Assessing Go-to-Market Health in 2022-23
By Claire Davis | November 3, 2022
As we shared in our recent post on Growth vs. Profitability, 2022 has brought profitability back to the fore in both the public and private SaaS markets. With this renewed focus on profitability operating efficiency also becomes top-of-mind, spurring efforts across SaaS companies to control burn and streamline spend.
While many CIOs across the ICONIQ Growth network broadly agree software will be relatively resilient to cost-cutting, increasing spend across discretionary software tools is likely to be further scrutinized in the coming quarters.
This diminished appetite to buy is already having an impact on go-to-market health across private SaaS companies, with longer sales cycles and slower inbound demand generally making it more difficult to achieve topline growth goals.
As we expect focus on profitability to persist in the coming quarters, it will continue to be of utmost importance to effectively track and understand the health of your go-to-market engine. Below we outline two critical components of go-to-market health—go-to-market efficiency and customer health—our favorite metrics for assessing each, and select benchmarks from the ICONIQ Growth SaaS portfolio.
As most of a SaaS company’s operating costs come from sales and marketing, go-to-market efficiency is perhaps the most critical driver of a company’s overall efficiency.
Our north star metric for understanding GTM efficiency is “net magic number,” which measures net revenue generation against sales and marketing operating costs while also accounting for the lag of a typical sales cycle.
There are multiple methodologies for calculating magic number, and the specific calculation you use should depend on your go-to-market motion, sales cycles, and gross margin. Here’s a quick summary:
While there are many flavors of magic number, we typically find net magic number (net new ARR during period x / sales & marketing opex during period y) to be the cleanest and most comprehensive magic number metric for an enterprise SaaS company. In fact, net magic number is one of ICONIQ Growth’s Enterprise Five, the top-five metrics we use to understand the health of an enterprise SaaS business.
Insights from our Research
Driven by relatively low operating costs, founder-driven sales motions, and strong customer retention, net magic number is typically highest during a company’s early stages. As SaaS companies scale past ~$50M ARR, magic number generally trends down due to competitive dynamics and shrinking headroom. [1]
Companies with a product-led-growth (PLG) motion tend to have higher magic number than companies with traditional sales-led-growth strategies, primarily driven by lower sales and marketing operating costs. [1]
How has GTM efficiency been impacted this year?
Though net magic number is expected to decline as a company scales, we’ve seen myriad headwinds to GTM efficiency in the last few years that have further impacted performance. This year as of Q2 2022, companies on average have been experiencing longer sales cycles and slower inbound demand, making it harder to achieve topline goals. [2]
While average performance against net magic number has declined due to these headwinds, resilient companies3 have maintained 0.9x+ NMN through the turbulent macro environments of 2021 and 2022. [1]
Net dollar retention (NDR) is our north star metric for understanding customer health. We believe NDR is one of the most important signals of overall business health, as it measures the efficiency of a company’s revenue generation against its ability to retain and grow existing customers.
Net dollar retention accounts for customer expansion revenue, customer contraction, and churned revenue, which renders it a robust measure of everything from customer health to product market fit. Like magic number, there are a number of different ways to calculate net dollar retention. We recommend enterprise SaaS companies track these three NDR KPIs:
Insights from our Research
Net dollar retention is one of the strongest indicators of long-term success for B2B SaaS companies. NDR is often highest in the early-stages when churn is low and customer expansion is rapid: between $1-$10M ARR, top-performing companies achieve 130-150%+ NDR. After scaling to $10M ARR, top-performing companies maintain 120-130% NDR.
Given a heavier reliance on land-and-expand motions, SaaS companies with product-led growth and those targeting mid-market to enterprise customers tend to have higher net dollar retention.
How has customer health been impacted this year?
As the macro environment impacts appetite to buy and decreases GTM efficiency, SaaS companies may rely more on existing customers to drive topline growth. As of Q2 2022, executives report closely tracking leading indicators of customer health such as product usage, late payments, and satisfaction scores, in tandem with lagging indicators such as net dollar retention. [2]
While SaaS companies saw higher-than-normal churn rates over the last couple years, they were able to meaningfully upsell healthy customers. Resilient companies3 achieved ~125% net dollar retention through the fluctuating demand of 2021-2022, suggesting strong customer health and product market fit. [1]
In the coming months, we’ll be deep-diving into go-to-market topics: how companies build their GTM teams as they scale, how these teams are compensated and incentivized, what the best-in-class GTM tech stack looks like, and more. If you’d like to be included in communications around these topics, input your business e-mail here.
Finally, for additional context on these metrics, benchmarks, and more, we invite you to explore:
Footnotes & Disclosures 1 Based on quarterly operating and financial data through Q1 2022 from 92 B2B SaaS companies (79 of which are ICONIQ Growth portfolio companies, chosen based on data availability, and 13 of which are other public companies selected based on ICONIQ Growth’s IPO performance criteria). 2 Survey data from ICONIQ Analytics & Insights: Navigating a Turbulent Environment series. 3 For context on how companies have performed against key metrics through recent market turbulence, we identified a subset of the B2B SaaS companies as particularly “resilient” based on an overall health score. “Resilient companies” achieved a top quartile health score based on performance against the following metrics between FY 2021 and year-to-date FY 2022 across topline attainment, rule of 40, YoY ARR growth, cash runway, and bottomline attainment. The views expressed in this presentation are those of ICONIQ Growth ("ICONIQ" or the "firm"), are the result of proprietary research, may be subjective, and may not be relied upon in making an investment decision. This presentation is for educational purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy any securities which will only be made pursuant to definitive offering documents and subscription agreements, including, without limitation, any investment fund or investment product referenced herein. Any reproduction or distribution of this presentation in whole or in part, or the disclosure of any of its contents, without the prior consent of ICONIQ, is prohibited. This presentation may contain forward-looking statements based on current plans, estimates and projections. The recipient of this presentation ("you") are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. The numbers, figures and case studies included in this presentation have been included for purposes of illustration only, and no assurance can be given that the actual results of ICONIQ or any of its partners and affiliates will correspond with the results contemplated in the presentation. No information is contained herein with respect to conflicts of interest, which may be significant. The portfolio companies and other parties mentioned herein may reflect a selective list of the prior investments made by ICONIQ. Certain of the economic and market information contained herein may have been obtained from published sources and/or prepared by other parties. While such sources are believed to be reliable, none of ICONIQ or any of its affiliates and partners, employees and representatives assume any responsibility for the accuracy of such information. All of the information in the presentation is presented as of the date made available to you (except as otherwise specified), and is subject to change without notice, and may not be current or may have changed (possibly materially) between the date made available to you and the date actually received or reviewed by you. ICONIQ assumes no obligation to update or otherwise revise any information, projections, forecasts or estimates contained in the presentation, including any revisions to reflect changes in economic or market conditions or other circumstances arising after the date the items were made available to you or to reflect the occurrence of unanticipated events. For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you. ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation.