2024 SaaS Metrics Predictions

Live from Schenectady, New York, it's SAS Talk with the Metrics Brothers.

I'm Growth, better known as Ray Reich, founder and CEO of Benchmarket.

And I'm Kak, better known as Dave Kellogg, independent consultant, EIR at Balderton Capital, and the author of Kellogg.

And together we are the Metrix Brothers.

Just like peas and carrots, Ray. Hey, you know, it's always exciting to think about what the coming year holds. So I thought in this episode we could share 5 Metrix predictions in our first episode of 2024.

Well, I think that's a great idea, but I'm not so sure about the peas and carrots analogy. I'm a, I'm a champagne and strawberries guy, Dave. But I do love top 5 predictions. And the great thing about top 5 predictions Unlike resolutions, which I fell out in a month, it's gonna take 12 months to see if these predictions are true or not. So let's come back at the end of 2024, do an episode on this and see how good our crystal ball was. Make sense?

Let's do it. Let's do it, Ray.

Okay, well, let's start with metric prediction number 1, Dave, and let you take it.

So the first metric we think is gonna get talked about a lot in 2024 is the Rule of X. This is kind of a brand new metric released, I don't know, last 2 weeks of December, I think, by Bessemer. I'll call it Bessemer or BVP for Bessemer Venture Partners. Byron Dieter, among others, a couple other people co-wrote the piece. And it's all about what they call the Rule of X, which is spiritually akin to a growth-weighted Rule of 40. So let me just build into this concept, if you will. We all know the Rule of 40 is just the sum of growth plus profit. And typically growth is revenue growth or ARR growth, and profit is either EBITDA margin or free cash flow margin. We'll cover those details in other episodes. But at its concept, the Rule of 40 says, let's add up growth plus profit. And if it's better than 40, that's good. And if it's less than 40, it's not good, roughly. So that's the Rule of 40. Now, people have come along and said, you know, if you want to use this metric as kind of a guiding light, we think they shouldn't get equal weight, that growth is more important than profit in building a great company. For among other reasons that growth compounds every year. And for among other reasons that if you do regressions, if you do a 2-factor regression, you can actually see how much more important growth is than profit. So for these reasons, the next generation came along and said, let's do a growth-weighted rule of 40. The first time I saw that was the Software Equity Group down in San Diego. And they did a 2-to-1 growth-weighted rule of 40, which sounds fancy. But in reality, the calculation is pretty simple. You just take 1.33 times growth plus 0.67 times profit, add that up, and now you've got your Rule of 40 score. And above 40 is good and below 40 is bad. So let me pause right there, Ray, before we build into the next level.

Yeah, no, it's really good. And I get asked a question all the time, Dave. It's like, well, what's more important? Is it growth or is it free cash flow? And then it's like, well, how much more important? And that regression analysis, in fact, you know, Bessemer actually did that on the BVP Cloud Index. It's kind of their top 100 public SaaS companies. And it was interesting, back on December 31st, 2020, growth was 9 times more important, Dave, than if they looked at the end of 2021, it was only 6.6 times more important. And right now, as of December 7th, it was 2.3 times more important as measured by not only a regression model, but how it impacted enterprise value to revenue multiples. So interesting ride we've been on the last 3 years.

Yeah. And to my knowledge, that really confirms a back to normalcy, right? That if you look historically, it runs between 2 and 3. And we are now back at, I think Ray said 2.3, which is right in the middle of 2 and 3. I think at the trough, Ray being the optimist left the trough out. But at the trough, growth was only 0.8x as important, i.e., was less important. than profit. So we like this metric. We like the math behind it. Now let me talk about how it's calculated and maybe some of the limitations of it. So the Rule of X basically says you add growth and profit, but you apply some multiplier. I can't remember what they call it. I'll just call it K to growth. So it's profit plus K times growth. And the question is, what's K? And the answer is they think it should vary as a function of 2 things. One, your stage. So they don't think companies, you know, and this is one of the things about Rule of 40 we didn't like, Ray, when you applied it to sub-$20 million companies or sub-$10 million companies, it didn't make a lot of sense. And these guys, by having this multiplier vary as a function of stage, kind of addressed that problem. So that's one. It should vary as a function of stage and it should vary as a function of time, i.e., as a function of the market. And as Ray talked about, some markets really overvalue growth, like by 6x or 9x. And it's typical.

