Why do some SaaS businesses flourish while others simply sputter along? David Skok compiled an excellent guide to measuring SaaS metrics that’s worth reading if you are at all involved in growing a SaaS company. One of the key items David highlights is customer acquisition. In this post, I review acquiring new customers through a business to business marketing lens and help you develop a revenue funnel analysis model to help you reverse engineer your revenue targets into key performance indicators to promote your products or services.
Many marketing leaders struggle with evaluating the importance of demand generation or branding early in their startup’s life. My view is that demand generation outweighs brand’s importance in the early years of your company. That’s not to say that branding and thoughtful positioning are not important. In fact, they ultimately determine how successful your customer acquisition efforts can scale. Here’s a good mental image of this trade-off:
As your startup matures, more of your marketing focus can be put on branding. But early on, your team’s focus should be primarily on finding early customers fast! So how do you set demand goals for your fast-growing business?
There are several approaches to creating this demand. The two biggest demand generation strategies in B2B are Account-Based Marketing (ABM), which works better for larger Average Contract Value (ACV) offerings (~>$25K+), and a Volume/Velocity model, where you need a small percentage of customers in a large pool of prospects and typically have a lower ACV (<$25K). It helps to do a bit of market research on how your prospective decision makers make their purchase decision.
There are countless resources to help you determine when you should consider an ABM strategy or a volume/velocity model. LinkedIn’s Megan Golden wrote a great article if you are considering an account-based marketing approach and driving abm campaigns towards key accounts. It’s important to decide on a customer acquisition strategy with your sales, marketing, and product counterparts as misalignment on the strategy is often cited as the number one cause for failure.
There are also many marketing technology solutions to help you measure your demand funnel, but these solutions can range from $10K a year to several hundreds of thousands of dollars. I’ve often found that a simple Google sheet can outperform complex software because using the Google sheet forces me to be close to the numbers and understand how they work.
I’ve provided a revenue funnel analysis template that fits the volume/velocity strategy as a starting point if you are planning to map out your revenue funnel. I find that monthly updating the sheet provides a timely snapshot and forces me to inspect each area in the revenue funnel for areas to focus on.
A basic revenue funnel walks through the lead to revenue process:
- Drive web traffic
- Generate leads
- Open opportunities
- Close customers
- Grow customers
Your revenue funnel may be much more complicated, including items like marketing qualified lead (MQLs), Sales-Accepted Leads (SALs), Tele/BDR leads, or you may have an Account-Based Marketing model with target accounts, engaged accounts, etc. This revenue funnel analysis template works better for volume/velocity revenue funnels. In a future post, I will create a model for managing Account-Based Marketing as well.
The template starts with two months of actual data (Jan and Feb) and then moves to the goals for the rest of the year. Unfortunately, too many marketers miss the step of reverse engineering their revenue/bookings targets into funnel KPIs. I’ve found that this step is critical in setting marketing goals and developing a strategy to hit your revenue targets.
The template has three sections and is color-coded to help you enter data where necessary. Beige cells are inputs, while cells with blue text are calculations.
One of the key ways to analyze your demand is to approach revenue or bookings targets from both your prospect’s behalf as well as from your sales team’s capacity. This section leans on several best practices for fast-growing SaaS businesses. Let’s walk through the section with our Cookie Monster example.
We see that Cookie Monster starts the year with 12 sales reps. A good rule of thumb in SaaS is for the reps to have a quota of 4-5x their monthly on-target-earnings (OTE). In this example, a rep’s OTE is $100K or $8.3K/month. At 5x, their quota is $42K per month. Across 12 reps, that provides a quota capacity of $500K.
This quota capacity is beneficial as it indicates how much your sales team can bring in if every rep hits 100% of their quota. Unfortunately, that rarely occurs, and the average quota attainment in SaaS is 80%. In this example, that means Cookie Monster had a $405K month on new logo bookings with a capacity of $500K for an 81% attainment.
By forecasting future bookings, we can determine how many full ramped reps we need at full quota to hit these targets. This provides your HR teams with a target for how many reps to bring in and help ramp up to meet their quota. More sophisticated revenue funnel analysis models take into consideration how often you lose reps (churn) and how many reps you plan to hire and what impact they will have to quota and ultimately to revenue, but this simple model provides enough feedback to spot any large discrepancies.
