When it comes to calculating SaaS business metrics, there’s a lot of ambiguity. Companies don’t know how to factor in unknowns like ‘churn’ or ‘upsells’, so they mess with numbers as if they were Play-Doh, not realizing these manipulations could be harmful in the long run.
In reality, if you want to know how your sales process is working for your business, there’s little room for toying with your metrics.
That’s because looking at the wrong ones or focusing on only one dimension of them could lead to false positives about sales team productivity. Worse, over-reliance on some metrics could lead your entire company down the wrong path.
If you want to get a clear picture into the performance of your sales efforts, look out for the following false positives and avoid them at all costs.
The False Positives To Avoid
#1 – Freemium Users
What you think it means: People are interested in your product and will eventually buy.
What it actually means: People are intrigued by your product but won’t necessarily pay.
Revenue comes from paying customers. No paying customers, no revenue. Despite the simplicity of these statements, a lot of people make the mistake of believing that the inverse is also true, that users = revenue. But if your users aren’t paying, this equation is totally backwards. As Jason Lemkin said in his webinar about SaaS metrics:
“Free users don’t count. I don’t care in SaaS. I don’t even care about trials. I don’t even care really about paid trials. I don’t care about anything. What I care about is paid customers. Anything that isn’t a paid customer doesn’t count.”
Free users don’t predict paid users, which means they don’t predict revenue. If your sales team is counting a free trial sign-up as a sale, you’re conflating hypothetical revenue with real revenue.
What should you be tracking instead? Average deal size.
Average deal size can be a humbling metric. Since it looks at deal size across all “closed accounts”–however you’re defining that–it’s bound to be much lower than those sky-high numbers you’re used to, like free users.
But this metric can tell you so much more about your product. While free users assumes that people are interested, average deal size shows—in dollar amount—just how that interest translates into real revenue.
#2 – “Opportunity Close Rate”
What you think it means: You can measure productivity by looking at how much your reps are closing.
What it actually means: You’re potentially ignoring top of the funnel productivity.
Tracking how many opportunities your reps close over the total number of opportunities is great, but it only tells you about a small slice of the sales cycle. An important slice, of course. But only focusing on opportunity close rate is a great way to forget about all the elbow grease your team puts in to get prospects to the opportunity stage.
In order to get your entire sales team moving faster, you need to think bigger and focus on top of the funnel as well.
A better metric to track? Sales cycle length.
‘Number of opportunities closed’ only looks at one sliver of the sales cycle, and rewards account executives (AEs) for closing deals. It doesn’t look at how long it took them to get there, which is crucial to track within a high-growth company.
Sale cycle length measures the number of days it took for an account to go from prospect to closed opportunity, which means it factors in all the work your team did—your sales development reps’ time doing research and on the phone, your AE’s time prepping for the demo, and more.
When you look at sales cycle length, you zoom out, and see a holistic picture of how your team is functioning together. Focus on driving that number down and you’ll learn way more about team productivity than something like opportunity close rate.
#3 – “Number of Big-Name Logos”
What you think it means: You’re expanding your customer base and making your product more appealing.
What it actually means: You’re focusing on acquisition instead of upsells and retention.
Go to any SaaS company’s homepage and you’ll see a collection of logos sprinkled across the bottom, hopefully giving you faith in the legitimacy of their business.
But number of “good logos” is hardly a metric, and a vanity one at that.
You might think they say something about your product and how much people like it, but in reality, the number of logos doesn’t say anything about your customer’s happiness or willingness to stick around.
As it turns out, a lot of companies make this mistake.
Price Intelligently did an in-depth study on how SaaS companies treat acquisition and found that even most C-level executives and founders thought that acquiring logos was more important for growth than making more money per customer or keeping customers around longer.
Logos are cool, but what you really want to track is NPS.
Even though NPS score tends to be characterized as a somewhat ‘corporate’ metric, Jason Lemkin found that assumption was totally backwards when he began to use NPS to measure customer happiness at EchoSign. He found that using NPS is a way to think about quality of customer happiness, which is way more important than quantity of big name companies.
If your sales team is really focused on finding the right customers and uncovering their pain, then you’ll have high NPS numbers.
Whether you ask users in an email or a pop-up on your website through tools like Qualaroo, it’s worth bringing NPS in as a sales metric. Measuring the success of your sales team by how happy their closed accounts are is a great way to see whether they brought in the accounts that have the most success with your product or service.
Ask Yourself: Does This Metric Align With My Business Goals?
Seth Godin has a nice metaphor about false metrics. Let’s say you’re on an elliptical at the gym, and you’re really set on burning 600 calories during your workout.
You start to push with your arms, thinking that you’re burning calories faster, but you wind up hurting your shoulders and not feeling good at all. This is similar to what happens when you orient your sales team towards the pursuit of one goal, without really knowing how it aligns with the health of your business.
In Seth’s words:
A useful metric is both accurate (in that it measures what it says it measures) and aligned with your goals. Making your numbers go up (any numbers—your BMI, your blood sugar, your customer service ratings) is pointless if the numbers aren’t related to why you went to work this morning.
This is where the diagnosis comes in for you and your sales team. Think about why you all came into work this morning. What’s the one thing your team is chasing? If you’re an early-stage startup, it’s probably MRR growth above all else. So, if you’re measuring something that doesn’t contribute to MRR, something’s not adding up. Take another look at the metrics you’re tracking and you’ll more than likely determine the cause.