Go-to-Market Troubleshooting - by the numbers
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Go-to-Market is a topic I covered in a previous edition of the SaaS Barometer Newsletter. Go-to-Market (GTM) is the term being used to describe the combination of the strategy, the organizations (Sales, Marketing and Customer Success) and the processes responsible for acquiring, retaining and expanding customer relationships.?
Many private and public SaaS companies continue to face the challenge as the SaaS industry matures, in combination with a? cautious capital environment. Additionally many companies are experimenting with AI and are re-allocating budgets from traditional horizontal SaaS solutions into AI experimentation.? McKinsey and Company predicts that the amount of churned ARR will almost double over the next few years due to the rise of AI.
The above dynamics, even in the era of revenue growth efficiency, has resulted in SaaS companies becoming less efficient as measured by Sales and Marketing expenses divided by ARR growth.? Before we get into troubleshooting GTM - by the numbers, let’s discuss the scope and responsibilities included within Go-to-Market.
The Role of the Go-to-Market Function
Managing the entire Customer Lifecycle is the primary responsibility of the Go-to-Market function(s) and includes all three phases of a customer relationship including:
The ultimate goal of a Go-to-Market (GTM) strategy in a recurring revenue business model is to effectively and efficiently acquire revenue from new customers, retain those new customers and expand the relationship and increase the revenue from those customers.
During the zero interest rate policy (ZIRP) period, the primary focus for SaaS companies, especially early stage, venture capital backed companies was to establish product market fit and then quickly scale their ability to acquire, retain and expand customer relationships effectively. I define effectiveness as how well a process performs and delivers outcomes without regard to costs.?
Effectiveness measurements include leading indicators such as win rate, pipeline conversion rate and customer retention rate.
Over the same time period, there was a significant decrease in the focus on the efficiency of the customer lifecycle, leading to increased capital consumption in the pursuit of growth at any cost.?
Revenue efficiency measurements contrast the costs to acquire customers and the associated revenue. Revenue efficiency is measured by metrics including Sales & Marketing expenses as a percentage of revenue, Customer Acquisition Cost Ratio, CAC Payback Period and Sales Efficiency.
Over the past 24 months, I have worked with several companies to assess and benchmark their financial performance metrics, and the primary focus often becomes centered on GTM performance. As a result, my work rate includes an assessment of the effectiveness and efficiency of the Marketing, Sales and Customer Success organizations.
In order to standardize the assessment process, I created a methodology for GTM troubleshooting that focuses primarily on five areas.
Go-to-Market Troubleshooting - By the Numbers?
Below are the five primary assessment areas included in my GTM troubleshooting methodology:
I define “efficacy” as the balance of effectiveness and efficiency whereas effectiveness is how well a process performs and efficiency is a ratio of the outcomes delivered to the costs incurred to produce the outcomes.
1?? Customer Acquisition - Pipeline Generation Efficacy
Pipeline Generation Effectiveness Metrics to Analyze:
? Pipeline created by Source (# of opportunities and $ value)
This is simply the starting point to understand how effective the organization is at generating pipeline across each primary source.? Analyzing the trends over the trailing 5 quarters is a good starting point.
Pipeline Generation Efficiency Metrics to Analyze:
? Pipeline Generation Cost per Qualified Opportunity (By Source)
? Pipeline Generation Cost per Dollar of Qualified Pipeline (By Source)
One key to analyzing any GTM metric is to look at the five quarter and nine quarter trend if available. Being able to identify the actual effectiveness of each primary source and its subcategories such as paid media and paid social within the? inbound marketing category is one example. Some would call the above example the “advertising CAC Ratio” - which is typically calculated on a variable cost basis.??
The Customer Acquisition Cost Ratio (CAC Ratio) is calculated by dividing the fully loaded costs of each source by the dollar value of the opportunities.
