Tracking and Managing to the Right XaaS MetricsBy: Davis Giedt Cloud Computing, Cloud Sales, Technology Sales
Alexander Group’s XaaS Sales Strategy Market Study blog series concludes with another critical leadership priority for XaaS model optimization: tracking and managing to the right XaaS metrics.
For growth-oriented XaaS companies, tracking and managing to the right XaaS metrics is a crucial piece of the puzzle. As leaders hone new skills, such as customer adoption, they must learn which metrics tie to positive (and negative) business outcomes.
Our recent XaaS market research helped us identify the XaaS metrics that companies track, and where they fit into the buyer journey. As shown in Figure 1 below, we arrayed them across the ILAER buyer journey to better depict how metrics align with various stages of the sales process. We found that leaders track key metrics at each stage of the ILAER buyer journey to measure performance and productivity, as well as efficiency and profitability. They also track cross-ILAER metrics to monitor overall business results.
One insight from this analysis has been particularly fascinating: XaaS companies regularly track upwards of 50 metrics to manage their XaaS buyer journeys!
But not all leaders have the time to regularly track and manage to 50+ XaaS metrics. So, we’ve selected the most crucial metrics and placed them into four key categories. Read below to learn more about these crucial metrics and what they mean for your XaaS business.
1. Identifying and Landing New Customers: It’s all about CAC
In a recurring revenue world, landing a new customer can be difficult and costly. Knowing when your business will achieve ROI on that investment is crucial. As such, companies track Customer Acquisition Cost, also known as “CAC,” [or the cost of marketing and sales personnel and programs dedicated to acquiring new customers, divided by the number of new customers, or CAC Cost of Sales, which divides Cost by new customer ACV bookings or margin.] Factors influencing CAC include deal velocity, deal size and the number of specialists and support resources involved in any given sale. Companies with lower CAC tend to have higher deal sizes and/or lower cost resources (such as inside sales). Companies with higher CAC tend to bet on strong expansion (“post-sale”) growth and long-term relationships with customers. Having a higher CAC is not always bad; the key is ensuring customer stickiness (retention) and growing customer spend through successful adoption, retention and expansion.
2. Adopting and Retaining Existing Customers: Plugging those pesky leaks
Given how difficult and costly acquiring new customers can be in a recurring revenue model, companies are now placing greater emphasis on retaining their existing customers. Companies now use new adoption metrics, such as usage frequency and number of use cases per account, as well as sophisticated telemetry data (e.g., number of users, average usage time per product per user, support tickets submitted) to track adoption and predict churn. Many companies also track Net Revenue Retention (NRR) to monitor the success of adoption and retention efforts. NRR measures revenue retention and expansion for existing customers by comparing average monthly recurring revenue year over year. When NRR is below 100%, the company has a “leaky bucket” problem, and is failing to make up for it by driving cross-selling and upselling. Through successful adoption, companies can often fix the leaky bucket problem. But to obtain a healthy NRR, they must successfully adopt, retain and grow their existing accounts.
3. Measuring and Improving Overall XaaS Health: Growing Customer Lifetime Value
Beyond CAC and NRR, leaders must analyze the productivity and efficiency of the entire organization to best gauge overall XaaS health in the short and medium term. The most informative way to measure productivity is to report Growth ACV (Annual Contract Value) Bookings per Seller, which is the average growth license bookings (from landing new accounts and expanding existing accounts) that each seller brings in each year. Companies typically track this on an ACV basis, to normalize for varying contract lengths. Companies transitioning from perpetual license selling to XaaS can see growth ACV Bookings per Seller decrease, as the first-year value of contracts declines. The positive side effect of the transition is that companies gain recurring revenue customers that, with ongoing nurturing and adoption, can become reliable, long-term revenue sources.
To make important short- and medium-term model improvements, XaaS leaders also find it crucial to understand sales force efficiency, and look to Sales Expense to Revenue (or E/R) as a key indicator. Although lower E/R indicates higher efficiency, it can also be a sign of underinvestment. Increasing investment in the right roles or tools can yield exponential results in new sales, customer retention or expansion selling.
To evaluate productivity across the customer journey and across time, companies turn to another metric: Customer Lifetime Value (CLV), which is the revenue a customer brings in over the years they continue to (or are projected to) purchase the service. CLV, along with CAC, provides a comprehensive view into long-term profitability, by comparing the cost of acquiring a new customer to the total revenue that customer will bring in.
4. Balancing Profitability and Growth: the Hallmark of a Best-in-Class XaaS Organization
Leading XaaS firms effectively balance profitability and growth, as measured by the Rule of 40. The Rule of 40 states that publicly traded XaaS companies with a combined annual revenue growth rate and EBITDA margin above 40% comprise 80% of market capitalization for all XaaS (source: Piper Jaffray’s 2018 software market review). Companies that execute well on efficiently acquiring new customers, retaining and growing existing accounts, and driving high CLV offer themselves the best chance at balancing profitability and growth, and consistently outperforming the rule of 40.
Growing in a recurring revenue model requires a holistic understanding of your buyer journey. As the metrics landscape evolves, XaaS leaders must continue to track and make decisions on key metrics that are right for their businesses. To learn more about tracking and managing to the right XaaS metrics, schedule a briefing of our latest XaaS research findings.
Co-authors: Christina Politi, consultant, and Zach Holland, business analyst, both work in Alexander Group’s Chicago office with the Sales Analytics and Benchmarking practice.
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