The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave @Kellogg and Ray on LinkedIn @RayReich. Thank you so much for listening to the Metrics Brothers podcast.

Markets only moderately overvalue growth, say 2.5 or 2.3x where we are. So the way you calculate this thing to get your rule of X score is you say that growth plus K times profit equals that rule of X score. And then we can talk basically higher is better in this case. And Bessemer's ultimate argument is that the Rule of X score is a better predictor of your enterprise value to revenue multiple than the Rule of 40 by itself.

Yeah.

So, so Ray, back to you.

No, I think we've covered that one really well. I would recommend, as people are listening to this, do a search for Bessemer Venture Partners Rule of X. And it's like a 6 to 7 page article they wrote on this. That was published in TechCrunch. Highly recommend you guys read it out there.

Yeah, it was published on TechCrunch. The only odd thing is it was not also on their blog, so you have to subscribe to TechCrunch. I did, uh, in order to read the darn thing. Uh, presumably it'll end up on their very good blog one day, but right now TechCrunch is the master source.

Okay, you want to move on to the next one?

Yeah, Ray, it's your turn here. Why don't you tell us what the next kind of our number 2 hot metric in 2024, what's it going to be?

Well, as my brother, Kat, calls it, this is the ultimate overall productivity metric, and that is ARR to FTE. And it's an aggregate productivity metric, and it really allows you to see as you grow as a company each stage, how those ARR to FTE metrics should really grow. OpenView did a really nice job of this in the report they published back in October. And Dave, you okay if I put some of the numbers behind it, or should we wait for a minute?

Yeah, I think it's important, Ray, because this one, unlike some metrics, this one, as we've discussed in other episodes, varies a lot with the size of the company. So, so I think it'd be great to throw some numbers. Yeah.

So I'll throw the numbers and we can talk about some of the questions that it also raises. But the numbers, um, from the OpenView, if you're less than $1 million, hey, they're saying, you know, at the median, it should be around $42,000 of ARR per FTE. But the key is that's doubled in '23 versus '22. Then you get to the $1 to $5 million ARR, and it's around $90K, and that's up about 10% over last year. $5 million to $20 million ARR, it says you should be around $167,000 of ARR to every FTE. That's at median. And what's interesting, that's up from $106K. So it's up almost 60% year over year. So you can really tell that companies have ratcheted down headcount while they've tried to ratchet up the ARR per FTE. $20 million to $50 million, it's now $212K, and that's up almost 50% year over year. And above $50 million, it says $250K. So those are the 5 segments that OpenView highlighted, Dave.

Okay, got it. So, so as mentioned, this metric really varies a lot. with scale. And to me, I don't know, somewhere between 10 and 20 is where you should really start to watch it. But if you're going to watch it below there, be sure you don't compare it to much larger companies because they're benefiting in effect from the cumulative ARR base they have built over time, right? That's what makes this metric go up as a function of scale because you're getting rewarded for acquiring and retaining customers as you grow.

And what's interesting is if you go and do this analysis on public B2B SaaS and cloud companies, You're kind of in that $300,000 to $350,000 is the median. So it's even higher. And if you're at top quartile, even at $50 million in this report, it says $353,000 of ARR per FTE, Dave. But it's a really important one. But I have a question for you. And I was— I got caught in this when I was talking to a company that had a lot of offshore resources. What is an FTE? What if I have 50% of my resources in a low-cost area like India or the Philippines?

