Benchmark-Enabled Decision Making at SaaS Metrics Palooza ‘24

We’re thrilled to share that Lauren Kelley’s session from SaaS Metrics Palooza 2024, “Benchmark-Enabled Decision Making,” is now available as a special podcast episode! Whether you attended live or missed the event, you won’t want to miss this – Lauren provides actionable guidance on improving go-to-market efficiency, refining operations, and driving sustainable growth in today’s market.

In Lauren’s presentation, she delves into the Rule of 40, key efficiency metrics, and practical strategies SaaS leaders can use to identify inefficiencies, optimize resource allocation, and enhance EBITDA. Using insights from our sister company, DealEdge, Lauren analyzes the latest software market trends, highlighting how top-quartile SaaS companies are achieving record-high valuations. 

Click here to listen to the episode on Spotify.

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Transcript: Benchmark-Enabled Decision Making at SaaS Metrics Palooza ‘24

Host: Welcome to SaaS Conversations, a podcast from OPEXEngine by Bain & Company.

Today’s conversation is taken from SaaS Palooza, an annual online gathering of hundreds of SaaS finance professionals to discuss metrics and industry trends.

“When we isolated out software transactions, what's super interesting is that while average valuations have come down to 2018 levels, top quartile valuations are actually higher than ever before – and the delta between the two is larger than seen previously. That delta is closely associated with improved Rule of 40 and the underlying performance KPIs driving the Rule of 40.”

That’s Lauren Kelley, in conversation with event host Ray Rike. In her talk, “benchmark enabled decision making” she describes how SaaS operators use SaaS benchmarks to improve performance in cost management and to enhance go-to-market efficiency, 

The charts and data visualizations used in this talk are from a white paper prepared by OPEXEngine together with DealEdge (both are Bain & Company data companies) and are posted on our website: www.opexengine.com and a link in the description.

Let's listen in.

Ray Rike: This is always one of my favorite sessions to introduce at SaaS Metrics Palooza and that's because this is someone that I consider not only a great partner as a co-founder at the SaaS Metrics Standards Board, but someone that I really consider a personal friend after working [together for] so much time on defining metric standards. That is Lauren Kelley, the Founder and CEO of OPEXEngine by Bain & Company. Welcome, Lauren.

Lauren Kelley: Thank you, Ray. I love the introduction, and I really appreciate it. I think this is my third time speaking at SaaS Palooza, and you've done an amazing job. I’m always impressed with the quality of other speakers that you bring into SaaS Metrics Palooza.

Ray Rike: We're ready for a perfect trifecta. The stage is yours.

Lauren Kelley: Thank you. As Ray said, I'm CEO and Founder of OPEXEngine, which was acquired 100% by Bain & Company in 2021. We have been working for 18 years to build out our B2B software and SaaS benchmarking database and platform. I'm honored to be a part of the group speaking today.

I'm going to discuss how benchmarks can improve cost management, enhance go-to-market efficiency, and [how they] correlate with top exit valuations. I'm going to start here by talking about the latest market trends. I'm going to explain a little bit about how those are associated with the Rule of 40, and then I'm going to talk about how our customers are using benchmarks to enable better decision-making to improve valuations. Let's get started.

We're seeing – and I think it's fairly common knowledge – that revenue multiples have decreased between 2021 and 2022. We’re also seeing that there is a stronger correlation between top valuations and Rule of 40. So valuations are coming down – on average – closer to 2018 numbers.

At the same time, we were really surprised when we pulled together this data with our sister company at Bain, DealEdge (which collects more than 40,000 private equity transactions on a quarterly basis and presents analysis around them). When we isolated out software transactions, what's super interesting is that the average valuations have come down, but the top quartile valuations are actually higher than ever before – and the delta between the two is bigger than we've seen before. And that delta is associated with improved Rule of 40 and the underlying performance KPIs.

