget process you’ll take what a department spent last year. And you’ll take what the board and the CEO are looking at for growth and various targets and then put them together and give these numbers to each of the departments, and then the departments will say what resources do they need to achieve these targets? And how am I going to grow from what I did last year? And then oftentimes the horse trading begins and it can be collaborative or it can be not collaborative. It can be a quick process or it can be a difficult process.
But the way this CFO did it was he would always make sure that there were benchmarks associated with the targets. So, for example, if you’re giving sales their chance to develop have their input into what the budget should be, give them benchmarks and give them ranges. And in addition, make sure that the sales folks understand what the other resource allocation benchmarks should be. He found that it was very, very effective and eliminated a little bit of the horse trading. If you could see that out of 100% of what we’re going to spend next year your department should have some percentage and where the rest of the spending goes. And this is what gets us to the revenue target or the profitability target or the combination of both in the rule of 40.
And then once the team put the budget together and the executive management had signed off on it, the CFO would send the budget that was agreed upon by the management team with benchmarks to the board a week in advance of the board meeting to approve the budget and say, this is what we’ve come up with. These are the benchmarks that we think it relates to and this is the context for why we’ve decided this. And I’d like your approval. And he said his goal walking into the board meeting every year and biannually was always to get approval right away rather than to start a discussion about what the budget numbers meant, why budget this or that, letting the board dig into various things. I’ve heard variations on that story from a lot of different CFOs that have been hugely successful in using benchmarks to make budgeting a more efficient and collaborative process, and reducing all the horsetrading and back and forthing.
Eric, what have you used in terms of building a budget in terms of really focusing on building collaboration and agreement among the management team? Maybe you could give some specific examples of how you’ve used benchmarking.
Eric Mersch: I think what you said is exactly right and that’s how I focus on it. I first determine next year’s targets using benchmarking. Then you drive consensus along management to get to a budget, you socialize it with the board, and then you get approval, and then throughout the year you continue to benchmark against it.
What I would say is the CFO is a strategic role and it’s your job to drive the budgeting process. It’s not enough just to send out templates and wait until you get back and then drive the consensus once the horse trading begins. I think some specific examples I’ve seen are a company in pivot, building out a larger R&D platform. So the R&D expense or this specific company was 15 points higher than the benchmark. And so obviously we went in to look at it and we found high percentage of tech debt work. And then we also found that the roadmap was very aggressive and just required a lot of people working on it. And so because we are above the benchmark and because it was taking up dollars from sales and marketing and stuff in G&A, people, process, systems, we came up with a talent acquisition strategy that help reduce the costs, even though we are able to increase the head count. But that’s one area where if I had not had benchmarking data, I would not have been able to push back. And I felt that was really productive. And it made for a very collaborative discussion too. Because I was able to challenge it with real data and then we as a management team decided that we need to get the spend down. And we came up with unique ways of doing that. And I find that people respond very well to data. They want to be, they want to have parameters, they want to see how they’re doing. And so having this data is a significant help.
Lauren Kelley: It takes the emotion out of that the normal sort of personal issues of you are telling me what to do or you’re wrong or whatever. It’s just a matter of we’re all trying to solve this problem here. We’re trying to build an efficient fast growth company and we’re all working together on it. So speaking of pivots, there is a question that came in that says when a company goes from an on premises business model to cloud SaaS, how much of, how much in terms of increased valuations have you seen? I think we do have some good information about companies that have done that. But Eric, have you seen that you’re, you’re in silicon valley so you’re probably working mostly with companies that are pure SaaS, but have you seen a change in terms, and I don’t know if this person’s working with a company that is private and still looking to raise money or whether as a public company looking how to present that, but maybe you have some comments on that.
Eric Mersch: Well, it certainly is more difficult as a public company to implement a pivot. As I found that my last W2 job there is significantly higher multiples for SaaS companies, especially ones that meet the criteria of these benchmarks that OPEXEngine has pulled together and then you can pull together yourself through comps and through other resources. I have only worked with one company transitioning from a perpetual to a SaaS business and I would say we completed a $50 million raise almost entirely because we had a SaaS strategy and it wasn’t at a pure SaaS company now performing along the lines of benchmarks. So growing at T2D3 with a 75% gross margin, earning a million a month with a LTV to CAC above three. That kind of company only routinely gets 10x on it on a fundraising. But the premium can be, I’ve seen it as high as 18X in the eighth about dynamics, which was growing along those areas and had created a unique value proposition.
