Why Lead Velocity Rate (LVR) Is The Most Important Metric in SaaS

The-Secret-to-SuccessOne 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.

Screen Shot 2012-12-11 at 2.25.45 PM

Key image from here.

34 comments

  1. Pingback: SaaS and The 7-10 Year Sales Cycle « saastr

  2. 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 think Daniel, Jason, and Jim all spoke about this naming convention as something that leaves something to be desired – so my friend @GrantG9 and I decided to see if we could help out. The basic premise is this: Jason is using physics terminology (velocity) for a purpose that physics already has a term for (momentum). In this post, we compare, contrast, and define Lead Velocity and Lead Momentum in such a way that shows the value of each, clarifies their definitions, and hopefully creates a common terminology for us to move forward with! Let me know what you think? http://sumo.ly/Efm

  3. 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.

  4. Kirk VanDervort

    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.

  5. Raphael

    Is there a specific Equation that you use to calculate this metric?

  6. Jason — great insight regarding focusing on leading “lead” metrics vs. lagging sales metrics. I think every scaling SaaS company with revenues > $1-2m has to grapple with this issue. And it gets worse if you’re the CMO, because you’re not just tracking qualified leads, but the hundreds or thousands of dollars spent getting each lead, perhaps through dozens of different campaigns each month (I know this through my personal experience as a SaaS CMO). The term I like for this type of marketing is “high velocity marketing,” which I think dovetails nicely with your thesis: http://www.nadimhossain.com/1/post/2013/04/from-inside-sales-to-high-velocity-marketing.html.

    PS – if you know of any SaaS companies that might want to get more insight on the issue you’ve outlined above, please have them reach out to me: nadim [at] brightfunnel.com, to participate in our beta: http://www.brightfunnel.com/index.html.

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  8. featurekicker

    Awesome, insightful post. Many thanks for sharing.

    I see that your LVR goals decreased as your ARR increased. Can you take us back to pre-$1M ARR? What were your LVR goals when you had $0, 10k, $100k, $500k ARR?

    I suppose we could back into those calculations if this assumption is true: you were shooting for 100% YOY growth at all times.

    Alternatively, does it make sense to benchmark an early-stage company with less than $1M ARR against the LVR metric?

    • Yes our goal once we hit $2m in ARR was to exceed 100% annual MRR/ARR growth.

      LVT definitely works for companies less than $1M ARR as long as you have any volume of in-bound leads … what you want to see is that it is growing MoM at a fast enough rate. Going from 20 in-bound leads a month to 40 and then 80 and then 160 is a big deal, even if the absolute revenue is still tiny.

      But probably until you hit Initial Traction, say $500k MRR – $2m MRR depending on your ACV, etc. … until then it will be a less refined revenue prediction tool. But even then it can work very well.

  9. Super useful post Jason. Seems the most fungible variable here is the definition of qualified. What was the process you and the team used to consider it qualified? If they signed up on the echo sign homepage for an account or more info?

    • One way or another, you need to Score Leads and then decide when are qualified to go to sales or otherwise. For us, the lead scoring system was a combination of actions on the site plus requests for information. A simple sign up for a FREE account did NOT count as a qualified lead. It’s just a sign-up. A sign up for an enterprise trial that never sent a document for signature was also not a qualified lead, unless they took another action, e.g. say hit Contact Me in which can they most clearly were a lead. More usage of the service = higher lead score.

      In any event the key point for measuring lead velocity is to come up with an objective lead scoring system (whatever that system is) and then just measure qualified in-bound leads.

      But if they don’t take actions to qualify themselves (or aren’t qualified by someone on your team), they aren’t a lead … they are just a contact … and can’t count.

      • Thanks Jason! Really helpful. The idea of scoring a lead on a scale (rather than just binary yes/no) is interesting too.

      • yes. as you grow and start using tools like HubSpot, Marketo, Act|On, etc. you’ll see that functionality is all build into them. it’s extermely important and effective.

  10. Jason: Your users’ comments have further defined these key terms: ‘Qualified’, ‘Leads’ and ‘Velocity.’ Great discussion. thanks.
    Can you share some echosign insights on leads from channels vs inbound. When did you switch over to prioritizing inbound leads over every other form of lead. Maybe a topic for another post?

  11. Jordan Cohen

    Great article, thank you!

    Question: are the #s used in the chart real? Curious how big of a team you had (lead qualification specialists?) in order to qualify 600 leads in Jan and more than 1000 p/mth by the end of the year. Also curious how that mapped to total lead volume (including “unqualified” leads. Appreciate any insights publicly posted her or sent to me privately! Thanks much – Jordan

    • Yes this is our actual chart from the mid-early days. At this point, we actually had no lead qual team yet for higher quality leads, only for lower quality leads were we did at this time outsourced lead qual.

      Rather, we merely used a relatively tested form of lead scoring to route leads to the reps. No unqualified leads were sent to the reps, but we knew how to lead score them so that different categories of reps would get from 50-150 leads a month depending on market segment.

      With hindsight, we should have added more lead qualification headcount earlier for higher quality leads, but this worked fine up to $5m-$8m ARR or so.

  12. Jason,

    Did you ever see a dip in your sales conversion rates when you dramatically increased your LVR? Our sales team has gone from 1 to 6 (+ 1 full-time lead gen) over the past 9 months and we have always prioritized LVR as our most important metric. This quarter we have consistently produced LVR at a much higher rate than ever before. However lately I’ve seen a dip in sales meeting conversion and am trying to determine the cause.

    1. I over emphasized weekly LVR and it has caused the sales reps to produce leads that aren’t truly qualified to be counted in order to bloat performance.

    2. Over emphasis on generating LVR is diluting the reps ability to consistently and predictably work the rest of the sales funnel toward closing business.

    3. Something else

    Important to note that the majority (90%) of our leads to date are still out bound.

    Curious to hear your insight.

    – Adam

    • You shouldn’t see a material dip as long as your lead scoring is consistent.

      If it is, don’t allow a dip in sales to be excused by complaints about lower quality leads, etc.

      Sales should track your LVR. Hold them accountable.

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  15. Would you consider cold calling in your LVR channel tracking?

    • As long as they are qualified leads — it’s probably not too important where they come from. It doesn’t matter if the call is warm or cold, what matters is if it produces a qualified lead (e.g., an appointment, a demo, etc.).

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