One thing that is great in SaaS, from a 20,000 foot perspective at least, is You Can See The Future.
It’s the benefit of a recurring revenue stream in a B2B model. If you did $100k last month, and have grown 6% a month each month for the last 12 mos, I can pretty much say you’ll be a $2m+ ARR business in the next twelve months or so.
The thing is, sales is variant, and sales pipelines have big data quality issues — and worse, sales as a metric is a lagging indicator. In fact, your monthly sales tell you about the past. Pipelines are cr*p for predicting the future. Pipeline for This Month is useful, but still dependent on how various reps get probability right. Pipeline for Next Quarter is almost useless for most SaaS start-ups, even once you get pretty big. And actual sales are a lagging indicator … they reflect leads from the past, qualified, managed, and then closed over a 12+ month period. Even if your sales cycle is short, how long ago was the lead first created? Probably over a year. The sales you get this month are really the sales you began to create over a year ago.
>> But there’s a better metric, your Key Metric, you should track and score yourself to, and hold your VP Marketing and marketing team to – Qualified Lead Velocity Rate (LVR), your growth in qualified leads, measure month-over-month, every month. It’s real time, not lagging, and it clearly predicts your future revenues and growth. And it’s more important strategically than your revenue growth this month or this quarter.
- If you set as a top corporate metric growing your LVR about 10-20% greater than your desired MRR growth — and you have a consistent sales team — you’ll hit your revenue goals.
- And the great thing about LVR is while sales may ultimately have a quarterly variance, and while a lost renewal can hurt — there’s no reason leads can’t grow every single month like clockwork. Every single month.
As long as you are using Qualified Leads, and you use a consistent formula and process to qualify them, you can then See The Future:
If the leads keep coming in, then over a quarter, over six months, if you have a strong, consistent sales team, sales will track the leads, lagging at least by the median length of your all-in sales cycle.
If the leads keep coming in, and sales growth does not track your lead growth, you’ll know you have one of two problems:
- If the sales team has changed, your sales team quality may have declined. Time for some changes. You can measure this by revenue/lead for the sales team as a whole, and for each individual rep. If this is declining, you have a problem, one way or another.
- If the sales team hasn’t changed much, and your MRR growth isn’t keeping up with your LVR — then you have a problem with your product. You aren’t keeping up with the competition. Time to make a change.
And LVR can buck you up in the tough times. If you’re having a tough month or quarter on the revenue side, but the LVR is hitting plan and your sales team is strong — don’t sweat it strategically. You’ll do fine. Make changes if necessary, but shrug off the down month.
At EchoSign, we set LVR growth targets of 10%/month once we hit $1m in ARR, and then 8%/month once we hit about $3m in ARR. The goal of 8%/month was to produce enough leads to grow the business at least 100% YoY.
And you know what? We hit the lead generation growth goals, the LVR, just about every month, and certainly every quarter, and every year. And by hook or crook, with the benefit of an every increasing quality sales team, and an even increasing quality product — the revenue followed. Not like clockwork every day. But clearly, ever quarter, and every year.
Follow other Core Business metrics of course — just understand they aren’t as good. Sales and pipeline lag. MRR growth is important but minor variations can lead to huge modeling variances.
But hit your LVR goal every month … And you’re golden. And you’ll see the future of your business 12-18 months out, clear as can be.
Key image from here.
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Good post Jason. I like the focus and distillation on one key metric for marketing. A question: Is this just saying that you should grow the number of good leads over time? The ‘velocity’ word throws me – sounds fancy, but isn’t this just another word for “growth rate”?
The post does not mention the importance of cost per qualified lead. Spending more money each month to grow your lead volume is an easy way to achieve your LVR.
Yes all it really means is the growth in Qualified leads over time. My overall thesis is that if you qualified leads are growing X% above and beyond your revenue goals, you are in fundamentally sound shape, even if you have issues to address (feature gaps, sales process problems, etc.).
I am ignoring cost per lead because I don’t think it’s THAT important as a Way to Project Growth, only for the reason is that for most SaaS companies, it’s hard to buy an excessive number of truly qualified leads. You can buy a lot of names, a lot of contacts, a lot of registrants … but assuming your qualification processes is hard enough, and you have discipline in your marketing processes and budget (2 big IFs) … then you can mostly ignore this as a Key Growth Indicator, at least.
I’m with Daniel… lead gen rate is more accurate. I do like the idea of lead velocity too — as it applies to the sales cycle (from first “qualified” contact to “resolution”). What’s important is when the clock starts and when the sale is concluded, deferred, or lost. I suppose you could just measure first contact to close and then talk about win rate, too. But in any case the rate of lead gen and throughput of the sales funnel is the key to success — in any business.
Yes maybe LVR is the wrong acronym, I’m still working on it. Growth in Qualified Lead Gen Rate is the real metric, I was trying to simplify it and focus on growth, with Lead Velocity. Still WIP.
Jason, ARR? could you tell me what this is? I’m sure I have an idea, just want to verify.
Thanks
Annual(ized) Recurring Revenue. The amount of recurring revenue you are doing this month, x 12. This will be higher than your GAAP revenue (unless you have a material one-off component to your business), but tells you the real-time run rate of your business.
Is there a specific Equation that you use to calculate this metric?
Yes but it’s very basic. Your growth rate in new, qualified leads per month.