For the entire pipeline generated in a period the Pipeline CAC Ratio formula is below:
For source specific Pipeline CAC Ratio the following calculation can be used
2?? Customer Acquisition - Pipeline Conversion Efficacy
Pipeline Conversion Effectiveness Metrics to Analyze
? Pipeline Coverage Ratio
Though the calculation is fairly simple, at the same time pipeline coverage ratio is often miscalculated due to timing or the formula used.? In sales cycles over 45 days - it is recommended to wait to calculate the pipeline coverage ratio until week 3, day 1 to allow for the inevitable pipeline cleansing that needs to be completed at the beginning of each quarter. For shorter sales cycles, such as less than 30 days, the pipeline coverage ratio can be calculated on week 1, day 3. Once the pipeline cleanse is completed the calculation formula for the pipeline coverage ratio is:
It is a best practice to calculate and analyze the pipeline coverage ratio by source.? This will provide valuable insights into which sources produce the highest converting opportunities, and often will also provide additional insight into the capital efficiency of generating and closing each dollar of pipeline.
? Stage by Stage Pipeline Conversion Ratio
Understanding how conversion rates are trending by pipeline stage is critical to identifying which stage in the pipeline (sales cycle) may require increased focus. Negative trending conversion rates in mid to button of funnel often highlight sales executive issues while negative trending top of funnel conversion rates more often suggest a lead or early stage opportunity creation quality issue.
Conducting a stage by stage pipeline conversion analysis does require a level of sales process consistency including standard gates between each stage which are consistently utilized and managed.
Pipeline Conversion Efficiency Metrics to Analyze
? New ARR Cost per Qualified Opportunity (By Source)
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One of the primary benefits of understanding the efficiency of each primary source of new customers is that it enables a more data driven approach to planning, financial modeling and budget allocation.
3?? Win Rate + Average Contract Value + Cycle Time
?Effectiveness Metrics to Analyze
? Win Rate by Opportunity Source and by Target Customer Segment
Win rate is an often misunderstood and miscalculated metric.? The most common mistake is to confuse pipeline conversion rates which are period based and the win rate.? To correctly calculate win rate, it requires a cohort of opportunities created in a specific time period (say by month or by quarter) and to calculate the percentage of those opportunities that result in “Closed-Won” at each point in time across the entire lifecycle of those opportunities.? You can see a quick video on win rate calculation by one of my favorite thought leaders on the topic, Bill Kantor b.
As companies scale it is critical to understand win rate by both the primary source of the opportunity and by target customer segment.? Often, expansion into new markets, such as moving into the enterprise from mid-market, or moving into a new country will impact the overall win rate.
? Average Annual Contract Value by Source and Segment
Average Annual Contract Value (ACV) is best calculated using the subscription annual recurring revenue versus using the total contract value or bookings value.?
By focusing on increasing the buyer’s perceived value of the solution, the associated increased ARR can positively impact CAC efficiency metrics including the CAC Ratio, CAC Payback Period and CLTV:CAC Ratio - not to mention hitting the New ARR plan and increasing quota achievement rates for the sales force.
ACV is best calculated and analyzed by opportunity source and also by target customer segment.
? Sales Cycle Time by Source and Segment
Sales cycle time is a critical input variable into multiple dependent metrics and processes including pipeline coverage ratio, forecasting and planning. As sales cycles increase, pipeline coverage ratios will typically follow and forecasting using traditional weighted methods such as stage based probability will also become less accurate and reliable.?
It is important to understand that some primary sources of pipeline, especially from inbound hand raisers will typically result in not only a higher win rate, but also much faster.
Step #4: Customer Retention
Effectiveness Metrics to Analyze
? Gross Revenue Retention Rate
? Customer Logo Retention Rate
? Customer Retention Leading Indicators
Gross Revenue Retention (GRR) measures how much ARR a cohort of customers represents at the end of a period including churn and downsells but excluding up-sells and cross-sells divided by the total ARR that same cohort represented at the beginning of the period. The trending of this metric is most instructive for operators (not investors) when the companies included in the cohort are only those that are available to renew (ATR) as multi-year contracts can obfuscate the reality of customer churn for those customers who have the option not to renew.
GRR is also a very good metric to use to determine the best fit ideal customer profile, as understanding the effectiveness of both winning a new customer and retaining that customer makes for a much more profitable ICP over time.
There are several Customer Retention leading indicators correlated to customer retention in most B2B SaaS companies.? Though the degree of correlation will differ for each company, some of the most common leading indicators include: 1) On-Boarding Satisfaction; 2) Net Promoter Score; 3) CSAT Score; 4) Product Utilization and; 5) Verified Customer Outcomes.?
