The Profitwell blog from Price Intelligence is often an interesting read. Rather than focus on outright promotion of their product, the team share the lessons learned from their customers. This bodes well for the future of that business. Listening to customers is a clear strong point. It also offers some genuine and surprising insights.
A couple of weeks ago Patrick turned his attention to SaaS benchmarks. The industry has developed accepted norms for certain numbers. Such as churn, expansion revenue and growth rate. These often quoted as essential thresholds to success for aspiring SaaS businesses to cross. Profit well also shows that they are all wrong. By big margins.
This is the first of a series so you may want to sign up for future updates. You might also want to pause for a second and think about the purpose and value of benchmarks as a species.
Who wants to be average?
By definition, benchmarks are an average of performance. Summed from a group of companies in an industry. Even the industry is defined by someone else. It may not be that close to the group of peers or competitors that you would choose.
This makes an interesting comparison but a terrible goal. Your ambition is to be a leader. The best product or business out there. Striving for average doesn’t cut it.
Best practice v innovation and disruption
Benchmarks are a window into the past. They are a report of historic performance. And the individual definitions are also relics. Reflections of existing business customs, methods and practices. SaaS startups are out to disrupt these worlds. To use innovation to challenge and overturn the established order. The very stuff of benchmarks is irrelevant to this agenda.
Are these the best things for your business to measure?
In a fast growing SaaS company there is no shortage of potential metrics. The leadership challenge is selecting and focusing on the most important numbers for your business. Benchmarks chosen and defined by an external agency are unlikely to be the top of this list.
External numbers of this type pose another risk. The right metrics are the voice of your customer turned into data. Benchmarks are the amalgam of the voice of other people’s customers. I know which set of numbers I would rather listen to.
How meaningful is SaaS benchmark data?
When you start out, benchmarks can be a useful to work out whether you idea is viable. You can use them as a rule of thumb estimate of profit potential for example.
Once you get beyond the back of an envelope stage, you need real data. It seems obvious that benchmarks can only be of value if they provide a reliable barometer. Profitwell shows that this is not the case for some common SaaS performance benchmarks. My experience tells me that more established data sources suffer the same problems.
Remember that public benchmarking companies like Gartner, Forrester and IDC depend on the companies benchmarked as a source of revenue. When I have worked with these companies, they aim to be impartial and act with integrity. Yet they are still vulnerable. It reminds me of a conversation I once had with the sales director of a big insurance company. “If you want to know how independent our resellers are” he said to me “watch what happens if we double the sales commission on a product."
In reality public benchmarking data is best used as a prop for sales pitches. Some people like that sort of thing I guess. As an operational tool, I am a serious sceptic. I recognise that estimating future performance or evaluating past performance is hard. More so in a startup.
That is because of deep inherent uncertainty. Risk is both the worst and the best aspect of making business decisions. Don’t be fooled into trying to mitigate it through false and irrelevant numbers. And well done to Profitwell for challenging the consensus.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.