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TOP QUESTIONS ASKED OF THE OPEXENGINE TEAM

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Q: Which SaaS metrics are the most important to Investors right now?

A:  This is a great question, because the investment climate has definitely changed in 2023. In 2023, investors are focused more critically on profitability, as well as on Sales & Marketing efficiency. S&M makes up the biggest portion of company spend usually and there is often room for improvement. And, of course, growth is so critical to company success.
The following metrics are generally critical to most investors to define valuation:

ARR / RevenueGrowth Rate
EBITDA
Rule of 40
Magic Number
NRR
CLV / CAC

In addition, each investor is a little different, and company stage affects which metrics are important. Early stage investors are mostly focused on seeing if a company is achieving product / market fit – or whether the management team has a plan to achieve product/market fit. Early stage investors aren’t expecting top quartile performance, or perfection, but they want to see that a company knows what KPIs are important, and can show a path to achieving good performance. In addition, investors will look at cash flow, cash runway and KPIs that show the size of the addressable market.
Growth investors will look at customer traction, both new customer acquisition and the unit economics of acquiring new customers (CAC, months to recover CAC, CLV/CAC ratios, ARR and sales productivity). Growth investors are also becoming more critical in looking at management teams, whether they are on top of their own company’s KPIs, and corresponding industry benchmarks. Are they putting good infrastructure in place to track and manage growth? Does the management team have the capability to do this? Again, investors aren’t necessarily expecting top quartile performance on all KPIs, but they are looking for a path to get there and KPIs that show that by applying more money, performance will improve.
Enterprise investors will look at growth opportunity, profitability, and the levers to improve profitability – could the company dial back Sales and Marketing if the market slows, in order to assess the investment opportunity. Enterprise investors will dig into the company’s metrics and benchmarks more deeply and we are seeing investors this year expecting much more precise information from companies, and again, judging them on both the speed and quality of a company’s reporting.
Fundamentally, when raising money these days, a company needs to clearly paint a picture of why investing in them is a good investment. Investors will only believe company data that can be verified, and comparisons against credible industry benchmarks. That sounds obvious, but is a major difference from previous years when due diligence wasn’t as deep and investors would buy into a growth story more easily.
We hear from our friends and colleagues in the due diligence business that while due diligence processes in 2021 and 2022 could sometimes happen in a few weeks resulting in an acquisition or investment, in 2023, due diligence is taking months and there is a deeper verification process to the numbers.

Q: How many metrics should I track in my company?

A:  There are many hot debates about the right number of metrics in a SaaS company’s regular executive reporting.  In our experience, successful SaaS companies are data-driven and track significantly more financial and operational metrics reflecting the health and performance of the company than traditional software companies.  There are more levers to making the subscription and hosted product delivery model successful – but when the many gears intersect and turn properly, a SaaS company has more leverage from the inputs and builds strong growth momentum.  That’s what makes the SaaS model so valuable and why so much investment flows into this sector.

The company’s executive dashboard should track the virtuous circle of lead gen, new customer acquisition, customer expansion, customer satisfaction, customer renewal and product development, which is the basis of SaaS company value.  

Here’s a list of the some of the most important metrics typically tracked by most SaaS companies:

  • Revenue/ARR
  • Growth rate
  • EBITDA
  • Operating Expense
  • Gross Margin
  • Magic Number
  • R&D ROI
  • CLV/CAC
  • Retention Rates:
    • NRR
    • Customer/Logo Retention
    • Gross Dollar Retention
  • Average contract value or average ARR per customer
  • MQL to per closed customer
  • Customer count
  • Company headcount
  • Employee productivity
  • Employee retention
  • Employee diversity

Beyond these high level performance metrics, there are myriad other key metrics, showing more detailed activity and performance in key departments, especially in the Go-to-Market areas of Sales, Marketing and Customer Success, as well as in Product and R&D. 

The number and type of KPIs regularly reported also depends on the stage of the company – and the infrastructure or ability of a company to report on its KPIs.  Here’s a few of the key differences between Early Stage, Growth Stage and Enterprise Stage companies that we’ve worked with.

Early Stage:  fewer overall metrics, but more metrics on cash management and runway, product development and product/market fit

  • Number of users
  • Average revenue per customer
  • Retention
  • Net cash from operations
  • Cash
  • Weekly/monthly spend

Growth Stage:  more metrics on sales and marketing activity & outcomes.  KPI reporting is focusing on improving the GTM both on new customer acquisition performance and customer retention.