I think we've all seen the data that shows that growth rates in general for the SaaS industry have come down. That doesn't mean that there aren’t a lot of good companies out there that are in the top quartile and have much higher growth rates, but overall in the industry growth rates have come down.

What I think is also particularly interesting is that in previous slowdowns – and Ray, you and I have been in this industry for a little bit of time – typically we have seen that smaller companies are not as impacted as bigger companies.

I think there are two differences now that are super interesting. One, it's been reported that there is less funding over the last year or two and that has been affecting smaller companies more than the bigger companies. In addition, customers are just being really conservative about purchases and moving more towards larger companies. So the growth rates for larger companies are actually, weirdly, sometimes higher than for smaller companies.

And then if we take a more nuanced view, we pulled together something [to look at], which I know my colleague Jen Smith, who is also speaking at SaaS Metrics Palooza, talked a little bit about this for investors.

For operators, I think it's also really important to understand the nuances within SaaS. We have all these different types of SaaS companies: horizontal, vertical, infrastructure, specific application areas, etc. Some of them are more mature, which means more saturated, and others are less mature, which typically means higher growth.

Even in general, when you think about the industry, it’s important to know where you sit within these ranges and scales because in order to understand what “good” looks like for benchmarks, do we focus on comparing a company against a cohort filtered for high growth rates? Or do we filter on a more mature sector where you might have higher margins and slower growth rates, but the Rule of 40 is even more important there?

The bottom line that we want to talk about here is that you can't cut your way to a better valuation and you can't spend your way to a higher valuation – especially if cutting reduces your growth, you're really not achieving what you wanted to. EBITDA is a sum of revenue and your operating expense and your cost of revenue. You have to have a balance, and that's where benchmarking can provide you with the guidelines. It's not an exact blueprint. Every company is slightly different, but it can provide you with the road signs and the direction that you need to go in.

Even the best performing companies have pockets of inefficiency and overspend, especially in go-to-market operations where typically the largest investment is made.

In today's market, the data is even more confusing, and the norms are changing because competitive companies are incorporating AI tools to increase efficiency and cut costs. We're starting to see some real benefits in operational areas there. 

I'm going to talk now about a model that we use when thinking about the KPIs that are important to benchmark. If at the top, you're trying to build value in a company and improve your valuation, we've seen that it's associated with the Rule of 40. The Rule of 40 is just made up of a number of performance metrics underneath that, and in a world where we're moving from growth at all costs to profitable growth, we have definitely seen that Rule of 40 is correlated with valuations. Underlying that are performance KPIs like CLV to CAC, Magic Number, R&D ROI, and Employee Productivity (or Revenue per Employee).

And then underneath that are a number of drivers that are actionable and that companies can focus on. Dave Kellogg recently wrote a blog on the importance of knowing when you're focusing on business performance versus focusing on the numbers, which can be distracting (and people love to get caught up in all the definitions and various tweaks).

Ultimately, the performance is the performance and it ladders up – and that's what the executive management team of a company is focused on. There are a number of key SaaS performance metrics that are easy to explain and easily generalizable – with some nuance – among companies with similar operating models. If we stick to simple definitions of these performance metrics, this is how investors are going to look at your company. And ultimately, it's all of our jobs to build value in a company.

Let's just take CLV/CAC. CLV/CAC ultimately is just telling you: for what you spent to acquire a customer, how much profit is that customer supposed to generate over the probable lifetime of that average customer? A good CLV/CAC used to be 3x to maybe 4x and that was great – that was when growth rates were a bit higher and there was a lot of money being poured into the market and into companies. Now, we're starting to see a lot of companies with 6-10x CLV/CAC, with better cost management and better focus on ensuring that all the elements and the processes underneath CLV/CAC are good.

There are a myriad of underlying drivers of performance, a combination of resource allocation choices that your company has made – and that's what we benchmark to help companies get a better sense of what it looks like on the outside. 

