Success is a relative concept. Whether a company measures its performance against market leaders, near peers, or its own past performance depends largely on its strategic goals.
But companies hoping to attract investors—especially those planning to go public in the near future—need to keep a close eye on industry benchmarks. These metrics are also helpful for companies that want to grow quickly or are looking for ways to reach the next revenue tier. In fact, more than half (57%) of CFOs say their board or CEO now asks how they are performing relative to benchmark companies, according to Adaptive Insights’ CFO Indicator Report Q1 2017.
The metrics that best convey how a company stacks up depend on several factors, including sector, size, and sales team structure. However, some financial metrics offer a useful barometer for almost any SaaS team. Here are three benchmarks that can help your company assess its performance—and find efficient ways to grow.
Benchmark #1: Growth speed
Not sure if your company is leading or lagging? Pick a growth milestone, whether that’s $10 million or $100 million, and see how long it took other companies to get there.
Whether you choose to gauge your performance against the top quartile, the median, or the bottom quartile, looking at real-world success stories will help you set a realistic timeframe for meeting your growth target.
Looking at year-over-year growth benchmarks can also give you a road map for the milestones the company should hit along the way. For instance, if you want to grow from $1 million to $100 million in seven years, drilling down into the past costs and revenues of a company that has already reached that goal will help identify changes your company might need to make.
And if your company is looking for investors, tracking against this benchmark will help you see how quickly you need to increase annual revenues to be an attractive option on the market.
Benchmark #2: Cash flow efficiency
Most companies measure cash flow efficiency using the “Rule of 40,” which says the combination of a company’s year-over-year growth rate and its profit margin should be 40% or higher. That means a company with a growth rate of 50% can get by with negative 10% profit margin, while a company with a 20% growth rate needs a 20% profit margin, as well.
But this rule is most applicable for mature companies, especially those that are at least three years post-IPO, with at least $100 million in annual recurring revenues (ARR). For companies that are still preparing for their IPO, growth rate has a much bigger impact on the value of the business. That means investors will want to see a higher cash flow efficiency ratio.
Benchmark #3: CAC payback
Knowing how long it takes your company to pay back the cost of a new customer acquisition can help you measure the impact of your sales and marketing efforts. You can get this number by dividing your company’s sales and marketing cost for a given quarter by the change in gross profits over the same quarter. This tells you how many months it will take to pay back the new revenue you gained, and most SaaS companies work to keep that number at or below 12 months.
But growing a SaaS business is not a linear process. In growth periods, the customer acquisition cost (CAC) payback period may temporarily increase as you hire and train a larger sales force and handle the initial churn that comes in tow.
If your CAC payback period seems long, you can drill down into the three major inputs that influence this rate: sales rep costs, marketing spend, and sales support. Benchmarking these contributing elements can help your company decide what changes need to be made to make your sales and marketing more effective.
But making the most of these benchmarks—and the internal performance data you have at your fingertips—requires the right technology. To move the needle, finance teams need to spend time brainstorming solutions, not just compiling and maintaining benchmark databases. According to a 2017 PwC report, top performing finance teams spend 20% more time on analysis than data gathering, pay insight finance professionals 25% more—and are still able to run at a 36% lower cost.
“The technology is there and in general finance is lagging other functions in exploiting it,” Steve Crook, PwC UK Partner, said in the report. “Finance has an opportunity to get on the front foot in driving business performance, and now is the time to catch up with what the other functions are doing.”