Yeah, I don't know how they're calculating it for these benchmarks, so it is an important question. Look, it's not a very easy question to answer. If they are employees, to me, there's 2 questions. Does full-time equivalent mean contractors too? Most people would say no, right? So they have to be employees. But what if they're employees in a cheap location where there's kind of a 3-to-1 ratio between their salary and somebody else's salary? Personally, I would tend to adjust it for that. I think it's probably a party foul, but actually by adjusting it that way, I actually make the value go down, not up. Yeah, yeah, I hurt my value because I'm reducing the bottom, so the denominator. So I think it's a tough question. I don't have a great answer, Ray, on this one. Do you?

Yeah, so I don't know if I have a great answer, but I can tell you what 5 companies I've worked with, and they almost all have done it the same. They look at the average fully loaded comp of a person in the offshore location. Let's say it's Philippines. And then they divide that by that same average total loaded comp in the United States. And that becomes the factor they use. So let's say that's 5.

So if they have— Yeah, they do full-time US equivalent in effect. Full-time US equivalent is what they're doing, right?

Exactly.

Yeah.

Okay.

Cool.

Hey, let's move to the next one. What do you think? Everyone's going to say, God, you guys are halfway through the episode, you haven't talked about this one. So what's number 3, Dave?

So number 3 is 2 metrics, because to me the key message is basically NRR and GRR. And this is a trend that's been happening. It started in 2023, but it will continue into 2024. And why do I think the and is so important? It's because it was always about NRR. NRR has always been a highly watched metric. It's always been pretty correlated to valuation. There's no news that NRR is an important SaaS metric, but GRR, its kind of little brother, got left behind. Like, people really didn't look at it very much. And then as the downturn hit, people were like, wait a minute, are we masking a high level of churn with amazing expansion? So I'm going to look at both. And that behavior started in 2023. I think it's going to continue in 2024. So as an operating manager, you need to manage both of those metrics. You can't just say, hey, we've got an NRR. Don't go look in the corner at GRR. You need to be able to say, hey, here's our NRR and here's our GRR, and let's talk about the gap between the two.

Yeah, not that I want to add a, a 6th metric, but there's something really important here for me as an operator. You know, NRR minus GRR is basically your expansion ARR. So as an operator, you should know, hey, to go from a GRR of 86 To an NRR of 110, I need to have, right, 24 points of expansion ARR. So I would make that calculation as a CEO, CFO, hand that out to whether it's sales, marketing, or customer success and say, hey, we need to grow expansion ARR by this amount to hit our NRR goal based upon the GRR assumption. To me, that's really important, Dave.

Yeah. I mean, look, there's a guy out there. I can't remember who we talked about it on a prior episode who actually tracks the NRR minus GRR gap as a specific SaaS metric and does benchmarking on it. I'm not sure. I mean, we could quibble and that's what we're here to do, Ray, because they're both cohort-based measures. I tend to go, wait a minute, I'm not sure that's expansion ARR. And I like to measure expansion ARR as a percent of new ARR. So I think it's kind of funky, but I don't think you're wrong. Because what, GRR excludes expansion, NRR includes expansion. So, so that has to be the difference between the two. But, but, but yeah, I think I agree, but, but I'll just put on the record, my favorite metric is expansion ARR as a percent of new. That's the one I watch.

By the way, and if you listen to our previous episode, you're gonna hear Dave and I, we've talked about that several times where it used to be kind of Dave's rule of 70% was from new logo ARR and 30% was from expansion. And if you look at the Battery Ventures report issued in October, it's now about 55% comes from new and 45% is coming from expansion. So you gotta really focus on that coming into 2024.

Yeah, and you gotta be careful there, Ray, 'cause there's a difference between what is and what should be. And I'm not sure that, you know, 50% plus of new AR coming from expansion is a good thing. We can't debate whether or not it's reality 'cause that's what the numbers are telling us. But, but personally, I think it's kind of a bad thing. I think it means people are having too much trouble finding new customers. So they're kind of squeezing their bases. And look, that's good news if you have a base to squeeze, but it's hard to argue, you know, you want to keep increasing that number ad infinitum.