In SaaS-based businesses, we have two essential booking items: new customer or new logo bookings, and renewal bookings. Bookings vary from revenue because SaaS platforms recognize revenue over a fixed period during the contract, such as 12 months. Most of the demand generation teams focus on new logo or customer acquisition during the early stages of business, but it’s important to keep tabs on your renewal revenue as churn can quickly half the business.
In Cookie Monster, we see in January that the business sold $405K in new logo bookings to 12 customers for an Average Contract Value (ACV) of $34K. In February, the team only sold 11 customers for $390K in bookings, with a slight increase in ACV to $35K. While it may seem alarming that February saw a $15K drop in bookings, the team was actually more productive on a per business day basis: they sold $21K/day in bookings in February while January only had $19K/day. February had two fewer selling days and resulted in the lower overall bookings. The customer count is based on the bookings forecast for the business through the end of the year, along with assumptions around ACV.
It’s vital to think about each assumption as a risk and then to develop a plan to mitigate the risks. For example, if you assume the ACV will stay flat, what could you do to ensure it does? Should you put discounting guidelines in place? Should product marketing evaluate competitor pricing? Should you raise prices? These are incredibly important discussions to have between marketing, sales, and product as you evaluate your revenue funnel and plan for the year.
In section two, we determine the comprehensive funnel KPIs. It is best to start at the bottom of the funnel. In January, the sales team opened 36 opportunities (opps) and closed 12. It’s important to note that these 12 opps likely did not come from these 36 open opps. There is typically a significant delay between the opportunity open and close, known as the close time or age of the opportunity.
For B2B businesses, this can be as little as a few days or several months to years. Comparing the number of opened opps to closed-won in a given month, still provides valuable insight into the trends of the business and setting targets. We refer to this ratio as the intra-month close rate. In January, it was 33% (12/36). A health B2B close rate is between 25-35%, assuming the sales team has opened legit opportunities and not merely placeholders.
Next in the funnel is the number of leads. There are many ways to categorize leads, including list leads, marketing qualified leads (MQLs), marketing sourced leads, sales ready leads, etc. The key in the revenue funnel analysis is to be consistent in your labeling and use of the leads so you can track the monthly conversion rates. Here we see 550 leads were created in January. Again, these leads did not all contribute to the 36 opps in January. Some may have been created in January and immediately converted to an opportunity, but we typically see a lag between lead creation and when an opportunity is opened as well.
In more sophisticated models, it’s best to timestamp each of these stages so you can determine how long it typically takes your leads to convert to opps. Many times, simply putting in place exception rules to catch outstanding leads that haven’t been followed up on a timely basis can accelerate the deal cycle and improve overall conversion. January’s intra-month opp to lead ratio was 7% while it dropped to 6% in February. It’s also worth ensuring you have a documented service level agreement between sales and marketing on how each of those leads is followed up upon.
Next, we see web traffic of 18K sessions in January at the top of the funnel. You could use sessions, users, or page views as your top of funnel metric, but the key is to pick one and remain consistent. I prefer sessions because we want to gauge repeat visits to the website to predict conversion to a lead. Our January leads to traffic ratio was 3.0%. This number does not typically have as much time lag as the leads and opps numbers do because most lead conversions occur upon the first website visit or within a short period.
Finally, the comprehensive funnel then calculates conversion ratios, which are used to determine monthly KPIs by stage for the rest of the year. In this model, we include a few levers to grow your business, such as month over month growth rates for web traffic, lead generation, and changes to the close rate. Feel free to play around with these levers to adjust your revenue funnel as needed.
The revenue funnel analysis is one of the more critical aspects of digital marketing in B2B businesses. I’ve used a version of this to report on marketing metrics in nearly every board meeting and staff meeting as it provides a key connection to how marketing is delivering results to grow the business.
Once you establish these important KPIs, it’s important to have some accountability for the metrics across marketing and sales. At least one person should have their name next to each KPI. They should be tracking it and driving initiatives to hit and outperform their targets. For example, who is responsible for web traffic, and do they have a target for next month? What’s their plan to hit that number and continue to drive its growth? These tough questions allow you to build a marketing strategy that aligns with your booking targets.
I hope you found this template a useful start to your revenue analysis!