The Importance of Benchmarks for SaaS Companies in Deciding How to Allocate Capital
How can you track your progress in a meaningful way that helps you and your Board make the best decisions to guide your business forward? How can you measure your success in comparison to your peers – both your competitors, as well as the best in SaaS? To answer these questions, you need two things: 1) benchmarks of other SaaS companies to measure your company against and 2) your own data/metrics to see how you compare to top-performing companies.
Benchmarks on How Top Tier SaaS Companies Allocate Their Capital
SaaS Capital conducted a survey of over 700 SaaS executives that focused on how companies allocate their capital at different stages of growth. The Managing Director of SaaS Capital, Todd Gardner, and I just led a very informative discussion with a number of SaaS companies on how to apply these benchmarks to their businesses. Following are three key takeaways, but I encourage you to watch the full webinar for even more detail on how top performing SaaS companies spend their money.
Takeaway #1: Net Retention Rate is one of the biggest determinants in valuation
In the SaaS Capital survey, the top performing companies had a Net Retention Rate of 120%+. Net Retention Rate measures the total change in recurring revenue from a pool of customers over time and is calculated as follows: the current monthly recurring revenue (MRR) from a group of customers divided by the company’s MRR from that specific group of customers from one year ago. A high Net Retention Rate is often indicative of a low churn rate, and a swing of 10% has an exponential effect on long-term gains and sustainability in the business. (If you’d like to know more about Net Retention Rates, here’s a good article from SaaS Capital.)
Takeaway #2: Great firms are able to shift costs from COGS to customer success
The SaaS Capital survey examined the differences in how top and bottom-performing companies spend their money. The results clearly show that the more you can shift your cost structure from the COGS involved in delivering your solution (whether via professional services, a complicated deployment model, human experts, etc.) to customers receiving the value from your solution, the faster your growth rate. The companies who are doing well have found a way to deliver their products more efficiently and have re-allocated those dollars to building a better product and improving customer success – the things that matter to the customer.
Takeaway #3: The “Rule of 40” is not an absolute
One of Intacct’s investors, Bessemer Ventures, has shared a strong measure of SaaS success at the annual State of the Cloud presentations at SaaStr. The Rule of 40 is defined as Growth Rate + Profit = >40%, and it is often attributed to firms >$50M. In this survey, however, SaaS Capital found that many companies are still creating good enterprise value even if they are below the Rule of 40 target. A lot of this has to do with the competition in many spaces for who is going to become their category leader and making the constant decisions on investing for growth versus profitability.
How to Get the Metrics to Measure against Benchmarks
Charting a company’s course through growth is a very important topic. I spend quite a bit of time with our customers, SaaS investors, and executives of companies we are in a position to potentially assist. Everyone is working hard on solving big problems better than anyone else in their space, and they all need the data to guide decisions on how to best do that. Knowing the benchmarks to measure yourself against is only useful if you have your own metrics to make the comparison.
Our relationship with Salesforce.com gives us a unique view on the data and workflows behind the entire contract relationship, essentially building a customer-focused finance lifecycle. By integrating the opportunity master record out of Salesforce with the Contract master in Intacct, you can:
- Reduce churn by understanding the entire customer lifecycle from lead to cash.
- Have real-time reporting for the entire team on the P/L to make decisions on COGS vs. R&D.
- Have a forecast for the future and plan out growth and profit to drive to towards the Rule of 40.
Joining the data allows us to provide real-time Executive Dashboards from a combined view of one system of record on the core metrics you are managing against.
And having everyone on the same page creates a shared consciousness in decision-making to navigate your company’s growth, and it gives you the data to compare yourself against peer benchmarks to stay ahead of the pack.
To learn more about SaaS Capital’s research, please click here: http://www.saas-capital.com/resources/
To view our recent webinar discussion of how top tier SaaS companies allocate their capital, please click here: http://bit.ly/2ufVOQm
To see how Intacct can help you automate your SaaS business to get the insights you need to grow, please click here: https://us.intacct.com/software-saas-accounting-software.
David Appel is the Head of Software & SaaS at Sage Intacct, and is passionate about creating great B2B SAAS companies. Over time he has developed a series of SMB, Mid-Market, and Enterprise customer-lifecycle playbooks that focus on creating value for customers, increasing return for shareholders, and building great teams, that have generated over $1.1B in market capitalization for his clients.