This is what I love about doing SaaS Talk with you, right? You're always talking about what is, and I'm always talking about what could be. That's why I'm growth, Dave.

Yeah, yeah, yeah. And in this case, I think we're the opposite because you're talking about what is and I'm talking about what should be, which is you want that number at 30%. I'll stand by that, because if it gets a whole lot higher, it means you're over-relying on the base. Anyway, let's switch gears, Ray, to number 4. What are the— what's number 4 on our metrics predictions list?

Well, this is me paying a tribute to you, Dave, because you are Dave CAC Kellogg. So the CAC ratio and CAC payback period had to be in here. So I really think this is a key Efficiency growth metric for 2024, and you know me when I talk about CAC ratio. You know a lot of people say, "Hey, that's your sales and marketing investment fully loaded divided by the amount of new ARR from both new names and from existing customer expansion." But I'm like, that's the blended CAC ratio. I also really love to see companies calculate just purely on the efficiency of acquiring. new ARR from new logos being the new CAC ratio. And I even like expansion CAC ratio. So I think this is a great metric, but it's multifaceted.

Yeah, and I think, you know, the key point here, Ray, is that as metrics, these are old standbys, but their importance is going to be very high in 2024. And the reason is there's so much pressure on go-to-market efficiency. And there's 2 reasons for that. One, maybe one bad, one good. The bad one is software companies spend about twice as much on sales and marketing as they do on R&D. So, you know, the head is out of the foxhole, that attracts a lot of attention. That's maybe the bad news reason why there's a lot of pressure on the number. The good news reason is AI. And there's an explosion right now of go-to-market AI technology. I think it was Battery this time that basically did some math and said, you know, we think that with AI tools, you're a sales org of 75 people is equivalent in terms of quota capacity to one of 110. I.e., we could save something like about 30% of the headcounts and drive the same quota if you fully adopt these AI tools. And ultimately, that's going to show up in these numbers, right? If you can in fact reduce headcount by 30% and still drive the same sales, both these metrics or the CAC ratio certainly is going to drop.

Yeah. And I got to have a shout out to you because on the day that we're recording this episode of SaaS Talk, you also have published one of your most recent Kellogg articles about your top 10 overall predictions. And this was a big part of, I think, one of your predictions, right, Dave?

Yeah, this is one of them. I've touched on some of the other things as well. I hit the rule of X, but every year I do a Kellogg 10 Predictions. And it did in fact go out today. It was most of my holiday was writing it. 6,000 words, Ray, 6,000 words, 20 pages including pictures. So it's a big post. But yeah, I talk about this issue because that chart, and by the way, in the feedback to my blog, That's the chart that's catching everyone's eye. They're going, holy cow, my board is going to see this slide and they're going to come to a board meeting, maybe not in January, but certainly by June. And they're going to say, hey, are we using these new AI tools? And can we get similar sales productivity improvements basically by reducing support ratios? So take a look. I think it's prediction number 6. I can't remember, but it's in there.

That's a good one. In fact, well, I won't even go into, I made a, Another post today too on a similar subject. And my only concern about that chart was you might get productivity gains, but are you getting the same outcome gains? And you might say, Ray, productivity equals outcomes. But I see a lot of more immature leaders out there saying my activity level went up with less resources. But at the end of the day, productivity says, do the outcomes go up with less resources, right?

Yeah, yeah. I'm all about ARR. I'm not about phone calls made. So, let's— want to hit our last one, Ray? I think this one's on me.

Yeah, in this one, everyone kind of pay attention because it took me a while to really understand this one. And thanks to Dave, I do. So what's this kind of new metric that you think is really important?

