If you’re in SaaS or running a startup, you’ve likely been impacted by the tech stock narrative and the slowing of funding news from April and May 2022.
In fact, your LinkedIn feed and email inboxes are likely filled with warning signs, post-mortem takes on hot tech stocks that have cratered in recent weeks and a feeling of uneasiness as we see how companies are handling layoffs and hiring freezes.
And whether it’s a downturn, pause, stagnation or something else … there’s no question that the market – and specifically, the market for SaaS – will be going through another abrupt change over the coming months.
The best thing you can do?
Actively prepare. Then … take action.
And although you’ve likely heard about “tightening belts” and “focusing on profitability” we’re sharing some actual metrics to look at again – or for the first time in a while – that’ll matter most in this new market.
Note – all metrics will change during new or disruptive periods like the one we’re now facing. So re-running and reviewing the data now will help us make better decisions now and prepare for all possible scenarios.
Why SaaS Metrics Matter in a Downturn
When we think about where performance metrics matter most, we often think of earnings reports, valuation announcements or post board meeting intrigue. Really, the reportable metrics are lagging indicators of a business’ health.
And they’re always important. But some fuzzy math or shorter runways can be hidden during a strong, growth market. And in a downmarket – or even an uneven or uncertain one – the leading indicator metrics that are at the heart of your business matter even more.
Some of the SaaS metrics you measure may be the same: cash flow is important, as is your lifetime value to customer acquisition cost ratio (LTV:CAC). But we recommend honing in on these 6 metrics, especially now, in order to make smarter, more proactive decisions that’ll help you weather whatever storm is coming your way.
Net Revenue Retention
An oft-cited but somewhat misunderstood metric, the net revenue retention of your business – the net amount of monthly or annual recurring revenue from existing customers – is a leading indicator of what the future may hold and where your biggest opportunities – and weak spots – may reside.
Look at:
- Net revenue retention by product line, customer segment or industry
- Net revenue retention by customer cohort (new vs. old customers, customers by payment terms and customers by usage)
- Net revenue retention by usage, CSAT and engagement
Cash Burn Rate
Cash burn rate is the amount of money you are losing over a given period of time. Many startups aren’t profitable in their early stages – for good reason and typically on purpose. Losing money allows them to reinvest earnings back into the business to help propel growth and drive top line revenue. It also allows companies to accumulate losses which are advantageous from a tax perspective later on if/when they are able to turn a profit.
However, burning cash only works if you can secure more funding before the reserves are used. Otherwise, the business will cease to be a going concern. Typically a business will measure their burn rate as $ per month “we are burning $200,000 per month.” If you have $2,000,000 in the bank, then you have 10 months to either turn profitable, reduce your burn, or raise more capital.
In times of uncertainty around sales and funding, it is advantageous to reduce your monthly burn to increase your runway. It also helps to shift expenses to variable from fixed, if possible, in order to make changes quickly if need be (hire a 1099 vs. a W2 employee).
Magic Number
The Magic Number is a formula used by many SaaS companies and VC firms to measure sales efficiency. It helps determine how much revenue is growing relative to the amount spent on sales and marketing. In other words, for every dollar spent on sales and marketing, how many dollars of revenue do you generate?
< 0.5 – considered inefficient and there are some large business issues that need to be addressed
< 0.75 – potential for growth but need to fix some issues to either drive more revenue growth with the same expenses or the same revenue growth with less expenses
> 0.75 – doing great, keep pouring fuel on the fire and grow the business
The exact equation is: (Current Quarter Revenue – Last Quarter’s Revenue) * 4 / Previous Quarter’s Sales & Marketing Expense
Any business that has a Magic Number at 1 would be considered a highly efficient business – this would imply they can pay back their S&M expenses in one year with their revenue growth.
Utilizing this metric, you should be thinking about how your business will be affected by a slowdown in revenue growth due to macro economic factors. You can scenario plan by plugging in different revenue growth metrics and then backing into your S&M expenses by ensuring you keep a reasonable Magic Number.
Rep Productivity
We have good intentions for measuring rep productivity in the high-growth, good times. Especially as teams are staffing up and there’s a lot of change, it’s easy to hope that momentum will “lift all boats” and all reps will be more productive all on their own.
Enabling your team with tools and tech is paramount to address this. But first, you need to understand what the problem actually is. Measuring rep productivity helps you do that.
Things like:
- Average rep quota attainment
- Average deal size and velocity
- Account manager retention and net recurring revenue rates
- Rep resilience (quota attainment after a down month or quarter)
When looking at how successful and effective each team is, you can hone in on problem spots, other teams can learn from the most successful sellers and account managers and you can pinpoint how best to support leaders that are underperforming or don’t have focus.
In this case, measure the outputs and you’ll know where you need to make more investment.
Tool Effectiveness, not Tool Efficiency
The instinct – and the instinct of your board – is going to be to do more with less. And that leads a lot of teams to take the red pen to their tech stack budget, the tools that have piled up that are half-used, partially rolled out or aren’t being used to their full potential.
Instead of measuring efficiency from a surface level dollars and cents perspective, though, a more productive cost cutting measure is looking at effectiveness. You and your team’s buy tools for a reason. As part of contract reviews and asking your teams to review what’s working and what’s not, ground the decisions in:
- What was the original intent or purpose of the tool or service? Is it accomplishing it? And do we need that today?
- How does this compare to other tools or investments we have in the business? Can we combine, open up more access and get more bang for our buck?
- Is our tech and operations stack working as efficiently as possible, or are we holding our tools back by not breaking down the tech silos that keep information flowing and team workflows humming?
Employee Engagement
Microsoft recently doubled its employee salary budgets. More and more companies are running “stay” vs. “exit” interviews.
And my colleague Alex outlined why now is actually the time to invest in your people. As they are the ones who are going to get you from where you are today to where you’re trying to go. And an engaged team is one that will be more flexible, adaptable and have better outcomes than a revolving door of talent.
In order to have a sense for employee engagement, look at:
- Recent employee engagement scores (and if you haven’t run one recently… now may be the time)
- Average tenure of your customer-facing teams
- Rate of promotion + development
Staying flexible in an uncertain market
A changing market won’t mean the same thing for every company or industry. For every 5 RIF posts in our LinkedIn feeds, there’s an earning report like Salesforce that beat expectations.
One thing we know is that whatever changes are to come are likely going to be uneven. Certain industries, sectors and businesses sizes will be impacted differently than others, and on different time scales.
The full macro picture, length of this next phase of the market and impact to different industries has yet to be written. But whether you’re a seed-stage startup, a profitable business or one that has a lot or little funding runway … one thing is for sure. Re-running your business metrics and committing to sound economics can only make you stronger through this period and better staged for growth when it’s done.
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