This article describes how to define metrics for the sales and marketing functions of a technology business, and how to use these metrics to manage investment and growth.
Technology businesses have the potential to be highly scalable. But, how do you turn an innovative idea into a rapidly growing technology business?
One key to developing a successful technology company is to have a strong set of metrics that guide your business. Much like the control panel of an airplane, well-defined metrics, with appropriate targets, can give you early warning indicators when things are going wrong and can also show you the areas of promise that merit further investment.
In this article, I aim to share some of the key sales and marketing metrics that should be considered as you grow and scale a technology business.
Step 1: Know Your Business Model
The first step in defining metrics for your technology business is to understand your business model - specifically, your revenue model.
Technology businesses come in a number of shapes and sizes:
- Services-based: These include consultancies, web agencies, IT contractors and any other form of services-based business, which charge for time spent on a technology service. Typically, an hour of human time is the base underlying economic unit.
- License-based: Traditional software comes in this form (although, less frequently these days). This involves the sale of a one-time license fee (often based on number of users, number of CPUs or another measurement factor), which entitles the customer to have usage rights to a software application. A license-based model often includes a recurring annual maintenance fee of 15 to 20% of the original license fee, which includes support and future products upgrades.
- Software-as-a-Service: Due to market pushback on the up-front investment required in the license-based model, many software companies now sell their software in a monthly rental format, with a recurring monthly fee that lasts as long as the software is used. This is frequently called a Software-as-a-Service, or SaaS, model.
- Subscription-based: In this model, an individual or a company sign up for a recurring (monthly, annual, etc) membership - customer payment is linked to ongoing participation.
- Advertising-based: A popular model in the Internet space, advertising-based businesses offer content or a service, often for free, and are focused on getting a high volume of views. They then place ads on their site and generate revenue through advertising channels.
- Transaction-based: Commonly used in the eCommerce and payment processing spaces, a transaction-based business will charge a per-transaction and/or a percentage-based fee. In this scenario, revenue increases as transaction volume grows.
Building a successful technology business begins with selecting the right business model, and then understanding this model extremely well. The metrics that are critical to your business will represent the factors that impact your revenue model. Therefore, you need to know your business model before you can select the optimal metrics for your particular business.
Step 2: Understand Your Target Customer
There are a few basic questions that a technology business needs to ask itself about its customers:
- Who is my ideal customer?
- How do I make my ideal customer extremely happy and successful?
- If I succeed in making my customer successful, what value will that generate for them, and for my business?
- Who is my competition?
If you put these four questions together, you should be able to identify a set of goals and parameters:
Step 3: Build Your Go-To-Market Strategy
- The size of your addressable market
- The form your solution, or value proposition, needs to take (product features, message, delivery format)
- The business model and price point you should adopt in order to sell your solution
- The best way to reach, and acquire, customers
Based on your value proposition, you should develop:
- Company mission statement
- A summary of your core value proposition
- Company messaging strategy
- Pricing strategy
From there, you will want to develop hypotheses about how you can sell your product or solution. The more ideas, or go-to-market approaches, that you identify as possibilities, the better.
For each go-to-market hypothesis, you should dig into detail to determine the sales and marketing approach you will follow and the type and quantity of customers that it will potentially generate. Then, aggregate and prioritize your go-to-market approaches so that you can decide which ones merit investment.
Step 4: Create Your Metrics Fundamentals
Typically, the go-to-market metrics of a technology company start with two key factors:
1. What is the value of a customer (to you)?
2. What is the cost of acquiring a customer?
For each of your potential go-to-market channels, it is critical that you are able to measure the following:
Cost of Acquisition
- The first year value of a customer
- The lifetime value of a customer
- The amount of time between acquiring a customer and generation of revenue
- The one year retention rate of a customer
- Cost of generating a sales lead
- Ratio of sales leads to active sales cycles
- Ratio of active sales cycles to closed customers
- Ratio of closed customers that successfully launch and become productive customers
With this information, you can determine the business return of your sales and marketing investments, by comparing the cost of acquiring a customer against the value that a customer generates.
By comparing the first year value of a customer to the average cost of acquiring a customer, you can determine if you will get payback on your sales and marketing investment within 12 months. As a best practice, many technology companies target having the first year value of a customer be greater than the average cost of acquiring a customer.
By comparing the lifetime value of a customer to the average cost of acquisition, you can determine the lifetime return on investment.