Yeah, so Ray, first, we may want to do a whole episode on this metric. So for this one, because we're probably coming up on time, let me just introduce the concept. And the concept is the— what Jemimbal at Altimeter, I think he's at, calls the growth-adjusted enterprise value to revenue multiple. Boy, that's a mouthful, but that's what he calls it. It's a very descriptive name. I like this metric, but I've got a better name for it. I just call it the ERG ratio. The enterprise, the E, enterprise value, E, to revenue, R, to growth. So ERG, enterprise value, revenue, growth. And the ERG ratio for investors, and this is really an investor metric, it says, how much are you paying for growth relative to growth? And this is almost the exact equivalent of a metric back in the day called the PEG ratio, which is the price-to-earnings growth ratio, which was made famous by Peter Lynch in an old book called What Up on Wall Street. And it basically says, how much then are you paying for a given price-to-earnings ratio relative to its growth? And that's what this ratio is. You basically take the enterprise revenue to value— so enterprise value to revenue multiple and divide it by growth rate. For example, if we look at Monday.com, relatively recently they were trading At a multiple of 10x, their growth rate was 46%. So I divide 10 by 46 and get 0.22. If you look at the median of the Maritech public comps, it's 6 point— they're trading at 6.2. The revenue growth is 21%. So the ERG is 0.31. So basically anything below 0.31 on this ERG ratio means it's cheap given the growth. And like, for example, Monday is cheap given the growth because their ERG is 0.22 and the median is 0.31. You can see that looking at the numbers that you go, gosh, 10x multiple is pretty high for enterprise value to revenue, but 46% growth is pretty fast, right? On the flip side, you might look at somebody like Atlassian who is, or actually I'll pick HubSpot who's trading for 11x. So around 10x, 11x, and they're growing at 26%. Their ERG ratio is 0.44. If you go up to the really high end, you'll see C3. Ah, they're trading for 10x. Their growth is 6%. So, so their ERG ratio is the highest of the set by a long way. It's 1.78. So I think we should do a separate episode on this ratio, Ray, but I just want to get it out there. If you're an investor, if you know what the PEG ratio is, this growth-adjusted enterprise value to revenue multiple— what a mouthful— that ratio I can say it shorter, ERG. That ERG ratio is a great investor metric to see how much you're paying relative to a company's growth rate for its stock. And I think we're gonna talk more about it next year 'cause I think in general, it's gonna be a big focus on growth next year.

And Dave, one of the reasons I love that, you know, we ended with the ERG ratio, it basically to me conveys the same message of the Rule of X, growth matters. Growth matters more than some other things because with the ERG, the higher the growth rate, that correlates to a better ERG score if your P/E ratio is not too high.

Correct. If your enterprise value to revenue multiple is not too high, absolutely. That one way to make your ERG go down is to grow faster. So, and that's why I like this metric because as we talked about, this is going to be the year of efficient growth. Right. So we're going to have to look at growth and we'll be looking at stocks relative to their growth. And we also have to look at their efficiency. We'll be looking at CAC and CPP and ARR per FTE.

Okay. So let me just end this with the top 5 metrics at a high level. Rule of X was number 1. Growth matters more than free cash flow. ARR per FTE, the ultimate overall productivity metric. NRR and GRR. Critical to measure both of those together, not just one. The GTM efficiency metrics of CAC ratio and CAC payback period, and the peg of our time, the ERG ratio. So I think those are 5 pretty good ones for 2024, Dave.

Awesome. Me too, Ray. Happy New Year to everybody.

Happy New Year.

The Metrics Brothers AI, SaaS, and More is a production of the Metrics Brothers Growth and CAC and a member of the Benchmarkit Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray? Information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for information purposes only. This podcast should not be considered professional or, for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising arising out of any use of, or God help you, reliance upon the information presented here. Ray Grothreich is based in New York City and available on X @RayReich. Dave Kellogg is based in Silicon Valley and available on X @Kelblog. Schedectady, which is French for unspellable, is not our actual production location. Thanks for listening.