Startup KPIs Round 2 - Sales Efficiency

Once a subscription-based company, whether SaaS or Consumer, leaves the startup stage and enters the growth stage, the efficiency of growing revenue becomes (or should become) top-of-mind. ‘Sales efficiency’ as a concept is basically the repeatability of the company at growing revenue. To have a repeatable revenue model, the company must have a GTM machine that generates more revenue than the expenses used to obtain that revenue. Ideally, the measure lets us ask “does each additional sales hire lead to more revenue than it costs us to add and generate pipeline for that hire?”

There are a ton of metrics to measure Sales Efficiency, and to be blunt there is no one great metric. I’ve seen a combination of Annual Contract Value (ACV), Lifetime Value (LTV), Customer Acquisition Cost (CAC), Bessemer CAC ratio, payback periods, and the like. Like any KPI, each have their pros and cons. To pick one, we need to make sure we can use it to operate:

1. How simple is the KPI to understand by the team beyond the board room (e.g., VCs)?
2. Can we breakdown that top-level KPI into meaningful team and individual level metrics and key results, so teams can act to drive that top-level KPI?
3. Does the KPI align incentives so that each individual and team can unite in driving positive movement of the KPI?

Introducing the SaaS Magic Number

I’ll be frank. I hate the Magic Number as a metric to track, but there isn’t a better option that encapsulates all factors included in the efficiency of adding new revenue.

Why?

1. Simple to calculate and understand (as you will see below)
2. Actionable: It’s easy to create team KPIs that impact it
3. VCs use it - especially during a downturn - so we will eventually be graded on it. *

** I’m not proposing any operator should ever use the metrics VCs promote as their guidelines. VCs use their metrics to qualify a company for investment or benchmark their portfolio companies against other companies. Rarely should a company use these metrics for running a business. Operating a business is very different than investing in one. Even so, Magic Number has a bunch of pros that outweigh the cons.

Ultimately the SaaS magic number is a metric intended to uncover just how efficient our total go-to-market efforts are. By measuring our magic number, we’ll be able understand how to drive efficiency in our GTM teams and decide when the time is right to add new hires to our GTM teams.

What is the Magic Number?

Definition:

( Current Quarter ARR - Previous Quarter ARR ) * 4

/ ( Previous Quarter Sales & Marketing Spend )

If we made $100 revenue in the last quarter, $200 revenue in the current quarter, and spent $600 to make it happen, our magic number would be .67. We spent $600 to grow quarterly revenue by $100 or yearly revenue by $400 ($100 * 4).

What’s the Benchmark?

“1” is the benchmark.

More than 1 and we are investing effectively into sales & marketing efforts.

Less than 1 and we are inefficient and/or investing ahead of knowing the returns.

Realistically, organizations usually start scaling GTM more aggressively as they approach 1, as they have a good understanding of the levers that drive GTM efficiency.

Ok… Why did “Fuf” write that he ‘hates’ Magic Number?

Yes, Magic Number is simple, but it doesn’t account for a lot of important factors.

1. Churn. The ARR element of the calculation includes churn. This has pros/cons to the simplicity of the KPI. Churn is not reflective of marketing and sales spend or its efficiency. As such, the metric is a bit wonky for its primary purpose of understanding how effective the team is at generating new revenue. Even so, churn does reflect the quality of the revenue generated. What if the quality of the revenue is low and churns quickly? If yes, then the GTM teams have built a poor business model for sustainable growth. Customer satisfaction and feedback are the life blood of long-lived SaaS companies.
2. Customer Success costs. Depending on the business model and product, upsells can be driven by either Account Managers or sales. If the former, are these headcounts included in the metric?
3. ARR vs GAAP Revenue. the measure is ill-defined, and I’ve seen both. Depending on the business model, ARR and GAAP revenue are equivalent, but eventually the two financial measures diverge as they have different purposes.
4. BETS. Marketing should always be making bets. Many bets don’t pay off, but they will never know unless they make them. For later stage and public companies, in which Magic Number is more often used, these bets are drowned out by the much high overall marketing costs, e.g., the bets are a drop in the bucket compared to the overall spend. For those companies earlier in their journey, bets may have an outsized effect on the Magic Number. Never stop bets because of the KPI!
5. Time range. The “* 4” is silly. The longevity of your typical customers, the payback period, and the type of subscriptions (monthly, quarterly, multi-year) are not considered. Depending on your business model, subscriptions can be 6 months or longer than a year; deal sizes can be super large but erratic in consistency; payback can be longer than 1 year… I could go on and on.

What does this mean for you, the reader?

Our sales efficiency (revenue generated per AE+SE) is not to market. The cause is a variety of justified historic considerations, most prominently our prioritization of both topline revenue and learnings around sales processes. However, the end state is the same - we need to demonstrate our ability to scale sales and marketing, and we have not yet…

We know our product can be sold, we know it drives upsells, we know often we drive early expansions especially with games. We have the fundamentals in place. Now, it’s time for us to learn how to scale. As such, our go-to-market teams (AEs, SEs, SDRs, Marketing) must adapt, and we must become more efficient in the new bookings generated.

Ultimately, we need to

1. Generate more top-of-funnel.
2. Discover where that top-of-funnel generated is most cost effective.
3. Iterate for scale: Set more aggressive targets for activities and personal efficiency, including making denser calendars with more meetings, using SE and eng time more wisely, reinventing sales processes and GTM approaches assuming less manually intensive approaches, understanding how to improve each step of the funnel.

Can we do these things? Absolutely. We just haven't focused on them.

How do I make this real while I'm working at a Saas company?

Think about not only the revenue generated but the costs of generating the revenue.

• Can I write a blog, create a video, or refer a podcast to augment the sales team?
• Can I build a growth feature that generates awareness and leads? (Unity, Flutter, React Native?)
• Event attendance has a cost. Are you “really” generating pipeline or should someone else go in your stead or at all?
• GTM vendors have costs. Are we renegotiating and revisiting contracts?
• Does the feature I am designing or building have the potential to generate an upsell? If so, how can I help make this a reality and quicker?
• My friend works at game company Z. Introduce them! (Free marketing!)

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