So there’s significant upside. There was a cautionary tale here too, in that because there’s so much upside from subscription revenues, SaaS revenues, a lot of companies are trying to recast themselves their perpetual license revenue as SaaS revenue. And I think you just have to be wary. There’s a lot of pressure to do that. There’s a significant amount of money can you gain from doing that is very important. It’s very important that as CFO, your job doesn’t become, how do we make our business look like a SaaS through some type of term subscription or something, but providing feedback to the company on here’s what we have to do in order to make our business a subscription revenue business or a pure SaaS business. Here’s what we have to do, here’s how we pivot and here’s the upside. So I think that’s a value add in that cautionary tale.
Lauren Kelley: That’s a really good point. We also work with some of the big consulting companies like Bain and others that do a lot of consulting with big enterprise companies and also with PE firms that are acquiring companies. And many of our companies have some PE ownership if not all are fully owned. I think investors are a lot more savvy than they used to be about what a real recurring businesses versus pretending that something is recurring revenue. And from the very early days when companies would include maintenance in their subscription revenue to some other things that people do. In the benchmarking we separate all of that out and it helps companies sort out how they want to, how they want to manage that.
I’m going to launch a quick poll and just ask the participants, what are the hardest metrics that they find to benchmark for their company? I’m going to read a few of the questions that came in before, that we had in advance of the Webinar.
The board thinks we should spend much more in sales because our revenue growth isn’t high enough, but we’re a transactional business more like B2C and maybe should be spending more in marketing but not hiring enterprise sales people. How can I use benchmarks to improve this discussion?
I think that’s something that we’ve been talking about all along the way. And in our platform you can filter by average contract value, by do you sell to the enterprise, to SMB? There’s different benchmarks for most of these things. There’s different benchmarks for the balance between sales and marketing, between an enterprise company, where you’re going to have really expensive salespeople and that’s going to drive your costs up and your marketing’s less expensive as compared to pure transactional companies that are really spending very little in sales. And it’s mostly marketing and also R&D because of costs. It costs a lot to develop a website that is self-service and transactional. So it shifts some of that. And, as Eric said diplomatically, we want to take the labor cost out of low ACV companies. So that was the first question. I’m going to end the poll. Let me share the results with everyone. Definitely CAC because it’s hard to calculate. Definitely something that’s very well examined. Marketing retention and some on employee productivity.
Another one of the questions was how much time does it take to fill out the benchmarking? And I’ll answer that and then I’ll ask Eric to answer that because he’s come at it a couple of different times. We have companies that have been doing it year over year and they say it takes maybe half an hour, 45 minutes to do the full benchmarking data input just to check it. Other companies can take a week, not working solidly for a week, but sometimes there’s data that you don’t have at your fingertips, but it is valuable to get it. I’ll mention this because I hope everyone on the call make sure that they have this information at their fingertips, but last year for the first year in 2000, well I guess 2017 – 2018 we added to the survey the question, what percentage of your company is male and what percentage is female? And 33% of our participants could not fill that out. So I’m reiterating that what that says to me is not that they don’t have that information in their company. What it says to me is that the board and CEO’s or whoever is driving the priorities of finance is not looking for that information. So it’s not something that maybe finance has available, but I’d like to make sure that everybody thinks about it. And when you fill out the survey, you have that data. So I’m going to turn that over to Eric. How long do you think it takes to fill out the benchmarking?
Eric Mersch: Well, that varies obviously because when I go in, I usually am driving the initial input (the first time a company is participating in the survey) and it may be a little different experience on my end. I would say about a week, not because I’m working eight hours a day or someone’s working eight hours to do that. There’s a lot of work into collecting the data and that takes time. So for tech debt, that is a difficult metric to get from R&D. But the other thing is trying to basically take your individual data and make it conform to the standard data. That’s the OPEXEngine benchmarking engine user works with. And that’s good for two reasons. One, you can standardize your numbers and then two, I would say the more you invest in understanding this, the better your outcome will be. So it’s just like anything else. I guess technically you could just whip right through it. I like to spend the time because it level sets all of our data in and puts it into a format that makes the best use of the tool.
