When scaling a SaaS company, keeping tabs — and acting on — key performance indicators is an absolute must. Intronis CEO Rick Faulk explains why that is especially true when it comes to sales and marketing, and highlights the most critical metrics to track your spending and success.
In almost any industry or discipline today, metrics are essential to conducting performance analysis. Not only do they give you a better understanding of how efficiently your operation is (or isn’t) running, but they also allow you to identify the levers that need to be pulled to fuel smarter growth.
That is especially true in the world of SaaS – particularly when it comes to gauging the productivity of sales and marketing organizations.
By measuring and analyzing the strongest and weakest points in your sales and marketing processes, you can very easily scale back on the activities that are not yielding results and fuel additional resources behind the ones that are working. That will not only improve your company’s ability to target, nurture, close, and retain high-value new customers, it will also help you better understand your talent gaps or deficiencies, and address them before they become a problem.
Ultimately, the objective of this analysis is to go beyond basic one-off measurements like cost per lead, and focus more broadly on end-to-end conversion metrics that allow you to paint a comprehensive picture of the effectiveness of your operations. At the end of the day, having that information will give you more confidence in the decisions you make, thus, allowing you to ensure that every dollar you spend on sales and marketing generates the return needed to keep your company on the right path.
5 Key Sales and Marketing Metrics that SaaS Companies Must Track
The reality of operating a SaaS business is that you have to spend money to make money.
Yes, some SaaS products are so innovative and groundbreaking that they can fuel growth without huge investments in headcount or sales and marketing, but those businesses are the exception, not the rule. For most companies, growth trajectories remain stagnant or flat unless a business is capable of intelligently scaling and layering spending in ways that produce sizable (and, ideally, profitable) returns.
Of course, that does not mean a company should just blindly increase its current spending habits and hope for the best. To drive meaningful growth, a SaaS business must be able to determine where its best customers come from and create a plan for scaling sales and marketing activities to attract more customers.
To do that, SaaS companies must track (and act on) five critical sales and marketing performance metrics:
1. Customer Acquisition Cost (CAC): Very simply, this metric describes the fully loaded cost of acquiring an average customer. It includes all sales expenses and allocations, as well as the marketing expenses required to draw prospects into the funnel. To calculate CAC, you simply take the gross margin of annualized new revenue from a given quarter and divide it by the sales and marketing expenses from the previous quarter. This figure will reveal how long it will take your company to recoup the initial investment used to capture customers (see metric #4 below), which can subsequently be used to determine whether the business can afford to boost sales and marketing spending.
CAC = Gross margin of annualized new revenue form a quarter / Sales and marketing expenses from previous quarter
2. Marketing expenditure per dollar of annual contract value (ACV): Essentially, this metric is the marketing component of CAC. It is designed to help you determine how much you are spending on marketing programs relative to how much revenue those programs bring in. In many cases, a healthy ratio is 2-to-1, which is to say that you spend about $2 on marketing to acquire $1 of ACV. The lower the ratio, the more likely it is that your marketing operation is running efficiently. And the more efficient your marketing team is, the easier it will be to scale.
ACV Ratio= Expense of marketing campaigns : Revenue from marketing campaigns
3. Average time needed to pay back CAC: Depending on your SaaS company’s pricing model, this metric could be reflected in months or years. The goal is to evaluate how much money you spend to acquire a customer relative to the average annual value that customer will bring in. So, if you spent $2,000 to acquire a customer that brings in $1,000 of revenue annually, it will take you two years to break even on that customer. Again, the lower this ratio is, the better your sales and marketing teams are functioning, the healthier your business is overall, and the simpler it will be to scale.
CAC payback time (years) = CAC / Average annual value of customer
4. Lifetime Value (LTV)-to-CAC ratio: This metric takes the one above a step further by allowing you to determine the total value that a customer is going to deliver over the life of their contract, and compare it to the money spent to acquire that customer. To do that, you simply calculate the projected revenue that your average customers bring in over their lifecycle, and divide it by CAC. Ideally, SaaS companies should strive to achieve a 3-to-1 LTV to CAC ratio, which would mean that, on average, customers bring in 3x more revenue than the cost required to acquire them. If, on the other hand, CAC is higher than LTV, your business is likely in trouble and scaling should be the last thing on your mind.
LTV-to-CAC Ratio = Projected revenue average customer in a lifetime : CAC
5. Ratio of Sales Qualified Leads (SQL) to Marketing Qualified Leads (MQL): The reality of lead generation is that not every lead that your marketing team generates and delivers will evolve into a legitimate sales opportunity. And because calculating CAC requires you to factor in the cash spent on lead generation in total (regardless of whether those efforts yielded SQLs or MQLs), this metric can speak to the efficiency and quality of your lead generation efforts. The higher your ratio of SQLs to MQLs, the more likely it is that your sales and marketing teams are aligned and making the most of lead gen expenditure. Ultimately, that can have a big impact on CAC and, by default, every other metric on this list.
SQL-to-MQL Ratio = Sales Qualified Leads : Marketing Qualified Leads
Honing in on More Granular Metrics and Performance Measurements
While each of the metrics listed above will give you a big picture view of your business, there are numerous other metrics that your SaaS company needs to track if it hopes to accurately calculate those measurements and put them into context.
What are some other key performance indicators?
For example, some additional metrics for gauging sales performance include:
- Leads to opportunities ratio
- Opportunities to wins ratio
- Sales cycle duration (period of days)
- Average deal size
- Bookings per rep
- Win rate
- Pipeline growth
- Pipeline coverage
- Trials or customers in process
Ultimately, measuring each of those things will allow you to understand the efficiency of your sales organization, as well as perform more thorough capacity management and resource planning.
For instance, if your average deal size is $5,000 and each sales rep books 10 deals per quarter, you can reasonably estimate that the capacity of each rep is $50,000 in revenue per quarter. So, if your goal is to generate $250,000 in bookings per quarter, then you will need at least five reps to do that. Additionally, if you notice that one rep is only generating $20,000 in revenue per quarter and that person’s win rate and pipeline growth are below average, you may need to intervene and either coach that rep up, or let that person go before he or she costs you too much money.
For your marketing organization, there are several additional smaller scale metrics that you should be tracking, as well. These can include cost per lead, program efficiency relative to each dollar of ACV, web traffic conversion rate, and lead capture efficiency (i.e., how many leads does each marketing tactic yield relative to the investment made in that tactic). Measuring those metrics is critical to truly understanding the effectiveness of individual marketing initiatives and channels, and ultimately deciding which tactics should receive more or less funding.
Of course, the metrics that are most relevant to your business may differ from those that are important to another SaaS company. As such, it is important to fully examine your economic model and identify the measurements that most accurately reflect the health of your company. From there, sales and marketing performance measurement is all about having the discipline to actually use the data you collect to do something productive.
Whether that means patching holes in your sales and marketing processes, ramping up spending on tactics and initiatives that are working, or adding headcount to reach certain revenue objectives, this metrics-driven approach will drastically improve your ability to drive growth in the smartest, most cost-effective manner possible.
What other metrics do you use for tracking sales and marketing performance?
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