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Benchmarking

Being part of sales and professional services over the last two decades, I am always eager to navigate the world of benchmarking, definitions, current trends, industry insights in the ever-changing world of SaaS, CCaaS and CPaaS.  

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I am committed to providing my team and our customers with the best insights and assessments to make informed decisions.  In a world where customers can easily change their "as a service" or subscription, we need to ensure that accurate, informed decisions are made by our customers and we have set appropriate expectations.  

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Understanding benchmarking and standards is important to everyone's role; and, quite frankly, imperative to the sales role.  More on this later.

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I will try to answer some of the Finance 101 most common questions I get.  Take what is meaningful to you and ignore the things that aren't important to you.  Understanding this information will help sellers participate in all the necessary tracking, indicators, charting and graphing that sometimes takes the joy out of selling but is extremely important to the business.

Rule of 40 for SaaS

Commonly used only if at $1M ARR; which generally takes five or more years.

20% Growth Rate
20-45% is great!

20% Profit Margin
Free Cash

Rule of 40 for SaaS
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If growth rate plus profit market is 40 or above, you have sustainablity and are profitable.

If growth rate plus profit market is 40 or below, you have cash flow and liquidity risks.

EBITDA – Earnings (net income) Before Interest, Taxes, Depreciation, and Amortization. 
Ranges from 11-14 for S&P 500.  Over 10 is considered good.

Cash Flow - Lesson 101

  • Logically, higher cash flow yield is ideal

  • Obviously, cash flow must satisfy obligations and efficiently convert sales into operating cash

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  • Operating cash flow margin is a key indicator of performance

  • If a company cannot produce enough profit from sales and operating activities, it is at risk of becoming insolvent

Cash Flow - Lesson 101
Cash Flow - Lesson 101

Market Analysis, Growth and CAGR

  • What does the market research predict for CAGR?  

  • Does all research point in the same direction?​

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  • In the example below, I've built a representation of the CCaaS Market Growth

  • It is based on Allied Market Research, CCaaS Market, Published Aug 2022

  • It represents a similar prediction as other research available

CAGR
CAGR

*CAGR - Compound Annual Growth Rate

CCaaS Market

CAGR - Lesson 101

  • CAGR stands for Compound Annual Growth Rate

  • It is nothing more than a "smoothed" rate of return and shows an investment yield

  • The investment yield is done on an annualized, compounded basis

  • It is an average rate annualized

  • While all this sounds easy to calculate using Excel formulas, it is the role of the CFO to manage the details

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  • CAGR can hide interim volatility and present a steady growth picture.

  • In reality, the example below shows how growth can remain same at beginning and end of year

  • Yet not show the volatility of what is taking place month-over-month

CAGR Masks Risk

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Margin and Profit - Lesson 101

 

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MARGIN

  • measures the performance of the operations in percentage terms

  • margin shown as %

  • view into business on effectiveness and efficiency

 

 

PROFIT

  • measures the performance of the operations in terms of dollars

  • profit shown as $

  • view into buisness on sheer monetary terms

Tools to look at financial performance.

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MARGIN

PROFIT

Gross Margin - overall cost of sales to total revenue

  • standard  for pure SaaS should be 50-70% (healthy) 75-95% (high) for GPM

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Operating Margin - overall operations cost

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Net Profit Margin - overall health and profitability

  • standard for pure SaaS should be 8-10% (healthy) 20% (high) for NPM

Gross Profit - is markup of goods and services high enough to cover all production costs

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Operating Profit - is operations profitable enough to cover all costs (direct and indirect)

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Net Profit - overall profitability for a period after all costs (direct and indirect)

MRR and ARR

MRR - Monthly Recurring Revenue
ARR - Annual Recurring Revenue  
Lesson 101

  • As of this moment, there are over 1 trillion dollars in market capitalization of SaaS companies, yet the MRR metric still isn't part of either GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). 

  • It is ​easily trackable for SaaS companies
  • This tells you where the business stands at any given point 6, 12, 24 months; and growth trajectory

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ARR = Sum of subscription revenue for year + recurring revenue from add-  ons and upgrades - loss from cancellations and downgrades in same year.

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MRR and ARR

One of the best ways to increase revenue is to increase ARR:

  • New customer / logo

  • Boost contract term

  • Cross sell product

  • Upsell product 

  • Expansion of footprint

 IRR - Internal Rate of Return 
Lesson 101

  • Finish this section 
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