Every revenue leader is looking to accelerate growth and improve performance. Most, if not all, are looking to grow by a substantial margin. After all, you don’t often hear “If I could just improve by half a percent more, we’d hit our stride.” But what if the way to achieve meaningful growth of 10%, 25%, or even 100% in fact lies with the half-a-percent improvements? Revenue growth is more scientific and subtle than you realize. The key to SaaS growth is optimizing the system as a whole because exponential growth is unlocked when you start thinking in a system mindset and work to optimize holistically. There is power in small, yet compounded improvements.
This year at Ramp, InsightSquared’s annual revenue ops conference, Winning By Design partnered with InsightSquared to discuss this topic. At Winning By Design, we start by defining and outlining the customer journey and what the key metrics of measurement are. The best way to model and measure your business is by aligning to key stages in the process mapped against the customer journey. We believe there are seven key metrics that matter, which are outlined and defined below. These seven metrics enable you to simplify each stage down to one conversion rate, which is the output divided by the input. This conversion rate then gives you indications at the highest level of health and quality of execution within that stage of the customer journey. It also provides you with the insight on where to dig deeper to assess if you are dealing with a quantitative or qualitative problem.
The seven key metrics mapped against the customer journey:
Conversion Rate 1(CR1): Prospect to MQL rate, indicative of the quality of the database
Conversion Rate 2 (CR2): MQL to SQL rate, indicative of the quality of Lead Development campaigns
Conversion Rate 3 (CR3): Showrate, hand-off, indicative of the quality of the prospecting work
Conversion Rate 4/ Win Rate (CR4/WR): Win rate, indicative of the quality of the total sales process and the sales skills
Annual Contract Value (ACV): Measurement of discounting, indicative of the effectiveness of negotiation
Conversion Rate 5 (CR5): Churn during onboarding, indicative of quality of the customer engagement experience
Conversion Rate 6 (CR6/Churn): Indicative of the stickiness of the service, ack of impact results in churn
Conversion Rate 7 (CR7/Upsell): Upsell during usage during the length of the contract
In order to make substantial improvements to revenue growth, the common mistake most revenue leaders make is to go to the end of the sales process or the customer journey and see what they can do to specifically improve win rate. Although this does have an impact, how big of an impact does it really make? For example, if we look at the chart below, let’s assume all other stages in the process remain the same, but close rate (Conversion Rate 4) increases from 20% to 25%. The model runs 1,000 prospects through the system with an Annual Contract Value (ACV) of $30,000.
In this example with a 25% improvement in close rate moving from 20% to 25% we have increased ARR by $57,600, or an overall 25% improvement in Annual Recurring Revenue (ARR). Focusing on a single metric delivers linear improvement. 1% improvement in close rate equals a 1% improvement in revenue. The issue is that reaching a 25% improvement in close rate is a daunting task and would not only take a lot of work, but realistically would also take a lot of time, if achieved at all.
This is where the scientific methods comes into play and what we like to refer to as systems thinking for Sales as a Science. One of the biggest challenges today in driving revenue growth is that go-to-market strategies have become so complex and involve so many teams over a number of critical stages in the buyer’s journey. Mathematically, if we want to gain leverage over the model we need to take advantage of is multiplicative properties. If you impact more than one area at the same time they compound. The result of this is not linear growth but parabolic growth, which is significant.
Looking at the same example above, let’s rerun the exact same analysis but this time we are going to improve all five metrics by 5% each instead of 25% in one area and see the impact that it will have. With just a 5% improvement across these key metrics, there is an overall 27.63% improvement in revenue. Even though this is just slightly above the performance in ARR that we saw from the first example, increasing metrics by 5% versus 25% is far more realistic and feasible, making the results a lot more probable.
Where this really starts coming to life is if you model this over the complete SaaS lifecycle as we have done below and look at the power of compound improvement when you consider the whole customer journey. Doing analysis on the entire lifecycle from marketing leads to upsell, and optimizing those critical steps in the buyer’s journey throughout the different departments is crucial. Business intelligence tools like InsightSquared, can help you understand and view the data around core KPI’s and then diagnose the root cause of issues so you can increment the performance step by step and stage by stage. The surprising power of compound improvement comes because optically a 1% greater SQL to SAL conversion does not seem like a big jump, but when multiplied with the same type of performance across other key stages, the outcome is dramatic.
So, if we rerun the analysis and look at the impact of small improvements across the whole customer lifecycle, let’s see how that changes revenue. Still only running 1,000 prospects through the model and using $30,000 ACV per deal, we can take the entire lifecycle from prospect to upsell and add 5% improvement across all metrics and then 15% improvement across all metrics to compare and benchmark. Additionally, we can add 5% improvement and 15% improvement in close rate alone to see variance of linear versus compound improvement. The raw data is copied in the appendix.
The power of compound improvement is illustrated in the chart. The huge delta in improvement shows when it is compounded versus linear. There is a 47% improvement of revenue from a 5% improvement across the board and an astounding 205% improvement with a 15% increase across the board.
As a result, the key to SaaS growth is optimizing the system as a whole. Exponential growth is unlocked when you start thinking in a system mindset and work to optimize the customer journey holistically, not in individual pieces and parts. To deliver these improvements takes organizational support and an agreed definition of the customer journey. Metrics aligned to the customer journey allow you to simplify each stage down to one conversion rate and then diagnose which areas of the business are working and those that need improvement.
It is possible for your organization to drive substantial revenue improvement by following these three steps:
1. Think of your GTM strategy and revenue growth as the optimization of the whole system because true growth comes from refining the process and not just one metric.
2. Focus your analysis in InsightSquared on identifying the core metrics per stage to use as your first step in diagnosing performance.
3. Build your action plan specifically on one root cause item at a time within a department. For example, how to write more effective emails for BDRs to drive higher outreach to connect rates, which will in turn influence Conversion Rate 2.
*Be sure to read our upcoming series of blogs! We will dive in to specific InsightSquared reports and dashboards and discuss how to’s for diagnosing situations where you can uncover ways to improve your sales process.*