B2B software is a tough place to compete right now. As a CEO, you are constantly seeking ways to enhance the value of your businesses. But in order to gauge how you are doing, you need a clear picture of the company’s current performance and also highlight areas for potential growth and improvement.
With these metrics, CEOs can make informed decisions that drive sustainable growth, improve customer satisfaction, and ultimately increase the overall value of their business. In this blog, we’ll explore some of the most critical metrics that every B2B software company should track and how they can be used to propel your business to new heights
Financial Metrics (Rear view mirror)
These are lagging metrics, financial indicators that are based on past performance:
Annual and Monthly Recurring Revenue (ARR/MRR). Track recognized ARR/MRR and ARR run rate (most recent month’s MRR * 12). Recognized ARR and ARR Run-rate are rarely the same value for growing companies. You’ll want to track ARR growth rate as well.
Customer Lifetime Value (LTV). This is the average revenue per customer x the average number of years a customer is retained.
Customer Acquisition Cost. Sum of Sales and Marketing Expenses in a given quarter over the number of new customers acquired in that same quarter.
CAC Payback. The number of months it takes to payback the sales and marketing costs to acquire that customer.
Sales Magic Number. The amount of new ARR that you can acquire for $1 of sales and marketing spend. If you spent $100K in a quarter and added $200K of ARR your sales magic number is 2.0. If your number is greater than 1.0 there is room to invest further in sales and marketing. If its less than 0.5 than there may be a need to improve a few things. We have a calculator you can use here.
Gross Margin. Total Revenue less Cost of Sales. The Cost of Sales gets a little hazy but the best practice is to include all variable third party software components, as well as services and support costs. Basically everything but Operating Expenses.
Burn Rate. Total Revenue less Total Expenses.
Free Cash Flow. Cash in minus cash out. Cash basis profitability versus Accrual basis.
Gross Retention Rate (GRR). The amount of recurring revenue in a given period less recurring revenue that churns (does not renew). For a mature company, this number should be north of 90%.
Net Retention Rate (NRR). This is GRR but including any upsells or expansion revenue from customers in the same period. If you are between 100 and 110% you are doing great.
Churn. Same concept as retention, but looking at the count of customers, not revenue related to customers.
Leading Metrics (forward looking)
Sales Bookings. This is the dollar amount of sales that is booked. Booked sales is future revenue, rarely unless it’s hardware can it be recorded right away. Booked sales may also have deferred cash collection. It’s important to split booked sales out by revenue type. Example, recurring software value vs services; or tracking multiple years of booked sales versus one year, etc.
Opportunity Creation. The number of opportunities created in a period of time. (Ex. Monthly, Quarterly, Annually). Track opportunity types between New Customer, Existing Customer, and Renewal Opportunities.
Win rate. Number of Opportunities Won over Opportunities Won and Lost in the same period. Ideally track across New vs Existing, by industry, rep, region, product family, and opportunity source.
Average Contract Value. The average size of a new contract (bookings). Focus on new customer opportunities.
Sales Cycle Length. How many days does it take to close an opportunity from start to finish. Track New Customer from Existing Customer deals as they will be different.
Sales Velocity. A number which will tell you instantly if you have enough momentum to hit your number. It’s the product of Number of Opportunities in Current Funnel x Average Contract Value x Win rate over Sales Cycle Length. The product will be the number of dollars you are closing each day. So if your target is $1M new bookings for the year, your sales velocity should be $2,700. Our handy calculator can give you a sense of how you are doing.
Funnel Attrition. This is the number of meetings it takes to get an opportunity.
Other Operational Metrics
Services Backlog. Number of contracted hours you have approved. Divide that by your services capacity to tell you how many months of work you have contracted.
Utilization Rate. How many hours in a given period (week/month) is your services team busy on value creation (or billable customer work versus admin work). Your number should be north of 70% but best in class services teams would be in the 80% range.
Average Revenue per Employee. Total Revenue divided by Number of Employees. Ideally you will be operating at 2X the average cost per employee.
Project Gross Margin. Total Revenue less Cost as a percentage of revenue on a project. Ideally in the 40-50% range.
Customer Net Promotor Score. A simple but effective measure of customer satisfaction. The range is -100 to 100. A great score in B2B tech sectors would be 30+.
Conclusion
Running a B2B software company is a tough business but you can use these metrics as smoke detectors to root out fires before they happen. Better yet, create transparency in the organization so that the entire team can work together to improve the performance of the business.
