Podcast Summary: B2B SaaS Metrics and Priorities with the Alexander Group - Ted Grossman and Davis Giedt

Podcast: Metrics that Measure Up
Host: Ray Rike
Guests: Ted Grossman (Principal) and Davis Giedt (Director of Analytics & Research), Alexander Group
Date: May 24, 2023

Overview

This episode dives into the evolving landscape of B2B SaaS performance metrics for 2023. Host Ray Rike is joined by industry experts Ted Grossman and Davis Giedt from the Alexander Group. The conversation covers the top performance metrics for B2B SaaS companies, how performance and benchmarks have shifted in the current market, and how companies – from startups to corporates and PE-backed firms – are effectively using benchmarks to inform their strategies and drive growth.

Key Topics & Insights

1. Evolving Use of SaaS Performance Metrics

[03:21]

• Transition in SaaS Models: Software business models have shifted from perpetual licenses to cloud subscriptions and, more recently, consumption-based models.
• Primary Metrics: Long-term, two pillars endure—growth and efficiency.
  • Growth is key for valuation, especially in bullish markets.
  • Efficiency matters in tighter, profit-conscious times.
• Changing Market Sentiment:
  • Until recently, growth trumped profitability. Currently, profitability and efficiency are crucial.
  • Quote: “Almost all the metrics ... are going to be about either growth or they're going to be about efficiency. ... The key is sort of the weighting and what's been happening lately.” — Ted Grossman [03:38]

2. Metrics with Increasing Importance

[05:55]

• Efficient Growth & Margin over Pure Growth:
  • Growth is no longer enough — achieving it efficiently is what matters.
  • Boards/investors now demand a blend of margin and growth.
• Balanced, Tailored Approach:
  • There’s “no one-size-fits-all” set of metrics. Emphasize the right mix for stage, segment, and business model.
  • Often, strengths in some metrics offset weaknesses in others.

3. Most Impactful Efficiency Metrics

[08:28, 12:40]

• Top Efficiency Metrics Used by Alexander Group:
  • Sales and Marketing Expense to Revenue (E2R)
  • Profitability per Sales Rep
  • CAC Payback Period
  • Net Dollar Retention / Gross Dollar Retention
  • Cost of Growth or ‘Magic Number’
• Benchmarks & Best Practices:
  • E2R for scaled SaaS: 35–40%
  • Magic Number:
    • 0.5 = poor, 0.75 = good, 1.0+ = best practice
  • Quote: “If you're in growth mode, you're going to see sales and marketing expense to new bookings ... at the 1 to 1 or 0.9 to 1 ratio.” — Davis Giedt [13:34]

4. Debating the Magic Number and CAC Ratio

[15:26-17:42]

• Some see the Magic Number as an easily available, high-level efficiency indicator, particularly useful for benchmarking against public companies.
• Ray Rike prefers the CAC ratio, focusing specifically on new or expansion revenue efficiency.
• Quote: “...if growth is at a premium ... then the magic number becomes really important.” — Ted Grossman [16:36]
• Quote: “I think ... LTV to CAC ... is a much better ratio.” — Ted Grossman [17:26]
• LTV/CAC Ratio: 3.0+ is healthy, but calculation consistency is required for benchmarking.

5. Benchmarking: Context Is Everything

[21:35-25:39]

• Consistency and Clarity: Ensure metric definitions are consistent; understand exactly how benchmarks are calculated.
• Analysis & Application:
  • Benchmarks are one tool among many—strategy and context matter as much as the numbers.
  • Use benchmarks for self-evaluation but consider maturity, product competitiveness, segment, etc.
• Quote: “The numbers are so contextual based upon ... your maturity, ... competitiveness, overall cost structure.” — Ted Grossman [23:25]

6. Strategic Use of Metrics by Company Stage

[25:39-27:52]

• Early-stage: Emphasize growth metrics (Magic Number, CAC, viability).
• Scale/mature: Efficiency and margin become paramount.
• Example: Even best-in-class companies like Salesforce maintain high sales/marketing spend (~46% of revenue, even as growth moderates).

7. Aligning Investment and Growth Expectations

[29:54-32:25]

• 2023 sees more realistic growth rate targets and increased scrutiny on spending.
• Investments are focused on revenue operations, customer success, and data-driven initiatives rather than just expanding sales headcount.
• Quote: “There's still pretty strong interest in investment in 2023... but the investments are going to be more targeted.” — Davis Giedt [31:23]

Notable Quotes & Memorable Moments

• On Metric Consistency:
  “Make sure ... when you're benchmarking ... that you appreciate the logic and, and so forth that goes in.” — Ted Grossman [21:38]

• On Benchmark Limitations:
  “Every company thinks they're unique.” — Ted Grossman [24:53]

• On Efficient Growth Culture:
  “Efficient revenue growth is not the CFO's job. It's everyone's job to understand it.” — Ray Rike [37:23]

Tool and Technology Recommendations

[33:57-35:50]

• Data Visualization: Tools like Tableau, PowerBI help democratize and operationalize metrics for commercial teams.
• Predictive Data Analytics/AI: Tools improving account propensity modeling, helping target high-probability buyers.
• Foundational Data Strategy: Before investing, ensure sound data flows across marketing, sales, service.

Timestamps for Key Segments

• Introduction & Context: [00:00–03:21]
• Market Shifts in SaaS Metrics: [03:21–07:56]
• Most Important Efficiency Metrics: [08:28–12:40]
• Existing Customer Focus & Revenue Mix: [10:24–12:21]
• Top Metrics Alexander Group Tracks: [12:40–15:26]
• Metric Debates (Magic Number, CAC, LTV/CAC): [15:26–19:40]
• Benchmarking Advice & Application: [21:13–26:40]
• Efficiency Advice for SaaS Sales/Marketing Investment: [26:40–29:53]
• 2023 Growth Expectations & Investment Trends: [29:54–32:25]
• Tool/Technology Recommendations: [33:57–35:50]
• Closing Thoughts: [36:39–37:31]

Closing Advice

• Adopt a Metrics Culture Across Revenue Teams: Success isn’t just a finance concern; all revenue leaders need to embrace metrics and benchmarks.
• Benchmark Wisely: Use the right metrics in the right context, and validate benchmarking methodologies.
• Prioritize Data Infrastructure: Invest in foundational analytics and visualization capabilities—data-driven decisions empower sustainable, efficient growth.

This summary captures the main themes, practical insights, and the experts' candid perspectives, making it a valuable guide for SaaS companies navigating today's market realities.