Step 5: Identify Your Sales and Marketing Metrics
At this point, you need to break down your desired sales and marketing process and identify the factors that will drive:
- Customer cost per acquisition
- First year customer value
- Customer lifetime value
Cost per acquisition will be driven by:
- Lead generation costs
- Advertising and supporting marketing efforts
- Marketing team labor costs
- Sales team labor costs
- Sales and marketing infrastructure costs
To measure each stage of your sales process, you should be able to derive:
- Cost per lead (this should be measured by lead channel, as cost per lead will vary by lead channel)
- Cost per sales cycle
- Cost per signed customer
- Cost per productive customer
As you determine these calculations you will need to make assumptions about the efficiency of your sales and marketing process, including:
- Percentage of leads that will turn into sales cycles
- Percentage of sales cycles that will turn into signed customers
- Percentage of signed customers that will become productive customers
These values will become the underlying targets that you can measure to determine if your sales and marketing process is performing at the efficiency necessary to hit your acquisition targets. Your target and actual values of these metrics may vary by sales channel and lead source; tracking them separately by sales channel and by lead generation source will allow you to measure the productivity of each channel and each lead program.
On the customer value side, it is necessary to track the following:
- Average time between customer signup and revenue generation
- Average revenue generated per month, by customer type
- Customer cancellation / attrition rate
To summarize, we are developing a set of metrics that track your ability to hit desired cost per acquisition and customer value levels. At a high level, this will allow you to validate that your sales and marketing investment will generate a timely return. At an operational level, this enables you to track the efficiency of your sales and marketing programs and to put measurements in place to determine if you are executing each stage of the sales process in a way that will allow you to hit your higher-level goals.
Step 6: Create Your Business Plan
At this point, you have worked through the assumptions involved in developing an effective sales and marketing model, with high level targets identified for cost per customer acquired, customer first-year value and customer lifetime value.
You should now take the detailed operational metrics and set targets. These targets will help you understand how much to spend on marketing, how many marketing people are needed and how many sales people are needed. Your sales and marketing investment should be rationalized by determining if the cost per customer acquired has an acceptable relationship with customer value.
Your higher level strategy should be supported by developing a bottoms-up business plan that incorporates targets for the detailed efficiency metrics (lead to sales cycle ratio; sales cycle to closed customer ration; etc). Assuming your detailed operational targets calculate out in a way that results in an acceptable cost per acquisition, you now have a set of operational targets that will become the foundation for your metrics dashboard.
Step 7: Develop a Metrics Dashboard
A sales and marketing metrics dashboard should incorporate the following:
- High level measurements (Revenue, Cost per customer acquired, Value per customer)
- Detailed operational metrics (Lead to Sales Cycle percentage, Sales Cycle Close Rate percentage, Customer Launch Rate percentage)
- The ability to report on actual values and compare to the plan values in your business plan
- Wherever possible, the ability to drill down on operational metrics by sales channel and by lead source
Using the business plan described in step 6, you can develop a metrics dashboard that has weekly and monthly targets for all of the operational metrics that drive your sales and marketing model. You can then report on actual values against plan.
A sales and marketing metrics dashboard is something that you want your sales and marketing teams reviewing at least weekly and your full senior management team reviewing at least monthly. An effective marketing team will drill into the detail of your dashboard metrics on a more regular basis and will use the data to increase/decrease the investment in different marketing programs, lead sources and sales channels based on the value that they are generating.
Step 8: Live the Metrics, And Refine Your Approach
Your metrics dashboard will be an early indicator that tells you whether or not you are performing against the expectations of your business plan. It will also identify where the efficiency of your sales and marketing operations are exceeding, and missing, target levels.
To take full advantage of your metrics dashboard, you need to incorporate its review into the weekly operations of your team. You also need to tie your team's quarterly goals to the factors in the dashboard, which will make your key metrics personally relevant to them.
When used correctly, a metrics dashboard will allow you to adjust your marketing investment to the areas where it will get the most return. As you see operational efficiency, adjust your approach to prioritize more investment in these areas. Likewise, your dashboard should allow you to see where programs are not working so that you do not spend good money after bad.
A metrics-driven marketing team can be nimble and informed as they adjust strategy and direction, using the indicators in their dashboard to determine where investment will yield the best ratio of customer acquisition cost against customer value.
If you combine a good dashboard with intuition, a solid business plan and a good product you have the potential to oversee a growing business that spends its sales and marketing budget in an effective and high return way.