With the uncertainty in today’s economy, SaaS companies are working hard to conserve cash while balancing growth and profitability. On that note, the question then arises which one should we be aiming for?
During an economic downturn, using SaaS benchmarking with a variety of operating and cost metrics can help you calibrate how efficient different areas of your business are so you can find opportunities for improvement. That brings us to the next question, how do you operationalize your benchmarks in your strategic plan?
This article will:
- Help you understand why you should use benchmarking in your planning processes.
- Share key sources of benchmark data you can use to develop benchmarked KPIs.
- Walk you through a step-by-step example of how to use benchmarks in planning and budgeting.
Why should you use benchmarking?
Benchmarks provide a touchstone for your business, something you can compare your company with to understand it in the larger context of the SaaS industry. Many leading SaaS companies benchmark their financial and operating performance over time and compare them with best-in-class companies in the industry. With benchmarking, executives are able to better evaluate the health of their business and be more effective in their financial and operational planning.
You can use benchmarking in several different ways to improve your business:
- Inject more objectivity into your planning processes. Benchmarks bring objectivity into negotiations with your board and key stakeholders by anchoring the discussion around what the best-in-breed do rather than debating hypothetical numbers.
- Achieve better alignment on goals and objectives. When you use benchmarks to set your goals and objectives, you shift the conversation from a debate about what the goals should be to a discussion about how to achieve them.
- Identify big opportunities for improvement. Benchmarks are also useful for identifying performance gaps or areas in your business that with improvement can accelerate growth.
- More effective change management. Benchmarks can make it easier to get buy-in when you need to make changes in your business because they provide objective evidence of why the changes are needed.
What metrics should your company be benchmarking?
Now that you understand why you should be using benchmarks in your business, where do you start? How do you identify the ones that you should be using for your KPIs?
We recommend first focusing on strategic level KPIs, the “metrics that matter” to the management and board and prospective investors. Here’s a list to get you started, bucketed into financial metrics, SaaS metrics, and operating metrics where benchmarking can be useful.
- YoY ARR growth rate
- Gross margin percent
- R&D expenses as a percentage of revenue
- S&M expense as a percentage of revenue
- G&A expenses as a percentage of revenue
- EBITDA margin (%)
- ARR per FTE
- Burn multiple
- Net Revenue Retention (NRR)
- Gross Revenue Retention (GRR)
- Customer acquisition cost (CAC)
- CAC payback period
- Rule of 40
- Annual revenue churn rate (%)
- Magic Number
- Logo retention rate (%)
- AE ramp-up time
- Booking/OTE ratio
- Average sales cycle time
- Lead-to-opportunity ratio
- Lead conversion rate
- AR turnover
- Current ratio
- Employee attrition rate
Be selective about the benchmarks you choose
There are several sources of benchmarks you could use for planning. However, it’s important to understand their limitations to make sure you choose those best suited to your business.
Metric definitions are not standardized, meaning that companies may be calculating them differently. As a result, a given benchmark may not provide an apples-to-apples comparison that is relevant and useful to your business. This makes the benchmark data less actionable for the purposes of strategic planning and ultimately reduces the positive impacts they would otherwise have on your business.
Also, in order to be actionable, benchmarks need to be bucketed into different classes of companies. In order to choose the best benchmarks for your company, you would want to see them listed by one or more of the following characteristics:
- Maturity (startups, scale-ups, enterprise, etc.)
- Revenue range (e.g. <$5M; 5M to 20M; 20M to 50M; 50M to 200M)
- Target customer segment (e.g. SMB, mid-market, or enterprise companies)
- How new customers are acquired (inside sales, field sales, channel/partner sales, or a combination)
The more representative the benchmarks are for your company the more useful they will be.
This challenge is one of the main reasons SaaS CFOs and CEOs end up relying on internal data from their previous years’ budgets and performance to put together the next year’s fiscal plan, usually just adding some percentage of the previous year’s numbers to get their target.
Using reputable benchmark reports and providers can help you overcome this challenge (and the temptation to limit yourself to just your own data).
Benchmarking service providers are probably the best source of benchmark data out there because they provide a broad range of data based on sample sizes large enough to ensure they’re representative. Examples include:
- RevOps Squared 2022 B2B SaaS Benchmarks & SaaSKPIBenchmarks.com
- Benchsights (more for sales metrics)
KeyBanc Capital Markets is another great resource because it provides data compiled from private SaaS companies.
