Proving the value of an existing or future indirect sales channel for your software-as-a-service (SaaS) business can be tricky. Anthony D’Angelo, shares five critical metrics that will help you illustrate the effect a successful channel strategy can have on the revenue potential of your business.
About the author
Anthony D’Angelo has more than 20 years of experience in global channel sales, advancing industry-recognized channel teams, sales results, and partner programs for fast-growing companies in both the networking and security space. Today, he’s the Head of Sales for Zift Solutions, a leading provider of Partner Relationship Management (PRM) and Through-Channel Marketing Automation (TCMA) solutions, including the new ZiftONE for Ecosystems.
Previously, Anthony served as the Global Channel Chief for Cato Networks, where he built a world-class channel team and more than tripled channel-led sales results. Before this, he was the Director of Global SD-WAN Partner Sales at Cisco Systems, where he oversaw partner sales for Cisco’s SD-WAN product line. He has also held executive sales positions at leading companies such as Viptela, Westcon, Net Optics, HP, TippingPoint, and RSA.
Crucial Metrics: Evaluating Your SaaS Channel Strategy’s Value
Proving the value of an existing or future indirect sales channel for your software-as-a-service (SaaS) business can be tricky. That’s because the SaaS business model is different from that of other businesses. Typical financial metrics like income statements and cash flow forecasts can completely miss the mark when measuring the underlying health of your SaaS business and the potential of your indirect sales channel.
With SaaS, you have a hefty initial investment before bringing a customer on board. There’s R&D, product development, hosting, sales and marketing, etc. Over time, your customers begin paying subscription fees, and eventually, you recoup your investment. But if you looked at a SaaS business’ numbers using traditional financial metrics at year one, they would look pretty bad. A lot of money is being spent, but not a lot is coming in. That said, you’ve invested in the possibility of significant profitability.
5 Metrics To Show The Impact of Your Channel Strategy
With that in mind, here are five critical metrics you can use to illustrate the multiplicative effects your channel strategy can have on the revenue potential for your growing SaaS business.
1- Recurring Revenue Growth
Whether monthly recurring revenue (MRR) or annual recurring revenue (ARR), recurring revenue growth is the simplest but most important metric in SaaS. It measures the growth in subscription fees your customers are paying monthly or annually.
Channel Impact: Channel partners can be a force multiplier, accelerating the growth of your MRR or ARR and doing so on a pay-for-performance basis, which typically is less costly than supporting a direct sales force.
2- Customer Acquisition Cost (CAC)
CAC includes all go-to-market costs focused on new customer acquisition, including all sales and marketing costs. When comparing this metric for channel and direct sales, the channel CAC typically will be significantly less. However, CAC by itself is somewhat meaningless; what’s important is the payback period.
Let’s look at an example. Let’s say that in the last month, you’ve spent $120,000 in CACs. To calculate the payback period, look at how many months it takes to recoup your investment. If your MRR is $12,000 per month and hosting is $2,000 per month, you would net $10,000 per month. If your gross margin is $10,000 per month, it will take 12 months to pay back the original $120,000, so your CAC payback period is one year.
Channel Impact: This metric usually favors the channel over direct sales because the channel has lower cost, less risk, a lower CAC, and a shorter payback period. Of course, there could be more costs later as the channel grows, but the risk has significantly lessened by then.
3- Churn & Net Retention
Churn and net retention are critical metrics for SaaS decision-makers. Net retention is the percentage rate at which SaaS customers leave or cancel their subscriptions (i.e., churn), reduce their subscriptions (i.e., down-sell), or increase their subscriptions (i.e., upsell).
Returning to our earlier example, let’s say your business has $12 million in ARR or $1 million in MRR. If this month, you lost 5 percent to churn and 3 percent to down-sell but upsold 5 percent, you’d have a net retention of 97 percent. If that remained constant over three years, you’d have $4.1 million in ARR or $300,000 in MRR, which is a significant reduction).
On the other hand, let’s say net retention was up 3 percentage points instead of down. If it remained at 103 percent, after three years you’d have $2.8 million in MRR. That’s 10 times the MRR you would have with 97 percent net retention! This is an extreme example, but it shows the power of net retention. While it looks like only a difference of a few percentage points, it’s a significant difference in your revenue.
Channel Impact: Because channel partners typically have long-term relationships with their clients, their customer retention stats are often higher than those of the direct sales teams. However, tracking churn and net retention by indirect and direct sales channels lets you see which channel has the most significant impact. Comparing retention rates also helps you analyze your channel investments and ROI.
4- Customer Lifetime Value (CLV)
CLV is the value of gross margin your customer will bring your SaaS company over the lifetime of their subscription. Consider a new customer you closed last month that’s generating a $10,000 gross margin. If you keep them for five years or 60 months, you’ll earn $600,000 in gross margin, which is the customer’s lifetime value.
Channel Impact: Since channel partners build trusted adviser relationships with customers, they can be an excellent way to increase stickiness and, therefore, customer lifetime value. This is particularly true when using the channel to increase your sales reach to geographies, demographics, and verticals that you wouldn’t reach as efficiently with a direct salesforce.
5- Customer Lifetime Value (CLV) to Customer Acquisition Cost (CAC) Ratio
To make this comparison, look at your CLV divided by your CAC. This metric is designed to show the profit you’ll generate on each new SaaS customer you acquire. So, if you spend $120,000 to acquire the customer and bring in $600,000 over the lifetime of the relationship, that’s a 5X return. That’s an excellent ratio! If you’re in this position – with a good return of 3X, 4X, 5X, or better – it’s a good idea to capitalize on this success and go after more.
Channel Impact: Because you can scale an indirect channel more quickly and inexpensively than a direct sales force, you can capitalize on the accelerating demand for your SaaS solution through the channel. If your return is 3X, 4X, 5X, or better, adding more partners in your indirect channel will enable you to strike while the iron’s hot.
Bringing All These Metrics Together In Your Channel Strategy
Use these five metrics to illustrate the positive impact that pursuing your channel strategy will have on your SaaS business’s profitability. On an ongoing basis, track segmented SaaS metrics for your channel to drive decision-making and success in your channel.
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