One of the best things about the SaaS business model is its predictability. Since SaaS businesses are built on recurring revenue, knowing your current sales, monthly growth and churn rate should theoretically be all you need to forecast your growth for the next year.
Of course, in the real world, things are not quite so simple. For one, it can be very tough to accurately forecast sales growth. It’s not quite as simple as looking at your historical sales performance, and extrapolating it into the future. After all, change is the only constant in software, and past performance is no guarantee of future results.
Instead, you should be looking at a metric that’s a lot more current, almost real-time, even. That metric is Lead Velocity Rate (LVR).
Lead Velocity Rate refers to the growth in your total qualified leads from month to month. It’s a measurement of how large your current pipeline is – how many quality leads you’re currently working on converting to paying customers.
The formula for calculating LVR is as follows:
Lead Velocity Rate = (Current Month’s Qualified Leads - Last Month’s Qualified Leads) / Last Month’s Qualified Leads x 100%
A critical part of this formula is the emphasis on qualified leads and not simply total leads. The reason for this is that lead quality can often vary quite widely in B2B markets, especially if you have a long sales & marketing cycle. That variance can be problematic, since LVR is a forward-looking metric, and input consistency is key to generating accurate predictions.
Hence, in order to maintain that level of consistency, it’s essential to adhere to a strict definition of what constitutes a qualified lead. Having said that, the ideal definition will vary depending on your specific market and solution.
Some companies find it appropriate to use marketing-qualified leads (MQL). These are leads who have performed some action indicating interest in your solutions. For example, they might have downloaded a white paper or asked some questions in your online chat.
Other companies prefer using sales-qualified leads (SQL). These are leads who have spoken to a live salesperson, and who have been deemed ready to enter the active sales process. Typically, SQLs have expressed a real need for your solution, and are looking to make a purchase within a specific timeframe.
There’s no one right answer for what a qualified lead looks like, but the main thing is to stick to one definition over time. This is very important: if you move the goalposts, LVR loses a lot of predictive power.
LVR is the single best indicator of future revenue growth.
At first glance, this might not seem to be the case. After all, why not just look at your actual MRR? Those are real dollars from paying customers, while LVR seems a lot more speculative.
The answer is that MRR is a lagging indicator, which might not be a reliable guide to future results. If you think about it, the revenue you recognized in the current month wasn’t actually earned this month. It involved a lengthy process of marketing and sales that happened over a 3 to 12 month period, which finally resulted in a paid subscription.
Since that cycle doesn’t always follow a consistent pattern, recognized revenue is an inferior predictor of future performance. It’s like driving on a winding, bumpy road by looking at the rear-view mirror.
In contrast, LVR is a leading indicator. If you had 1,000 qualified leads this month, and your historical LVR is 10%, then you can be pretty confident that you’ll have 1,100 qualified leads next month. And assuming that your sales conversions and average customer value stay constant, revenues are likely to grow by 10% as well.
LVR is also a lot more stable than sales metrics. The latter tend to have a certain amount of monthly variance, and the occasional large non-renewal can skew the numbers significantly. Meanwhile, lead generation tends to be a largely automated process, so your qualified lead pool should be growing fairly consistently every single month.
This means that if LVR numbers drop significantly in a given month, you can be sure it’s not a momentary blip, and that you should be seriously re-examining your lead generation strategy.
On the other hand, if the LVR is good, but MRR growth is lagging behind, that means you have one of two problems:
Apart from the standard sales and marketing challenges, the single biggest killer of LVR is misalignment between sales and marketing.
Remember, a lead only counts in LVR if it’s properly qualified, which typically involves a handoff from marketing to sales. If your sales and marketing teams have different internal definitions for what constitutes a qualified lead, then a lot of leads will simply fall through the cracks at this critical stage.
In order to avoid this, it’s critical that your sales and marketing teams communicate with each other on a regular basis. Marketing should update sales on any important changes in messaging or lead generation strategy. And sales should actively share any insights gleaned from customer conversations or feedback. It may also be instructive for marketing staff to sit in on sales calls occasionally, so as to cultivate a more direct understanding of customers’ needs.
Lead velocity is one of the most critical metrics in SaaS. It’s a bellwether for the health of your business, and can quickly alert you to problems before they show up on the bottom line. LVR will help you take your eyes off the rear-view mirror and drive your business to the next level of growth.