We also recommend looking at reports from Venture Capital Firms, including:
How to incorporate benchmark data into your planning
Step 1. Identify the metrics that matter for your business
The first step to making benchmarks actionable is to determine the metrics that matter most for your business, those that will have the biggest impact if you can move the needle on them.
The list of metrics provided above covers the more common metrics you might want to benchmark. The metrics you choose could include any number and combination of the financial, SaaS, and operating metrics as well as others. Just know that the more unique your metric is to your business, the harder it may be to find a benchmark for it.
Step 2. Find industry benchmarks for your key metrics
Setting targets for your KPIs/metrics based on data about your competition and/or the industry is a powerful way to determine whether your business is keeping up or falling behind in the market.
Now that you’ve selected your metrics, it’s time to go on the hunt for benchmarks. While it can be hard to find numbers for some metrics, it’s worth the effort to look. We’ve provided some great resources in the previous section to get you started here. Just remember to be selective about the benchmarks you choose as discussed in that section.
Step 3. Establish your internal baseline
Your baseline (or base rate) is how your business has performed in the past for the metrics you’ve chosen. The duration you choose to compute the base rate by averaging the metric over could be four months or 12 months or some other number.
Let’s say you’re a company working to raise additional funding and you’ve chosen two metrics that you have identified to improve. The table below shows your metrics, your most current numbers (baseline), and some representative benchmarks for other companies like yours (the competition) and your larger market (all companies).
Step 4: Use the benchmarks to identify your opportunities
When you set your KPIs, you don’t want to just pick the median values. Rather, you should select the value that will help you meet your objective. For example, if your goal is to raise money from bluechip VC firms, you should choose a number that corresponds to the 75th percentile. However, if you’re on the fast track to an IPO, you should use the 90th percentile.
In this example your goal is to raise additional funding, so you’ve set our benchmarks at the 75th percentile for each of your KPIs:
Using this approach, it quickly becomes clear where you’re falling short and need to make improvements. You need to increase your YoY growth rate and reduce your R&D expenses to bring you more in line with competitors in your space who may also be seeking funding.
Step 5. Make a plan
Now that you know where your opportunities are, you need to make a plan for addressing them. A good thumb rule is to start with the end in mind. For example, where do you want to be in three years? Then you need to ask yourself, can you realistically meet each of your KPIs in three years?
Once you establish a realistic timeline for meeting your benchmarks, it becomes easier to see what steps you need to take to meet them. By building those steps into your plan, you make your benchmarks actionable.
Here’s what that looks like:
In this example, to hit your three-year target for YoY growth, you’re going to need to increase growth by an average of 2% each year, so you add that to your current baseline to get your next FY target. To hit your three-year target for R&D as a percentage of total revenue, you’re going to have to reduce that by 3% per year, so your next FY target becomes 39%.
This is a simplified example. You can set your timeframe for meeting a benchmark and set your annual targets within that timeframe at whatever makes sense for your business. The point is that baselines are generally difficult to move, so you need to focus on making a plan that is achievable.
Step 6. Track your progress
The final step is to measure and track your operational progress against the benchmarks. We recommend doing this on a quarterly basis because doing so not only helps to keep you on track toward the goals, but also because benchmarks can change fairly frequently depending on the source. Benchmarking on a quarterly basis provides you with an effective way to measure changes in your company’s performance relative to your peers, which can help you keep up with your competition.
Leveraging your benchmarks to their fullest
Drivetrain is ideal for determining your baseline and measuring and tracking your progress against your benchmarks because it’s a purpose-built platform for managing both your collaborative planning and budgeting needs. When it comes to benchmarking, Drivetrain makes it easy to track your actuals in real time, allowing you to confidently make decisions faster to move your business forward.
Another benefit of Drivetrain is that it provides a single source of truth. Benchmarking only works when everyone in your organization is aligned and working toward the same goals. Drivetrain makes your benchmarks visible to your entire organization, providing a touchstone for every team to help them align their activities to achieve them.
If you want to make benchmarking not only easy but truly effective, contact us today to book your demo.