  • Operating expense:  Sales & Marketing, G&A and R&D expense
  • New, retention and expansion ARR
  • Sales productivity
  • Average revenue per customer
  • CAC
  • Months to recover CAC
  • Customer engagement and/or NPS
  • Sales cycle
  • Product development

Enterprise Stage:  more metrics on employee performance, cost management and profitability

  • Operating expense:  Sales & Marketing, G&A and R&D expense
  • Employee productivity
  • Employee retention
  • Net Income
  • Deferred revenue
  • Magic Number
  • R&D ROI
  • Rule of 40

In OPEXEngine’s proprietary benchmarking database, we have more than 300 SaaS KPIs that provide a comprehensive assessment of a company’s performance across financial, commercial, and operational areas.   You can do a quick benchmarking XRAY of your GTM functions and get an individualized benchmarking GTM report to prioritize areas of greatest opportunity for improvement, or do a full 360 GTM and Cost Management benchmarking to help guide the evolution of your operating plan.  Contact us to dig into the use cases and how OPEXEngine’s benchmarking can help.

Q: How do you use metrics in conjunction with one another? What is leading and what is lagging?

A: 

How SaaS KPIs Work In Conjunction with Each Other

To answer how metrics work in conjunction with another, think of a number of gears that as one turns, it turns each of the others as well so that you have a number of gears moving together.  SaaS requires that companies perform in numerous areas:  Marketing and lead gen interact with Sales and new customer acquisition, leading to Customer Success and customer retention.  Alongside all the Go-to-Market gears is Product Development and R&D.  And underpinning everything is overhead, infrastructure and Cost of Good.  Success in only one area at the cost of other areas eventually undermines the whole virtuous circle which is the value of SaaS.   So you have to look at KPIs that reflect performance in each of these areas to ensure that you aren’t missing a big problem in another area.  

Look at NRR, Customer (Logo) and Gross Retention Rate Together

An example of how KPIs work together is retention rates.  Many companies measure only one retention rate:  Net Retention Rate (NRR) which is based on the growth of net contract values.  My experience is that this metric, on its own, can be misleading, especially in times of economic change.  At the very least, I think NRR should be looked at together with Customer (or Logo) Retention Rate.  

Here’s an example:  let’s say my company falls into the 80/20 model where 20% of my customers provide 80% of my revenue.   Contract expansion with those 20% of customers is great, but I have small contracts and even diminishing contracts with cohorts of the other 80% of customers.  My NRR could be good, and over 100%, but significant resources might be expended trying to sell to the other 80% of customers, some of which are unprofitable, or even disappearing – especially in times of economic disruption.  My logo retention rate could be terrible, and no one on the management team really knows it if I only track NRR.  NRR and Customer Retention rate go hand in hand and should always be looked at together.   

SaaS KPIs are Often Lagging and Leading

Leading indicators are predictive metrics that can provide early insights into the future performance of the business. These metrics can help SaaS companies to make informed decisions and take proactive actions to drive growth and avoid potential problems. Examples of leading indicators in SaaS include:

  • Pipeline metrics: The number of leads, opportunities, and deals in the sales pipeline, as well as their progression through the sales cycle. These metrics can indicate the health and potential of the business, as well as potential challenges and bottlenecks in the sales process.
  • ARR & retention metrics:  A SaaS company at scale should be able to relatively accurately predict future revenues within a 12 month forecast period, based on previous ARR, retention rates and % of new customer ARR.
  • User engagement metrics: Metrics such as user activity, retention, and churn rate can provide insights into how customers are using the SaaS product and whether they are likely to continue using it in the future.
  • Product metrics: Metrics such as feature adoption, usage, and feedback can help SaaS companies to understand how their product is being used and how it can be improved to meet customer needs and drive growth.

Lagging indicators, on the other hand, are retrospective metrics that measure the past performance of the business. These metrics can be useful for evaluating the success of past initiatives and identifying areas for improvement. Examples of lagging indicators in SaaS include:

  • Revenue metrics: Metrics such as monthly recurring revenue (MRR), annual recurring revenue (ARR), and gross margin can provide a snapshot of the financial performance of the business.
  • Customer acquisition metrics: Metrics such as customer acquisition cost (CAC) and customer lifetime value (CLTV) can help SaaS companies to evaluate the efficiency of their sales and marketing efforts and identify areas for optimization.
  • Support metrics: Metrics such as customer satisfaction  – Net Promoter Score (NPS) can help SaaS companies to evaluate the quality of their customer support and identify opportunities for improvement.

Many of the above leading and lagging metrics above for SaaS companies actually act as both past and future indicators.  They are based on past history, but because of the subscription model, they are good indicators of what is likely to happen in the future.  The ability to reliably predict future revenues is one of the major reasons why SaaS and subscription businesses are so valuable.

Let OPEXEngine quickly help your organization assess these leading indicators

OPEXEngine has a new Go-to-Market X-RAY analysis that includes these and other metrics that assess the performance of your company’s Go-to-Market.  In as little as one week, OPEXEngine will create a board-ready report that will help you swiftly find potential cost efficiencies and growth opportunities.  

Learn more and get started by scheduling a meeting with OPEXEngine by clicking here.