SaaS Metrics & Benchmarks Tool — Connecting the dots to maximize value
As a CEO of a VC-backed SaaS company, you know that your VC investors expect at least x3 return for the investment they made and the risk they took in your business. Measuring and benchmarking key metrics of your SaaS business is essential to learn where your business stands at any given time; however, connecting the dots between these metrics can help identify and solve operational challenges towards operational excellence that can increase your SaaS business’ value.
As I wrote in my Strategic Acquisitions post, there are many reasons why businesses are being acquired and the value a buyer is willing to pay for them. However, a business demonstrating operational excellence across key metrics will receive a higher value than others.
As a former CEO, I looked for the annual SaaS metrics and benchmark reports to assess where my business stands each year. These reports include dozens of metrics across the entire operation of a business, at different growth stages. You need to pick the metrics that really matter and fit your business. Otherwise, you will get lost in the details.
To save you time and help you find where your business stands on the benchmark, we open-sourced the SaaS metrics & benchmarks tool. It’s a simple Google Sheet where you type a few metrics from your operation to get instant benchmark charts of key metrics.
While evaluating each of your business operation metrics on a benchmark is important, you should start connecting the dots between them to drive operational excellence that can impact the value of your business.
For example, if you are soft on revenue growth and need to push it up, you should look at how your gross and net retention is performing, and your pricing and packaging are set. Driving growth by hiring more salespeople and investing more money into marketing can work, as long as you are in good shape with other metrics. Otherwise, you will find your S&M ratio increases and the rule of 40 and magic number drop.
In my other posts, I wrote how I increased ACV by 48% by changing our pricing and how I improved our gross revenue retention by 20%. However, these improvements are interdependent. Growing revenue fast is very hard and expensive, while your gross retention is low, and your net retention does not work. When looking at an operational metric, you should look at depending on metrics that can help improve it.
Let’s look at a company I met recently, an $80m ARR SaaS business with a growth rate of over 45% and net dollar retention of over 110%. The business has plenty of cash from previous investment rounds and can keep operating for more years. These metrics shine on any SaaS benchmark report you will find. However, the gross revenue retention of the business is under 85%, below the benchmark. When looking at other metrics, you can find that the S&M ratio, the employee attrition rate, and the burn multiple are all higher than the benchmark, while the Rule of 40 is way below the benchmark. How should you read these metrics? Where does the problem stand, and how to solve it?
Let’s connect the dots between the metrics, the high growth can indicate that the business has a good product-market fit and a good demand for its services. The high net dollar retention means that customers see value in what they bought, and are buying more of it or other services around it. While this is great, why is so much invested in S&M and why are employees leaving, and why is the rule-of-40 low? that is all related to the low gross revenue retention. When you have a big hole in the revenue bucket and customers are not renewing contracts, you must spend more to acquire new customers to drive growth. It also leads to sales and customer success people miss their targets and KPIs and leave. As a result, you need to hire new ones. That increases spending, driving your rule-of-40 metric and burning multiple down the benchmark.
When I spoke with the executive team of that company, they already knew about their low gross revenue retention challenge but struggled to point out why it happens and the fact that it impacts other operational metrics that they have. I pointed them to my other posts, about how customer success accelerated growth and reduced cost as well as how I increased gross revenue retention by 20%. These articles managed to connect the dots for them and paint the broader picture of the operational challenge they had, and how they should solve them.
Here is another example of a business I met, a B2B SaaS company with $40m in ARR. The business has 97% gross revenue retention, 90% gross profit margin, a sales efficiency (magic number) of 0.5, and net revenue retention of 100%. The business’ growth stands at 20% YoY. Why is that? The root cause was the low-performing net revenue retention. When you spend so much to acquire a new customer (CAC) and have a great product that people love and renew each year, it is much cheaper to upsell into this customer base to drive revenue growth than to acquire new customers and get them onboard.
I pointed the executive team to my other posts about how I increased ACV by 48% by changing the pricing and packaging of our SaaS product, and how I identified strategic acquisitions and partnerships to cross sell and up sell into our existing customer base to increase net revenue retention. Identifying why their business struggled to drive a healthy net revenue retention and the impact on their other operational metrics as a result of it, helped that company to drive actions and operational excellence.
Leveraging the SaaS metrics and benchmark tool to spot operational weaknesses is important; however, connecting the dots between these metrics to understand where to focus your attention is even more important.
Like a large motor engine that needs to have all its parts in the right place to deliver the expected power, a SaaS business leader should look at the dependency between the metrics to unleash the actual value of a business and maximize shareholders’ return.
Written by: Yuval Ben-Itzhak
