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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.
- If your leads are growing faster than sales, then an upgrade in sales will almost always lead to higher growth. Often, much higher growth.
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 Adobe Sign / 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, every 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’ve got all the raw ingredients of success. And you’ll see the future of your business 12-18 months out, clear as can be.
(note: an updated SaaStr Classic post)