Here's an example of some of those metrics that I just discussed: Rule of 40, CLV/CAC, Magic Number, R&D ROI, and Revenue per Employee. And you can see that each of these – for a higher Rule of 40, which we know is associated with better valuations, and typically higher EBITDA companies, these [underlying] metrics are better as well.

So, it's not just about knowing these targets that you want to achieve. It's also about making sure that you're constantly improving because these targets are going to change next year. 

When we do a benchmarking with a company, we collect all these metrics and data from across the board – from their sales organization to marketing, R&D, and G&A – and in quite a bit of detail. We look at revenue in three different ways of defining the money coming into your company (not to mention the cash coming into your company – cash from operations). Then, we design a very tight cohort of peers and market leaders depending on what your goals are. If your goal is to increase growth, then you compare yourself to higher growth companies at the same stage and [who are] selling the same type of products or the same contracts.

If your goal is Rule of 40, we can sort the data that way. If your goal is just cost management – improved EBITDA – we can sort it that way. Benchmarks aren't going to help you change the market that you're in and the opportunity in that market, but what we can do is find those pockets of inefficiency where your spend is not producing the same results that similar companies with the same resources are getting for their spend. 

We look at a 360 picture of a company. Let's say retention is low – is it poor because of customer success problems? Is it poor because of an over-allocation in R&D or constantly producing new features and functionality that are confusing to customers? And not investing enough in retention or fast response times to technical problems that customers bring up? Or investing in tech debt that is now causing you problems?

When validating the operating budgets for 2025, companies are looking to identify the size of the prize: what can they improve next year in terms of cost management priorities and areas of inefficiency internally that might be dragging down their go-to-market?

This is what we look to answer when we're doing a benchmarking of companies. We look to answer these three major questions:

1. What are my largest areas of opportunity for margin improvement?
2. How effectively is my go-to-market organization performing (everything from sales productivity to customer success ratios against how many customer success people you have working each of your customers)? Are you segmenting? 
3. Are your costs within these groups averaging out to comparable numbers as other companies?

It is important to make sure that you're getting down to the underlying drivers because you can learn a lot from other companies. At that level, there are ways that we can compare companies to each other.

Then it's important to make sure that you're using benchmarks that are differentiated. You might have a cohort of companies that are really focused on growth, and those are the ones [that you] want to compare [yourself] to. Or maybe I have a cohort of companies that are most focused on cost management.

Benchmarking SaaS companies – and you know this, Ray – is not like figuring out the demographics of the United States or health statistics. It's only applicable in this business when you get down to comparing yourself against a very tightly-defined cohort of similar companies.

This is just a simple example, but if Michael Phelps compared himself to average swimmers, he'd be off the charts. If he compares himself to other Olympic winners, he can then dig into specific components. I don't know if he needs to improve anything, but let's say he wanted to improve his swimming skills or stroke – he can learn from [that comparison].

Peter Drucker said, “What a business needs most for its decisions – especially its strategic ones – are data about what goes on outside it. Only outside a business are there results, opportunities, and threats.” 

This quote is even more true today. Between new technologies like AI tools and new operating models, it's important to understand how other companies are operating today.

I'm going to give a brief example of a benchmarking of a company. This is an example company that's similar to many that we've worked with. These numbers have been tweaked to protect the innocent. 

Here's a company that is $115M, vertical SaaS. Revenue growth at 15% – pretty good. EBITDA margin is 5% and they've improved it over 2023 from about 0 or -1 or -2.

We start by looking at their goal, which is to get to between 10% and 20% EBITDA (ideally 15%) next year without affecting growth and potentially increasing growth.

We look at a whole variety of areas in cost management. These are just a couple of examples, but what you can see is that the company is spending more on hosting than its peers. One of the things that we find working with companies is that finance organizations love digging into hosting because you're not laying off people. You're not trying to convince your business partners in sales or marketing or R&D to shift their priorities or change processes. You're just looking at invoices and doing some analysis, and there are some great tools out there.

