The Value of Benchmarking

benchmarking  

After 8 years working with hundreds of SaaS and software companies (and about 60% of the SaaS IPOs over the past 5 years), one of the key ways that growth companies use our benchmarking data and services is for planning and budgeting.

Planning and Budgeting

Almost all of our clients use benchmarking to plan their financial and operating targets and models for 2-3 years out or more.  If you are a $15M revenue company, growing Y/Y by 40%, you’ll be $21M in a year and (assuming the same growth rate) and $29.4 the following year.  You need to plan for growth in headcount, how your R&D, Sales, Marketing and G&A expense ratios will change at different stages, what your cash needs are, and more.   For example, overall productivity and specifically sales productivity are different at different stages.  Fast growth can sneak up on you when you are unprepared and then the opportunity is lost or minimized.  Few companies do a good job hiring and training faster than plan and on the opposite side of the spectrum, running out of cash is no fun either, but can happen if you don’t have a good plan. 

Or, lets say you are an early stage company, and your plan is to get to $100M as fast as possible.  Good goal – how do you do it?  Make a plan working backwards from $100M and identify what you need at each growth stage.  

Pretend you are writing the investment memo for your company going public – what value metrics do you describe in the memo to make it worth investing in this cool company?  Now work backwards and see how you get to the performance described by that investment memo.  How do you do that?  Look at the benchmarks for how other companies did it.   And don’t just look at random, successful companies – the operating metrics for a LogMeIn type of company with a low priced, high volume sales model will be different than the operating metrics for a Netsuite type company with an enterprise product.

Growth Described by Key Operating Metrics, not P&L

Looking at financial P&L models gives you a sense of revenue, revenue growth and high level operating expense, but doesn’t tell you much about what it took to get those numbers in the model. 

For that, you need to look at a spectrum of key operating metrics which tell the story of your performance. And those metrics, from Cost of Customer Acquisition (CAC) to Revenue per Employee to your R&D spending as a percent of revenue will be different at different stages of growth.  Don’t assume that if you want to grow by 40% each year, that you should just increase all your spending by 40% (or some other static amount), increase headcount by 40% and so on every year.  It doesn’t work that way.   Most companies go thru different stages of growth and need to prepare for different rates of growth as well. 

Guideposts

Looking at how other comparable companies did it provides the guideposts for planning your growth.   Typically, the road from $1M to $100M isn’t a straight line from start to finish. Benchmarking provides you with context for planning, discussing performance with key stakeholders, to identify areas where there are problems, and to identify areas where you are doing really well (and maybe you should add gas to do even better).

Benchmarks aren’t a blueprint for your company, but they provide the numbers so you aren’t guessing.  Knowing where you are higher or lower than the benchmark makes it a choice and plan, rather than just random performance which can’t be repeated or scaled.  

I guarantee you that the highest performing companies are extremely focused on metrics and comparing their internal performance to benchmarks.  These are the companies that are typically growing the fastest, as they can plan the investments needed for each stage of growth (which allows them to take advantage of growth opportunities), and because they can quickly identify areas of inefficiency, target them, and improve them.

Maybe that’s why athletes are constantly comparing themselves to their peers.  The top athletes know darn well not just the performance of their peers (their P&L), but also how their peers train, what they eat, what shoes they wear, when they are sick, and how they recovered.

Give us a call (617-674-4218) or email me at lauren@opexengine.com if you are interested in discussing how benchmarking could help you improve your company’s performance.   

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