Over the past decade, the SaaS business model has seen an exponential rise in popularity. What was once the exclusive domain of pioneers like Salesforce has become an extremely crowded field, with a multitude of options vying for customers’ limited attention.
As a result of this trend, SaaS benchmarking has become increasingly important. After all, when there are so many alternatives available, companies have to make sure that they are performing in line with or better than their key competitors.
In this article, we’ll take a look at four ways your SaaS company can benefit from benchmarking:
Evaluating Progress and Goals
The first and most obvious reason for benchmarking is to compare your progress against your peers. This will help you to evaluate how well you’re doing, and to pace yourself for the long race ahead.
At the very least, you should be tracking these core metrics:
- Monthly Recurring Revenue (MRR)
- MRR Growth Rates
- Customer Lifetime Value
- Churn Rate
- Customer Acquisition Cost
- Total Sales, Marketing and R&D Expenses
These numbers are especially important if you ever intend to raise money or be acquired. They will give potential investors a good overview of your operations and how you compare to your competitors.
Just as importantly, they will also allow you to establish realistic expectations for growth, thus helping to avoid burnout. For example, it’s a common belief among investors that after you reach your first $1mn in annual recurring revenue (ARR), you should expect to triple that twice, then double it three times, thus reaching $100mn in ARR at the end of year five. This is known as the T2D3 framework.
However, research from OpenView found that only 0.1% of venture-backed start-ups reach that lofty goal. Of ten major enterprise SaaS IPOs in 2017, only two – Nutanix and Cloudera – managed to grow at that pace, and it took them $1.4 billion to get there.
Clearly, T2D3 is an unrealistic target for most start-ups, yet many promising companies have burned through their cash and gone bust trying to reach it. If these companies had had access to accurate benchmarks, they could have established more realistic goals and paced themselves appropriately, thus increasing their chances of success.
Identifying Best Practices
Besides measuring results, benchmarking can also be used to evaluate the quality of your business practices. By comparing your internal decisions and processes against that of your competitors, you can get a good picture of your strengths and weaknesses, and greatly accelerate your learning curve.
According to Lauren Kelly of OPEXEngine, such regular evaluations are necessary to keep pace with the rapid changes in the SaaS industry. For instance, in 2008 it was considered normal to spend 60% of marketing budgets on employee salaries. Today, only 30% is earmarked for compensation, while the rest is invested into training and software that makes marketing teams more effective. Without such up-to-date knowledge, it would be difficult for any company to achieve a high level of efficiency.
In many cases, this knowledge is already present in the industry, but is only known to a handful of leading-edge VCs and subject matter experts. Benchmarking democratizes this information and makes these best practices accessible to all.
Improving Resource Allocation
In many companies, resource allocation tends to be an arcane, haphazard process.
Typically, senior management will discuss the company’s revenue and profitability targets with the finance department, who will then assign budgets to each department based on historical spending and results. The department heads discuss plans for the coming year with their team, then determine how to fit everything into the budget. Very often, they will ask for more money, without considering the possible effects on other departments – after all, that’s finance’s job. As a result, money is often funnelled to the departments and initiatives with the most persuasive champions, rather than those that can offer the highest ROI.
Benchmarking can make this process a lot more transparent. By making each department’s industry benchmarks available for all to see, the entire company will make better decisions on where its limited resources should be allocated. For example, if sales asks for more hires to reach revenue targets and requests taking it from marketing’s budget, everyone can see how that would put marketing’s headcount significantly below the industry average. This will encourage people to break out of their functional silos and collaborate across departments to determine how best to reach the company’s goals.
Increasing Your Attractiveness to Customers
So far, we’ve mainly discussed internal benchmarks that you can use to run your company better. But there are also external, freely available benchmarks that can significantly affect the public perception of your company. Some of these benchmarks exert a great influence on your customers’ buying decisions, so it’s worth doing what you can to score favorably on them.
One of the most highly regarded benchmarks is the Gartner Magic Quadrant. This tool provides a visual representation of your competitive positioning in your industry:
There are four categories of providers within the Magic Quadrant:
- Leaders have great execution today and are well positioned for the future
- Visionaries have a plan to either adapt to the future, or create it themselves, but are currently lacking in execution
- Challengers are good at executing today’s plans, but don’t have a strong plan for tomorrow
- Niche Players have a strong presence in a specialized segment, but don’t have especially strong vision or execution relative to the competition
The Magic Quadrant is taken very seriously by B2B technology buyers, as many prefer to establish sustainable relationships with vendors who will continue to perform well over the long-term. Gartner itself points out that the Quadrant is not a scoring tool, and there are often good reasons to partner with Visionaries, Challengers and Niche Players. But the reality is that most customers prefer to buy from Leaders, and so companies should certainly strive to become one.
By improving your standing on the Magic Quadrant and other industry benchmarks, your customers will increasingly come to view you as a leading provider in your field.
That Which is Measured, Improves
The first step in beating the competition is to understand how you measure up against them. To that end, benchmarking can help you evaluate your results and make rapid improvements to your current practices. It’s a great way to get an edge in the competitive SaaS industry, and make your offering a lot more attractive to customers.
Leverage benchmarks consistently and intelligently, and before long, you’ll be leaving your competitors in the dust.