If we looked beyond this, we would also look at quota attainment. If you have 60% quota attainment, it may mean that only 10% or 20% of your sales organization is producing at the right level and producing 60% of your revenue. You have some inefficiency on productivity there.

This company's not producing enough in new ARR and that's going to drag down growth over time. It also has a leaky bucket in the customer retention side, so that can mean that the sales people aren't focused on the right customer profiles because if customers aren't renewing, then those are not the kind of customers that you want to sell to.

Then we look at: what is the size of the prize? Where can I improve the most? I look at that in cost management and we value it out. We look at go-to-market areas and where you could improve EBITDA there, as well as – how much is product contributing to this? These are all important things to be looking at.

Let me just make a quick note on GenAI because we get a lot of questions about it.

What impacts are companies seeing? Are they seeing anything? What departments are they seeing it in?

This was a slide produced by our colleagues at Bain & Company based on mid 2024 surveys of operating executives in tech companies (but not specific to SaaS). It's pretty interesting to see that there's already some bottom line improvements. We're excited to see that and I can't wait until we get the 2024 data finalized and we get into 2025.

So, I'm going to start wrapping up here.I'm happy to take questions now, either here or directly. Anyone can always email me at lauren@opexengine.com. Thanks very much, Ray. Love the opportunity to talk, and thanks very much.

Ray Rike: Lauren, thank you so much. As always, you provided not only great detail, but a framework and approach to using benchmarks. Let me ask you this question because you've been doing this for, gee whiz, almost 18 years: What are the top one or two mistakes that you see companies making when they try to use benchmarks to help inform what their goals should be?

Lauren Kelley: That's a great question. A couple of things – I think it goes back to missing the forest for the trees.. I'll give you an example. We like to look at average Comp & Ben in sales excluding stock option compensation.

And you might say, “oh, but that doesn't tell me if I'm paying my Account Executives the right amount, my BDRs, etc.” And we have ratios for BDR to Account Executives for various models, but ultimately, if I compare what I'm spending in sales to what another company is spending in sales, I'm not obsessing about particular positions.

What it shows me oftentimes is that overall, the average is too high. I'm spending too much on comp, and then we can go another level down and see if you have too many higher-level people or too much management and not enough producing the revenue. There are a whole bunch of different ways to be efficient about it.

Ray Rike: We are going to have the wrap up. So I'm going to ask you to pull out your crystal ball based on what you've seen in the first half of 2024: How do you think that SaaS performance benchmarks are going to be changing over the next 6-18 months? Do you think growth will increase? Do you think Rule of 40 will increase? Do you have any macro-level trends you want to forecast, Lauren?

Lauren Kelley: I think if you looked at the industry on average, there were too many companies that were funded so their growth rates are lower and they're in mature markets and customers want the established leaders so that throws the benchmarks off.

If I were to be more nuanced about it, I think that there will be segments in 2025 that have really strong growth rates, but there is more attention and more focus on efficiency – and on making sure that every dollar spent produces revenue. The understanding in the industry is just so much better than, Ray, when you and I started. You can't just throw money at the problem, but if someone believes in you enough – and if you show the market and you show the operations – then you can get money and you have to be able to show that your results are more efficient than they were probably 5 years ago.

EBITDA and Rule of 40 will continue to be higher. Top quartile Rule of 40 will be in the fifties, and we're also going to see average compensation in a number of areas coming down because the world is virtual now and companies can offshore and move whole departments into low cost areas.

Ray Rike: Lauren Kelley, Founder and CEO of OPEXEngine, a Bain & Company business. Thank you so much. I appreciate you being here at SaaS Metrics Palooza 2024.

Lauren Kelley: Thank you, Ray. I appreciate your giving me the opportunity and all you do for the industry. It’s great fun working with you. Take care.

Ray Rike: Thank you now. Bye bye.

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