By tracking and taking action in improving essential metrics you can position your team for better performance and productivity. Here we provide some insights into what we believe are the most important KPIs every young B2B SaaS company should track as soon as revenue streams arise.
At your startup, your CEO has probably asked questions like “How much revenue are our marketing efforts contributing? What’s our ROI?” In today’s technology-driven landscape, department leaders in Marketing, Finance, and Customer Success are accountable for meeting pipeline numbers just like Sales. We are under constant pressure to prove the value of our campaigns, and with the amount of data we have access to, it is often hard to differentiate between the important marketing metrics and the less important ones.
To understand your business and where it’s headed, it’s imperative to choose the right marketing metrics and to be able to see them all in context. By tracking and taking action in improving essential metrics you can position your team for better performance and productivity. Here we provide some insights into what we believe are the most important KPIs every young B2B SaaS company should track as soon as revenue streams arise from first customers.
When discussing B2B SaaS metrics, recurring revenue is the key. Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) are the sum of the total recurring license revenue normalized into an annual or monthly account, respectively. Basically, ARR = 12 x MRR. It’s important to note that ARR and MRR only include software-related license revenues -- other revenue streams such as pilots, one-time payments, services, onboarding, etc are not included in this KPI and should be reported separately.
Most B2B SaaS businesses work off of a monthly subscription model, in this case customers pay a fixed fee each month, meaning that the company has a predictable revenue source as long as they stay a customer. This can help you determine growth rates and see a better perspective of your revenue. Once you have a good handle on customer acquisition and churn, you can use that information to predict future ARR/MRR.
Monthly Burn Rate
How much money are you spending each month? A simple definition of burn rate is how much money leaves your bank account each month. It is calculated by taking your total revenue and then subtracting the amount you spent to get that revenue. There are two ways you can measure it:
Net Burn Rate measures how much you lost in a month after adding back revenues, seen by taking revenue minus costs of goods sold minus all expenses.
Gross Burn Rate measures the total money you spent in a month before adding back revenue from that month. Gross burn rate answers the question “if we lost all sources of revenue tomorrow, how many months could we stay in business?”
Burn rate is relative, depending on how your company spends and earns. If you were to burn $200k over a month’s time, and in that same month you brought in $170k in revenue, and you still had $120k in the bank, this would be a pretty high burn rate. You are losing $30k/mo and your financial statements show you only have 4 months of cash left. Track your expenses diligently and make sure they are investments that can help you work towards cash flow positive.
How much qualified pipeline do your reps have in their forecast? Your sales pipeline should include every opportunity your reps are handling at every stage of the sales process. The more visibility you have into your sales pipeline, the more revenue potential you will have for your business.
Start by tracking if the opportunity pipeline is increasing or decreasing in size for qualified prospects. If the pipeline is decreasing, your team should identify where in the process prospects are dropping off and focus on improving these areas. If your pipeline is filled with bad leads, it would be valuable to understand where these leads are coming from and how they are being engaged with.
For example, if you track your sales pipeline for three months and find that 25% of outbound leads become qualified prospects and you need 50 qualified leads to maintain pipeline growth, you know you will need to contact 200 outbound leads to maintain this pipeline growth. If you are just starting out with pipeline creation, HubSpot offers a free sales pipeline template to help you map out your own pipeline.
How fast are you growing your revenue Month-over-Month and Year-over-Year? Your growth rate measures the rate at which your business is able to increase revenue from sales during a period of time. Understanding the sales growth rate empowers companies to make decisions backed by data. If your growth rate decreases compared to prior periods, it can be an indication that your sales team needs to take a different approach to drive revenue growth. On the other hand, a high sales growth rate is often seen as a good sign for stakeholders.
Sales Growth Rate = (Current Period Sales — Prior Period Sales) / Prior Period Sales *100
To calculate your sales growth rate you’ll need to know the net sales value of the initial period and the net sales value of the current period. There are no simple rules that indicate a “good” or “bad” growth rate because the rate of growth is relative for each company. A few factors that can impact how much sales growth changes from year to year are: company size, competitive landscape, and sales goals. A small business may experience a higher sales growth rate because it’s working with smaller dollar values, therefore it only takes a few sales to see a change. Moreover, your competitive landscape can affect the performance in your industry. Lastly, a positive sales growth rate will depend on the unique goals of your company. Each company has its own set of goals and strategies that are highly influenced by the company’s leadership and bandwidth.
