Guest post by Aakanksha Gupta.
As a go-to-market (GTM) leader or growth strategist, you know the never-ending pressure to hit revenue targets. In most SaaS categories, competition is intense, and you’ll need a solid plan in order to achieve your revenue goals. You need to know where to invest your marketing dollars and efforts and monitor them consistently.
Image credit: Austin Distel on Unsplash
For SaaS businesses, particularly in B2B SaaS, planning starts with focusing on key metrics. The right SaaS metrics give you visibility into potential problems before they cause you to miss key targets.
This blog post will guide you through five essential GTM metrics for SaaS companies, explaining why they’re vital and how to leverage them to build a solid plan.
Why is SaaS metrics-based planning the key to success for GTM leaders?
How do you know if your GTM plan will succeed? Evaluating the effectiveness of a GTM strategy and the team driving it is always a challenge. SaaS metrics-based planning helps leaders tackle this challenge by providing a clear roadmap aligned with business objectives.
Metrics-based planning orients leaders and contributors in the same strategic direction. It sets a foundation for you and your teams to track performance. With this foundation, you can set intentional and clear goals and quickly spot where your GTM plans might be falling short or succeeding.
While there are various frameworks for revenue planning, many fast-growing SaaS companies adopt a top-down approach. In this approach, the CEO and board set the goals for the upcoming fiscal year, which are then translated into functional targets. This method facilitates the alignment of departmental plans with overall objectives. However, top-down planning can be complex, as various metrics impact each other, leading to necessary trade-offs.
Striking the right balance between the selected metrics is essential to create feasible top-down plans. Achieving this balance swiftly saves time and effort during the planning process, enhancing overall efficiency and increasing the likelihood of success for GTM leaders.
Which SaaS metrics should leaders choose?
To streamline planning, prioritize five key metrics alongside the “Rule of 40”:
1. ARR (Annual Recurring Revenue)
What it is: ARR is the contracted recurring revenue component of term subscriptions for over one year.
Why is it important: ARR is a critical metric that helps leaders track product-market fit and understand the short and long-term business health. They can set revenue targets, forecast sales, and assess the effectiveness of their pricing strategies using ARR.
How to calculate:
ARR = (Sum of subscription revenue for the year + Expansion ARR) – Contraction ARR.
OR
ARR = Monthly Recurring Revenue * 12
2. Growth Rate
What it is: Growth rate is the increase in a company’s total revenue or income over a specific period.
Why is it important: The revenue growth rate metric predicts future performance and momentum. GTM leaders can leverage this metric to evaluate the success of marketing and sales initiatives, product launches, and market expansion efforts.
How to calculate:
Growth Rate = ((Current period revenue – Prior period revenue) / Prior period revenue) * 100
3. GRR (Gross Revenue Retention)
What it is: GRR measures a company’s ability to retain customers and maintain revenue.
Why is it important: GRR is a key metric that provides insights into how well your business can sustain its baseline revenue streams over time. You can use it to evaluate customer satisfaction, identify churn patterns, and implement retention strategies.
How to calculate:
GRR = ((ARR at the start of the period – Churn ARR – Contraction ARR)/ARR at the start of the period) * 100
4. NRR (Net Revenue Retention)
What it is: NRR measures your organization’s ability to retain and expand contracts from existing customers.
Why is it important: GTM leaders can evaluate the effectiveness of upsell and cross-sell initiatives, identify expansion opportunities, and optimize pricing strategies by tracking NRR.
How to calculate:
NRR = ((ARR at the start of the year + Expansion ARR – Contraction ARR – Churn ARR)/ARR at the start of the year) * 100
5. Gross Margin
What it is: The gross margins indicate the percentage of revenue retained, with higher margins preferred for valuation.
Why is it important: Higher gross margins are an indicator of scalability. Tracking this metric over time can help leaders determine if they are on the right track toward profitability.
How to calculate:
Gross Margin = ((Total revenue – Cost of goods sold) / Total revenue) * 100
How can you use SaaS Metrics to build your plan?
Let’s see how you can build a plan that aligns with your company’s target with the following example.
Say Hooli is a fast-growing SaaS company with an ARR of $30M, operating in the US and EU and catering to two market segments.
Here are the targets set by the board:
- Growth rate: 100%
- GRR: 80%
- NRR: 130%
- Gross Margin: 80%
Let’s understand what these mean for you as the GTM leader:
- Let’s start with the target ARR for next year = Current ARR * (1 + Growth rate %) = $60M
- Now there will be churn so let’s add that to the equation. GRR gives us the upper bound of churn. This will be the target for your customer success team.
Upper bound of annual churn = 1 – GRR % = 20%
Expected churn = 20% * Current ARR = $6M
- NRR of 130% implies you need to expand the current base of $30M to $39M. Hooli will need to add $15M via up-sell and cross-sell to existing customer base to achieve its NRR target after accounting for the $6M in churn. This will be the target for your farming teams.
- To achieve the target of $60M for the year, Hooli’s sales (hunting) and marketing team will need to bring in $21M of new ARR.
New ARR = Target ARR – (Current ARR * NRR%)
The remaining metrics, Gross Margin, along with the Rule of 40, sets the constraints on Cost of Goods Sold (COGS) and EBITDA, respectively.
The increasing popularity of SaaS metrics-based planning approach lies in its simplicity. This approach lets you quickly check if your goals are reasonable or too ambitious. It sets the maximum limits for several downstream metrics right at the start, before you build your tactical plans. Knowing these limits early helps you avoid spending too much, hiring too many people, and making other planning mistakes.
However, managing these metrics manually can be cumbersome; automation is essential for strategic decision-making efficiency. This is where modern planning tools help.
How can technology help to build the plan and track performance?
Automating essential calculations and ensuring real-time visibility of your key metrics is table stakes in today’s competitive SaaS market.
To ensure that you are on track to achieve your targets, you need to measure and monitor your GTM metrics in one place. Your planning software should be able to bring your data together to model different scenarios quickly and enable you to surface otherwise hard-to-reach insights.
The best planning software can help you reduce failure risks, achieve a harmonic product-market fit, and lay a solid basis for long-term success. You’ll find six of the best in this detailed guide for revenue planning software solutions.
Aakanksha Gupta is a SaaS growth and product marketer. She is currently a product marketing manager at Drivetrain, a strategic finance platform that helps finance teams plan better and make better decisions with data.