ICP: Ideal Customer Profile: The simplest definition is that this is the fictitious description of the types of customers that would be the ideal buyers of your offerings. These are generally created looking at a multitude of various attributes (budget, region, industry, etc)
Buyer Personas: This is a fictitious representation of the buyers that will be most likely involved in the buying process. This can include various attributes like demographics, motivation, goals, challenges, responsibilities, etc.
MQL: Marketing Qualified Lead – this is a lead that has interacted with your marketing efforts and has met marketing’s definition of qualified.
SAL: Sales Accepted Lead: These are MQLs that get passed to the sales team for discovery.
SQL: Sales Qualified Lead: These are leads that are moved into an opportunity as they have met the sales definition of qualified.
PQL: Product Qualified Lead: Usually found in freemium or free trial business models, these are customers that have found value in your offering during these free engagements.
Opportunity Stages: I think 4-6 stages is ideal. Anything less and it will be hard to forecast, anything more it gets tedious to track and can create ambiguity on when prospects should move into stages.
Unweighted Pipeline: This is simply the total value or ARR currently in the pipeline.
Pipeline Coverage: This is calculated by: total unweighted pipeline / sales target. The ideal number will vary by company by their win rate but 4-5 is generally the sweet spot.
Weighted Pipeline: Once you’ve calculated the win rate by stage of opportunity, you can then create a pipeline based on the value of deals in each stage.
ToFu: Top of the funnel: This is what I call the information gathering stage your potential prospect is in. It’s about creating awareness of your beans at this stage.
MoFu: MIddle of the funnel: This is the educational stage. This is where you can let them know how you solve their problem.
BoFu: Bottom of the funnel: Now we’re at the stage where a prospect is going to make a decision.
Annual or Average Contract Value (ACV) = It’s the value of subscription revenue from each customer normalized over a year. (one time fees excluded).
Total Contract Value (TCV) = All payments contracted with a customer. (including one time fees that are not recurring)
Average Revenue Per User (ARPU): To calculate take total revenue generated over a specific time period / active users in the same time period
Example: Customer signs a contract for 3 years for 6 users. $50k year 1, $55k year 2 and $60k year 3.
The ACV would be (50k + $55k + $60k) / 3 years = $55k.
The TCV would be the total, so $165k and include any one time fees as well.
The ARPU for year 1 would be $50k / 6 active users = $8,333
Monthly Recurring Revenue (MRR) = Simply multiple average revenue per account x total number of accounts. This number factors in all churn, expansion and new.
Annual Recurring Revenue (ARR) = MRR x 12 months.
Average Contract Length: This is calculated by taking the length of all customer contracts / total number customers.
Bookings vs Revenue: I see these used interchangeably but they are different. Bookings occurs when a customer makes a commitment to buy (generally by signing a contract). Revenue is more of an accounting term and only occurs when you deliver your product or service. So, you can have bookings in January if a customer signs a contract, but if the service is not provided or delivered until March, revenue will not be counted until then.
Deferred Revenue: this occurs when you receive payment for services or deliverables that have not yet been rendered. (customer pays $1000 for a feature that will not be accessible for months)
Churn Rate: % of customers lost during a certain time period. If you lose 20 out of 200 customers in a year, your churn rate will be 10%.
Gross/Logo Retention: This is the inverse of your churn rate. In the example above, your Gross Retention would be 90%.
Expansion MRR: Amount of new revenue generated from existing customers, typically via upsells or cross-sells.
Contraction MRR: Revenue lost from customers downgrading and paying less.
Net Retention: Taking the Gross Retention, adding in the expansion revenue and subtracting out the contraction revenue.
Cohorts: Segmentation of users or customers based on similar traits and behaviors.
Average Customer Lifespan: Avg # years/months a customer stays on board / total # customers.
Customer Lifetime Value (LTV or CLV): Estimate of the average gross revenue a customer will generate before they churn. Generally this is ARPU x Customer Lifetime or ARPU / User Churn.
Service Level Agreements (SLA): These are agreements that typically outline what to expect from the provider and their responsibilities. Many times these include uptime promises and service availability, escalation processes, incident report expectations and more.
Customer Acquisition Cost (CAC): Simply the cost of acquiring a new customer. This can be a tricky calculation and have seen different companies get to this number in different ways. Do make sure you’re looking at only cost around new customers.
Most companies I’ve seen, for ease, calculate this by taking sales + marketing expenses / # new customers. But, for a more complete picture you really should take ALL costs associated with acquiring new customers / # new customers. A bit harder to determine sometimes though.
LTV:CAC Ratio: This is the money you spend to acquire new customers to the revenue you get from those customers. 3:1 is generally the aim point. 2:1 generally points to some problems with churn, expansion limitations or costs. 4:1 or higher should signal you’re not spending enough.
CAC Payback Period: This tells you how long it takes to recover the new customer acquisition cost in months. Obviously, a CAC Payback period longer than your LTV is a major issue.
The formula is CAC / MRR = CAC Payback. The sweet spot here is generally anywhere between 14-16 months at seed stage to 24-26 post series C.
Rule of 40: The North Star metric for many SaaS companies, this is the revenue growth rate plus profit margin. If over 40%, your valuation will be higher as there will be less concern about any liquidity issues in the future.
If you’re growing at a 70% rate, but your profit margin is (50%), your looking at a 20% rule of 40 number.
Sales Efficiency AKA Magic Number: New ARR (this quarter) / Sales+marketing cost (previous quarter).
Anything above 1 is strong and anything below .5 you’re most likely looking at an unsustainable growth model.
Sales Velocity: This measures how long it takes your sales team to move deal from opportunity stage to close. To calculate:
(# Opportunities + ACV + Win Rate) / Sales Cycle. You can measure and there’s value in looking at this by day, month, quarter or year.
Sales Cycle: The time it takes from prospecting a customer to closing the deal.
This will vary by ACV, but in general the average for $15K or under ACV will be 60 days, $15k-$100k will be roughly 120 days and $100k and above will be closer to 150-180 days.
DAU/MAU: Daily Active Users / Monthly Active Users: This is simply the % of your users that are using your platform on a daily or monthly basis. It varies greatly but 10%-20% DAU seems to be the average and anywhere near 50% is amazingly good.
POC: Proof of Concept: Generally seen in larger Enterprise offerings, these are essentially not always free and primarily to prove concepts and validate performance. These are to validate specific functions or parts of your solution before purchase. Codifying the criteria that equals success and responsibilities of both parties during the POC is critical.
NPS – Net Promoter Score: A customer satisfaction score that is based on the likelihood customers would recommend your company, generally on a 0-10 scale basis.