Average Deal Size
Average deal size is a useful metric for companies that do not rely on subscriptions or other fixed-price agreements, as well as those that are moving in the direction of more lucrative solutions over time. Knowing your average deal size per segment is key to tracking how many deals you need in your pipeline to be able to hit your sales goals. Are you targeting SMBs, Mid-Market, or Enterprise? Knowing the differences in deal size will also help contextualize your goals.
Let’s say for example you are aiming to hit $1M in revenue this month, you know enterprise customers have an average deal size of $100k and take about 3-4 weeks to close, and mid-market customers have an average deal size of $25k but only take 1 week to close, you can calculate how many opportunities you need in each segment to reach your revenue goal.
How many of your customers are not renewing at the end of their contract? If driving new customers is your ultimate goal, maintaining your existing customers is equally important. Since most SaaS businesses are based on annual subscriptions, keeping your customers is just as important as acquiring new ones. When keeping track of churn, be sure to dig a bit deeper than just the number of customers who churned. Identify the personas of your churned customers, as well as the industries or any other factors that can help shed some light on why they failed to renew your contract. This information would be valuable to your Sales, Marketing, and Customer Success departments.
Customer Acquisition Cost (CAC)
How much does it cost to sign a new customer? How much did it cost Marketing and Sales? This metric is easy to calculate: take all Sales and Marketing costs from one period of time and then divide by the number of new customers acquired within that period. For example, if you spend $50,000 over one month, and you add 25 new customers, your CAC would be $2,000.
While it takes money to make money, you want to make sure Sales is bringing in more than what's going out. If CAC is consistently low, your executives can assume that their Sales and Marketing teams are operating efficiently. However, if CAC spikes quarter after quarter, it can be indicative of an issue. For more detailed results, try calculating your CAC by program or campaign. These numbers can help you prioritize projects and scale your success accordingly.
Knowing your CAC also allows you to calculate how long it will take to break even after acquiring a customer. The payback time should not drastically exceed 12 months, or else your business growth will consume too much capital. A good SaaS business model is driven by a customer lifetime value (CLTV) that exceeds the CAC by at least 3 times.
Conversion Rates on Your Marketing/Sales Funnel
A steady stream of sales and marketing leads is important, but unless these leads eventually convert and purchase from you, they don’t provide much value. How many leads do you need to generate to get one opportunity? How many opportunities do you need to close one deal? The best way to calculate this KPI is to divide the number of sales divided by opportunities made in a specific time period, and the number of opportunities divided by leads generated within that same time period.
For example, if your team brings in 300 leads in a quarter and of those 100 become opportunities, we take 100 and divide by 300 to find your lead-opp conversion rate of 33%. Of those 100 opportunities only 20% became customers, which leads us to a close-win rate of 20%. Learn more about understanding the value of your funnel here.
Net Promoter Score (NPS)
This metric tells you how much your customers like you and your product and is a leading indicator for churn. The Net Promoter Score is based on one simple question: “How likely are you to recommend this business to a friend or colleague?”. Customers are asked in a survey to answer this question on a scale of 0 to 10. Based on their response to the question, the customer is classified as a promoter, passive, or detractor.
Promoters are those that ranked you 9 or 10. They are loyal enthusiasts who fuel growth through word-of-mouth on and offline. Detractors are customers that chose 0 through 6. They are dissatisfied and will likely soon churn. Passives answer 7 or 8. These are neutral customers who are neither enthusiastic nor unenthusiastic about your product or brand. To calculate your NPS simply take the % of promoters and subtract the % of detractors. Passives can be excluded from the calculation as they don’t exert as much influence on your brand’s reputation.
Cash in the Bank and Zero-Cash Date
Once you are out of cash it’s game over. Your Zero-Cash Date is the most likely date, at the current rate of spend/burn, that your business will run out of cash. Always model your zero-cash date and make sure you have a cushion if things don’t go as planned. Your zero-cash date should provide an indication of when new funding should be sought, and as your startup becomes cash flow positive and builds up its reserves, that date should move further and further into the future. This article from SaaStr goes over everything else you need to know about your Zero-Cash Date.
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