Lauren Kelley: I think it’s really a question of are you just looking for some quick information? Are you looking to really use it as a management process to make sure your data is consistent and that you’re learning from the peer network effect that we have here? Because we’re always adding metrics. We’re helping define with the community in terms of what companies are collecting.
Here’s an audience question: We sell healthcare management apps. It’s a software SaaS company. I’m looking for benchmarks for peers in my space. So we get this question sometimes and there’s a difference between a market research and marketing benchmarks and operating model benchmarks.
If you’re selling into a particular market and you have a very specific product, if you took all the companies with that same product, or selling into that same market, you’re going to have some really big companies. You’re going to have some little tiny companies. You’re going to have some horizontal companies that are coming into that market with some other product. And if you took all their internal financials and their operating metrics for their operating budgets and aggregated them, it wouldn’t give you very good benchmarks to modulate and figure out what’s the right budget for you. So we provide filters to the users of the platform by revenue so that the operating budget for a $10 million companies is different than for a $200 million company. And another one of the filters is invested capital because a $20 million company that’s raised $250 million is going to have a different operating budget than a $20 million company that’s raised $5 million. They’re just going to operate differently. So there’s a whole variety of filters there.
How many companies participate in the benchmarking? We have over 600 companies that are validated data in the database.
Another question that came in is, do the benchmarks give me credibility with the board? I’ll let Eric speak to that.
Eric Mersch: Absolutely. This is such a key issue and, because again, it’s undefined, but maybe it’s more difficult in this case because VCs may specialize in a certain area, they vertical SaaS or horizontal SaaS or enterprise versus B2C. And so the metrics they use within their organization vary significantly, both in definition and in number and type. So it’s very difficult to say, okay, my investors from this big investor company, this is what they want to see. It doesn’t match with what the benchmark say. So you can have an informed discussion and you can, you can have an informed discussion and absolutely, 100% and it’s true across all companies.
Lauren Kelley: One finance exec said to me recently, being able to pull up the benchmarks when he’s talking to somebody in the sales organization kind of levels the playing field because he’s never going to have the domain expertise in sales or in marketing, you’re never going to have the domain expertise, but you’re responsible for the numbers of the company and you want to have that discussion and have it be data-driven so you can look at different types of benchmarks or different variations on spending.
Another question quickly is, if my software product is hybrid, we’re transitioning from a perpetual to a SaaS model, can you benchmark us? Yes. We sort the data by percentage of perpetual versus SaaS revenue. As I said, we have done that.
Another question is do we just have data for highly funded fast growth companies? No, we have focused for the past 12 years on benchmarking software and SaaS companies with revenues between $1 million and $500 million. A lot of our participants are venture backed. Some are bootstrapped, some are private companies, some fast growth, slower growth, public companies, private companies, and obviously we would like to have everybody participate in the benchmarking. Let me see if there’s any other questions there. I’m going move to wrapping it up and talk a little bit about if you’re interested in participating in the benchmarking or the benchmarking community and you want to join contact us at firstname.lastname@example.org.
It’s not just the analytics platform, it’s also webinars like this. This is the first time we’ve one done one actually just about benchmarking. It’s always about how to define CAC or R&D spending issues or metrics how do you, how do you define R&D productivity, topics like that. Then we have what we call the SaaS finance meetups. Typically we do them in Boston and San Francisco and we have a group of our community sitting around the table sharing best practices. And then we also do one-off surveys. We did one recently on sales planning and very specific sales metrics. So we would love to have any companies that are not participating to join us.
The bottom line is that benchmarking is an effective management process. It makes the budget process more efficient and better informed. It helps develop the collaboration and understanding of the correct resource allocations among the management team. And it gives you the information that you need. And we do the hard work of collecting the data and validating it and cleaning it and presenting it. So anybody who’s not benchmarking, please, whether you do it with us or you just start using some of that data that’s out there, do it. We think our model is good because all our data comes from finance organizations. It’s not a free survey and we don’t do anything else.
So with that, I’d like to thank Eric, you’ve been terrific. Thank you to the audience and please send any questions that we haven’t answered. We’ll get back to you or send us ones in follow up. Thanks everybody.