The One SaaS Metric that Matters Most
Jason Lemkin, author of the popular SaaS blog, saastr.com, points to the one metric SaaS founders and CEOs should be focusing on first. Hint: It’s not revenue growth, or churn, or even lifetime customer value, but he argues it’s the true key to your long-term success.
In the SaaS world, there are a lot of metrics that founders proclaim as the harbingers of sustainability and corporate health. For instance, some might argue that it’s all about revenue growth rate or churn. Others suggest that lifetime customer value or average revenue per customer are SaaS metrics that deserve top billing.
For EchoSign co-founder and CEO Jason Lemkin, however, those SaaS metrics aren’t nearly as important as one particularly crucial driver of SaaS company success and growth:
Inbound Lead Velocity
(i.e., the rate at which your qualified, in-bound leads are growing month-over-month)
“Churn, lifetime value, and revenue growth rate are all critical metrics,” Lemkin explains. “But all of the great SaaS businesses are built on inbound interest. And if your company has perpetual organic demand, it’s going to be in good shape years down the road.”
The reason, Lemkin says, is that an engine fueled by word-of-mouth and virality naturally drives high lead velocity. And with that in your back pocket, you can solve virtually any other problem given enough time and runway, and upgrades to the team and product.
For instance, if you hire a bad VP of Sales, your revenue growth will likely drop, and perhaps fairly quickly. But fixing that problem might be as simple as firing that person and hiring the right VP of Sales.
In the process of courting enterprise deals? You better be ready to negotiate.
Sure, that hiring hiccup will probably look ugly on your balance sheet in the short-term, but as long as you act quickly, chances are it won’t sink your SaaS business. “A great VP of Sales can take half-decent in-bound leads and, no matter what other issues you have, at least increase the revenue per lead materially from where it was before,” Lemkin explains.
In other words, as long as the inbound leads are still there, you can fix whatever is dragging down your revenue per lead. You can upgrade the sales team. Focus on the funnel. Fill the critical feature gaps. But without leads — even with the world’s greatest product and sales team — it’s going to be very hard to get anywhere.
“You can’t really pay for or immediately fix organic demand,” Lemkin says. “Yes, you can batten down the hatches and strategize ways to speed it back up, and outbound demand generation can help. But those processes are much more intense than hiring and firing executives, or developing new product features that one-up your competition.”
SaaS Metrics: What Constitutes a Sustainable Lead Velocity?
Lemkin suggests that if your qualified organic leads are growing by more than 100 percent year-over-year, every other SaaS problem — be it churn or lifetime customer value — should be fixable with the right strategy and investments.
“That’s the one thing I wish I’d known when I was running EchoSign,” Lemkin explains. “When everything just seemed sideways for us in 2008, there were times that I thought we’d never get to the next level.”
The reality, however, was that the raw demand for EchoSign was doing just fine.
Even at its lowest point, Lemkin says EchoSign’s inbound leads were still flowing at the rate they always were. In fact, demand was accelerating. The company’s leadership simply needed to re-focus its strategy and begin to fully leverage its funnel full of inbound interest. So Lemkin hired a rock star VP of Sales, and combined that talent acquisition with a big feature release that closed key gaps in the product. Six months later, the company was on fire.
Focus on Lead Velocity First, Fix Everything Else Later
Truthfully, Lemkin admits that he didn’t fully realize the importance of lead velocity until after EchoSign had been acquired by Adobe in 2011. At that point, he had the chance to decompress and objectively look at what made the business successful in the long run.
He recently had the opportunity to do the same analysis with several other SaaS companies, and was pleased with what he found.
Are You Ready for the Challenges of Scaling Your Company?
“In one case, this SaaS company’s revenue wasn’t growing, and the CEO was deeply concerned and envisioning an end-of-days scenario,” Lemkin recalls. “But when I sat down, looked at his lead velocity, and saw that inbound leads were flowing in at a solid rate, I said, ‘There might be a lot of things that aren’t working, but I’m not that worried because there’s also something really working here. You have customers and inbound leads. Now we just have to close them.’”
The company hired a well-respected VP of Sales, focused on its most profitable segment, stopped chasing low-ROI market segments, and listened to its leads. In less than five months, it went from flat revenue to adding over $1 million in new ARR per month.
“I don’t mean to make it sound stupidly simple, but it honestly boils down to that,” Lemkin says. “If organic inbound leads aren’t coming in, in most cases your SaaS business is in trouble. At the very least, you have to go back to the drawing board — the evangelical phase — and either re-sell your vision or tilt. You can’t buy your way to organic qualified leads in SaaS.
“So my advice to founders is once you are past the earliest first traction and have any inbound leads at all, then always to look at lead velocity. If you can figure out how to maximize revenue per lead, you can allow that information to drive everything else you do.”
Do you agree with Jason? Of all SaaS metrics, is inbound lead velocity the one that matters most?
Gross margin documents the business your product is building, yet it’s often tucked away in a financial update while a medley of product metrics enjoy the spotlight.
The bottom line: Expansion-stage SaaS companies are well positioned to thrive in 2021.
Using data from this year’s Expansion SaaS Benchmarks Report, OpenView’s Dan Knight breaks down the three distinct components to fundraising.