The SaaS business model centers around recurring revenue. Once you have secured a happy customer who has a need for your product, you can count on regular income for months or even years to come. Still, while SaaS models can offer healthy finances, forecasting your growth can be difficult.
In theory, if you know your current sales, monthly growth, and churn rate, you should be able to forecast growth. However, these simple forecasting models often turn out to be inaccurate. The future is always uncertain and your future growth rates could vary dramatically.
LVRs can help you peer into the future
Fortunately, you can use Lead Velocity Rate (LVR) to measure your performance in near real-time. This way, you can compile an accurate, up-to-date overview of your business and its performance. Let’s take an in-depth look at LVRs and how you can use them.
Lead Velocity Rate Explained
As you’ve probably guessed, your lead velocity rate is based on leads. To be more specific, your LVR measures the growth in the total number of qualified leads month to month. The formula for calculating LVRs is very simple:
LVR = (current qualified leads in a given month – qualified leads from previous month) divided by last month’s qualified leads multiplied by 100 percent.
A bit confusing? It’s often easier to grasp these financial concepts with a real-world example. Let’s say you sell a SaaS CRM. Last month, you drummed up 200 leads. This month, you reeled in 225. So:
Your leave velocity rate is 12.5 percent, which for most companies would suggest healthy, sustainable growth.
However, Leads MUST Be Qualified
Some companies make a critical mistake when calculating their LVR: they include unqualified leads, which will result in inflated numbers. When it comes to making business decisions, you need to make your decisions need to be informed by accurate data and information.
It’s essential for leads to be qualified. Unfortunately, your marketing and sales efforts will almost certainly drum up a lot of unqualified leads. These aren’t going to help you grow your business. If anything, they’ll be a distraction and potential waste of resources.
Okay, so how do you qualify leads? There are two common approaches. First, you can use marketing qualified leads. This means the lead performed an action that shows genuine interest in your product. For example, someone might send an email inquiring about your product, or maybe they sign up to watch a demo.
Another option is to use sales qualified leads. With these leads, the party has talked to a live salesperson. This sales person can qualify the leads themselves, determining whether they should be put in the sales process.
You can have either your marketing or sales team qualify leads.
Which one should you use? This depends on your situation. If you can find marketing factors that do indicate a high likeliness that the lead will become a paying customer, MQL makes sense. If not, you may be better off with SQL.
However, whichever method you chose for qualification, you need to stick with it. If you switch from SQL to MQL or vice versa, your LVR loses much of its predictive power. You’ll basically have to start from scratch if you switch qualifying strategies.
Why LVR Beats Other Metrics
So why should you have care about LVR? Turns out, lead velocity rate is one of the best indicators of future revenue growth. At first glance, LVR may not seem that promising. After all, it’s a speculative number. Even if you’re drumming up leads, you don’t know if they’ll convert.
There are other options as well, such as Monthly Recurring Revenue (MRR). This indicator shows you how much money is coming in each month. MRR can be broken down into subsets as well, such as churn MRR (lost revenues) and new MRR. So why not use MRR to predict future growth?
Unfortunately, MRR and many other metrics are lagging indicators. The marketing and the sales processes are both lengthy and sometimes a lead will need weeks or months to get through your sales funnel.
You could rely on other sales metrics, of course. However, sales data tends to have a monthly variance that’s hard to account for and normalize. If you don’t take these variations into account, you could be basing your decisions on inaccurate information.
Further, lead generation is often automated and the resources most companies put into it remains consistent. As a result, lead-centered data tends to be more reliable. If leads suddenly do decline, you’ve got a major problem on your hand. Something in your process may have broken down.
Remember, the Customer Journey Can Be Complex
Since the customer’s journey often doesn’t follow a consistent pattern, using revenue can be an inaccurate way to predict the future. Could you imagine driving your car down a winding mountain road while using only your rear view mirror to guide you? Of course not.
An example of a simple customer journey map.
Yet that’s what you’re doing when you rely on past revenues. By using LVRs instead, you can focus on the road ahead. Let’s say you drive in 500 qualified leads this month. By looking at historical data, you determine your LVR is 10 percent. So come next month, you should have 550 qualified leads.
If your sales and average customer value stay the same, this means you’re revenues will grow by 10 percent as well. Now you suddenly have a decent idea of what the future holds. You can use this data to more accurately make business decisions. Should you expand the sales team? Can you afford to upgrade equipment?
Making such decisions blindly is dangerous. By using lead velocity rates, you can craft a reliable picture of the future. Then, you can make decisions based on your projections.
Conclusion: LVR Offers a Good View of the Future
Lead Velocity Rates help you understand your company in real time. And while there’s no surefire way to see into the future, with LVRs, you can make educated assumptions. For SaaS and other companies, LVRs are a powerful metric. So if you’re not using LVRs, you need to start ASAP.