How to Use Industry Benchmarks
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How to Use Industry Benchmarks
“Best Practices, Cautions and New Benchmark Reports”
Benchmarking is defined as the practice of comparing internal key performance indicators and/or business processes to industry norms and best practices measured against other companies or collection of companies, typically in the same industry.
Benchmarking is used to measure performance using a specific key performance indicator (cost per unit of measure, productivity per unit of measure, or cycle time of x per unit of measure) resulting in a performance metric that is then compared to other companies.
One story behind the origination of “benchmarking” is that it started in the gun and ammunition industry to test and benchmark a gun’s accuracy and also measure the person using the gun’s accuracy to become a “marksman”.
If you are interested in the broader topic of benchmarking, several great resources are referenced in Wikipedia. If you are interested in some of the best practices and cautions in using benchmarks in the SaaS industry this edition of the SaaS Barometer is for you!
Benchmark Best Practices
Most SaaS companies review benchmarks related to the key performance indicators in the form of metrics that measure the performance of a business process or its financial performance. Common metrics that are most often benchmarked include: 1) Rule of 40; 2) CAC Payback Period; 3) Net & GrossRevenue Retention; 4) Win Rate; 5) Burn Multiple and: 6) Enterprise Value to Revenue Multiples.
The above are just a few examples, and far from an exhaustive list of key performance indicators (metrics) that should be measured internally and benchmarked externally. Below are a few best practices when using benchmarks or beginning a benchmarking initiative.
👉 Compare your company’s internal performance metrics to similar “like” company segments that are grouped or filtered by the below company profile attributes:
👉 Numerical benchmarks are best used as a guideline for process efficiency, financial performance or returns on specific process investments. No single metric or its benchmark should be used in isolation. Having a performance metrics framework that highlights a metrics inter-dependencies is a great place to start.
👉 When possible confirm how the metric used to create the numerical benchmark was calculated. An example is when using a CAC Payback Period benchmark - understand if it was calculated using a gross margin adjusted formula, which can change the benchmark by up to 30% as measured against a non gross margin adjusted calculation formula.
👉 Benchmarking should extend beyond the numerical measurements and expand into “process benchmarks” to evaluate your current state process to a company or group of companies that have superior numerical benchmarks for a specific process. An example is to understand what does another company or group of companies do to have a 10% higher Net Revenue Retention Rate? Snowflake may have a ~ 140% NRR which may be dramatically impacted by the pricing model, the product attributes, what group of customers they include in the calculation and even when and how they define new revenue versus expansion revenue.
👉 Identify the top 3-5 metrics that you want to focus on in your company, and evaluate the benchmarks for all 3-5 metrics in similar companies to your own. This is important as there will often be strategic trade-offs to optimize one performance metric at the expense of another. Several of these examples are below:
The overarching theme from the above can be boiled down to:
Benchmark “Report” Cautions
⚠️ Timing of the metrics used to calculate the benchmarks.
In some reports, benchmarks are calculated using metrics from very different time periods. One popular report I reviewed included data from time periods spanning across 2012 - 2024, which is unreliable in an industry that is evolving so quickly and/or has experienced major volatility such as growth rates from 2020-2021 or 2022-2023 versus using a smoothed growth rate from 2020 - 2024.
⚠️ Benchmarks that are shown based upon averages vs median vs top quartile
Some common benchmark reports in the SaaS industry only show the top quartile for certain benchmarks and then change to showing averages in another section/page within the same report - know which measurement criteria the benchmarks are showing. Reports that show the benchmark spectrum including “25th percentile, Median, 75th Percentile” or “Top Quartile in the title or chart label” or “via a legend” or “as a footnote on the chart page is a best practice.
⚠️ Understand the population for the benchmark and for the segments being shown
That does not mean that a population of less than 100 is bad or greater than 500 is good, but at least try to understand the size of the population and the company profile attributes of the participating companies.
⚠️ Understand that both survey-based benchmarks and system-based benchmarks can be biased due to the profile of the population and/or the calculation methods being used
Certain benchmark reports are based upon a large population of smaller companies, while others are based upon a selection of the top tier VC backed companies. This selection bias does not automatically render the reports useless – but understanding that a benchmark may be biased upon the population participating in the benchmarking
⚠️ The source of the benchmarks, such as being from a VC firm, versus a platform vendor versus an independent research company can impact the benchmarks themselves or the benchmarks being shown in the resultant report. None of the above participant make ups are necessarily better or worse - just highlighting that understanding the source of the benchmarks including the profile of the companies included is a good way to understand how relevant the benchmarks are to your company
Latest SaaS Benchmark Reports
Over the past few years, I have seen a significant increase in the number of benchmark reports being published. Though I have some strong opinions on the best practices to use when creating, publishing and using benchmark…I believe it is very valuable to review as many of quality benchmark reports as possible including the recently published reports below:
👉 CloudZero Cloud Cost Management Benchmarks (Interactive Version)
Summary
Benchmarks are a great tool to include in your SaaS executive toolbox, but are not a perfect instrument or precise guidance system to follow on your company’s unique journey.
Using benchmarks to inform and help establish company level “measurable objectives” when planning, setting objectives and measuring performance efficiency is best served when the benchmarks you use come with an understanding of how your company profile compares to the population in the benchmark reports you use, and in context of your company strategy.
If you have any questions on how you are using benchmarks or how your company’s internal KPIs and metrics measure up to “like companies” benchmarks, feel free to email me at [email protected] to ask your questions or schedule a quick call!
SaaS Talk with the Metrics Brothers features Dave “CAC” Kellogg, author of @kellblog and Ray “Growth” Rike. Dave and Ray cover a wide range of SaaS Metrics topics and also cover many of the latest industry benchmark reports. If you use SaaS Metrics, catch an episode of their fast moving, banter and entertainment on your favorite podcasting app or simply use the link below!!!