It is a good exercise to identify, capture and analyze each of the above leading indicators and GRR signals as part of any end to end Go-to-Market troubleshooting exercise.
Efficiency Metrics to Analyze:
? Customer Retention Cost Ratio
The Customer Retention Cost Ratio measures the amount of Customer Success and Customer Support expenses incurred in the pursuit of retaining customers and their associated ARR.? ??
One nuance of calculating the customer retention cost ratio is it is a best practice to not include Customer Success expenses allocated to up-sells and cross-sells.? Though this can appear to be difficult, it can be easily be estimated by surveying every Customer Success resource and asking them what percentage of their time is allocated to identifying and nurturing up-sell and cross-sell opportunities with existing customers and also asking what percentage of their time is allocated to on-boarding, supporting and managing existing customers.?
If your company uses account managers or account executives to renew existing customer agreements, these allocated expenses should also be included.
Step #5: Customer Expansion
Effectiveness Metrics to Analyze
? Net Revenue Retention Rate
? Expansion ARR as Percentage of Total New ARR
? Product Penetration Ratio
Net Revenue Retention (NRR) measures how much Annual Recurring Revenue a cohort of customers represents at the end of a period divided by the ARR they represented at the beginning of the period.? All ARR impact from up-sells, cross-sells, down-sells and churn should be factored into the end of period ARR calculation. The current benchmark for the median NRR is 101% and varies primarily based upon ACV, product portfolio and pricing model.
Expansion as a percentage of total new ARR has traditionally been viewed as good if a company hits 30% of total new coming from existing customer expansion.? Thay benchmark across the industry is now at 35%, and starting at $50M ARR and above is closer to 50%.
Product Penetration Ratio is a great measurement for those companies with three or more products that can be purchased independently.? Dividing the total amount of products available for purchase by a customer by the average number of products per customer and viewing this over a 2/4/6/8 quarter time horizon provides valuable insights into both the expansion ARR potential but also an opportunity to analyze GRR by the number of products each customer cohort has purchased.
Efficiency Metrics to Analyze
? Expansion CAC Ratio
The most underutilized metric in SaaS and one of my favorites, especially in a phase of industry maturation that is so dependent on existing customer expansion.? The Expansion CAC Ratio measures the amount of Sales, Marketing and Customer Success expenses allocated to the pursuit of expanding existing customer relationships including cross-sells and up-sells.
In 2023 the median expenses allocated to existing customer expansion to generate one dollar of expansion ARR was $1.00.? Though this may not sound that bad, it represented a $.31 increase year over year or a 42% increase.? The common belief that expansion ARR is much cheaper than acquiring new ARR is still true, but without measuring the costs of increasing expansion ARR it is difficult to determine how much investment to make in new customer acquisition versus existing customer expansion.
Summary
Go-to-Market trouble shooting is far too often only completed in reaction to missing the financial plan.? Best in class companies proactively identify the GTM performance metrics that not only measure the prioritized outcomes, but also the correlated input variables and signals that serve as leading indicators to the probability of achieving the outcome measurements which are the lagging indicators that matter to CEOs, CFOs and investors!!!
This week’s SaaS Barometer Newsletter is brought to you SaaS Metrics Palooza - the ONLY industry event dedicated to the sharing of best practices of how leading companies and investors use metrics and benchmarks to measure and guide their journey to success. Click here to see the amazing line-up of speakers, their session title and also to register for this virtual event!
CMO, Hypergrowth Advisor, Took Atlassian Public
1 个月Two questions - how do you factor in multitouch and multi channel contributions to your CAC by channel? In B2B marketing, multitouch is the norm, creating portfolio strategy vs easier channel attribution like B2C. Similarly, I’ve found difficulty in keeping inbound and outbound channels actually separate for attribution. A prospect may have been inbound a long time ago and then respond to outbound now or visa versa. The time periods people choose to categorize one vs the other are a hot debate topic (3 months, 6 months?) - but long nurture cycles are the essence of awareness and content marketing. Second question - why do you like 5 and 9 months for analysis? Why not 4 and 8?