Correct Cohorts Lead to Performance Benchmarks

January 3, 2023

Most SaaS executives can relate to a friendly debate at a board or leadership team meeting about what percentage of revenue should come from “upsells'' to existing customers, what is “healthy churn,” or what is an acceptable acquisition cost per new logo (CAC) among other famous metrics. In these discussions, lots of conventional wisdom is shared, backed-up by “benchmarks'' that come from an investor, a blog, a conference, or another favored industry source. This scenario played out daily in boardrooms or over Zoom® meetings, is rooted in the well-intended push for “the playbook” to be data-driven. What’s also played out every day for SaaS companies, at all stages of maturity, is that applying benchmarks from companies with different business models and growth rates can lead to very poor decisions and performance. That’s because benchmarks need to fit the business model and require context to be applied in a relevant way. That relevance requires an intentional comparison to peer companies — a cohort. Cohorts are typically established first around revenue and growth rates. You can also add a second cohort based on additional criteria, enabling an even more informative understanding of the company’s current position and potential trajectory. To show how cohorts work, let’s take the example of a fictitious company — SaaSCo, a mid-sized enterprise IT software solution vendor.

SaaSCo’s sales slowed in 2022. At a recent board meeting, one of their company’s investors forcefully declared that SaaSCo should have 30% of their revenue for the coming year come from upsells to existing customers. This was meant to be a standard part of the playbook as well as part of returning the company to higher growth. If the SaaSCo executive team acts on this target, they will need to devote a significant part of their sales team’s capacity towards current customers. There are large-scale potential implications:

  • Reduction in a sales capacity to land new customers
  • Another long sale cycle to upsell existing customers who already showed conservative buying behavior
  • After winning a long sales-cycle deal, “selling again” risks eroding the relationship with the customer and may affect retention rates

If the SaaSCo leadership team wants to seriously consider this new target in their playbook, they should first benchmark their company against relevant peers to see if this “30% target” fits their model - and moving to this model will affect resource allocations across the company. To get started, SaaSCo can establish a cohort for their immediate peers by revenue size, business model and average contract value (ACV):

For cohorts to be truly effective, both the companies included and the underlying data must be truly comparable — an “apples-to-apples” comparison. How the data is collected, normalized, and organized matters. At OPEXEngine, this is the core challenge our platform addresses: bringing rigor, precision, and trust — true “science” — to performance benchmarking.

Now, SaaSCo can see how they compare to their current peers, where they are strong, and where they fall short. They can now add a second cohort to understand what it will take to get to a target of a 30% increase in their contract values. While the first cohort helps them evaluate where the company is doing today relative to companies with a similar average contract value (ACV), a second cohort, using a higher average contract value (ACV), can show them where they need to get to and where they need to invest resources:

This approach will allow SaaSCo, first and foremost, to better understand its position today and what it will take to achieve the target recommended by the board. It is clear that many factors are impacting the company’s growth rate, which is significantly below its industry peers today.  SaaSCo will need a coordinated and disciplined management team approach to align around what it takes to achieve higher average contract sales to customers. Having benchmarks for all major departments of the company will help ensure that the whole team is moving forward towards the new goal. SaaS companies require much greater coordination than legacy software companies between all departments, particularly between sales, marketing, product and customer success to achieve the kind of higher performance that makes the SaaS model valuable. Here’s how the benchmarking plays out for SaaSCo:First, a top-line view of SaaSCo against the two cohorts. SaaSCo’s growth rate challenge is clearly visible:

Second, a view that shows that while SaaSCo isn’t far off the benchmark for new dollar retention rate (NDR) today, they will need to work harder to achieve a higher NDR which is the norm for higher average contract values.

Third, a view that shows how SaaSCo benchmarks against the other two cohorts on sales efficiency for the whole company, shown in the employee productivity benchmarks:

SaaSCo’s leadership team can draw several conclusions from the benchmarking exercise:

  • SaaSCo’s growth rate problem isn’t just a problem of whether or not they increase sales to current customers - several actionable metrics are below benchmarks and require focus
  • SaaSCo needs to dig into sales and marketing productivity, which is easier with accurate benchmarks to align the management team
  • SaaSCo can validate with the board that companies with higher average contract values typically have higher net dollar retention rates. This is an opportunity for the leadership team and board to have a shared understanding and make the necessary changes, guided by the benchmarks

With regards to the original question — should SaaSCo redeploy sales resources so that 30% of the pipeline comes from current customers? According to this benchmark analysis, addressing pricing and sales productivity looks to be the best near-term action to improve growth.  In addition, greater resources will be needed for Customer Success and Product Development. Unlike the discussion at the board meeting, this conclusion is based on trustworthy data from comparisons to relevant peers, made possible because of precision cohorts.In an increasingly data-driven world, a surplus of conventional wisdom and “generally accepted benchmarks” constantly bombard SaaS company executives.  When performance benchmarks are used correctly, there is a tremendous value creation opportunity which starts and ends with precision cohorts. At OPEXEngine, solving this opportunity has been our mission for nearly 20 years. We are the pioneer and leader in this space because of the rigor, precision, and unmatched dataset we bring to performance benchmarking. This includes 250+ benchmarks from more than 1000 of the world’s leading technology brands and advanced filtering that allows significant customization to get the closest comparisons possible.

In the end, benchmarks are both a roadmap to reduce risk and a practice that increases the probability of success in an uncertain environment.

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