December 21, 2021

How Will My SaaS Company Grow? | Storytelling With Data

Jen Happ
Chief Operating Officer

This is part three in our series, “Finance: Storytelling with Data.”  Catch up below:

Part One: Introduction, what is Storytelling with Finance?

Part Two: What Has My Business Achieved So Far?

Finance: Storytelling with Data

Part Three: How do I think my company will grow in the future?

Whether you’re talking to your board or potential investors, being able to accurately depict how your company will grow is an important skill. While explaining what you’ve already achieved as a business is a huge component of any pitch or report, knowing how you’ll apply that information into the future is just as critical. Accurate, data-informed revenue projections will allow you to tell a compelling (and believable) growth story. To do this, let’s cover how to come up with a revenue forecast as well as some common traps that I’ve seen companies fall into—resulting in unbelievable growth stories.  

Understanding Your Past to Inform Your Future

The first step in telling your growth story is to understand where your company has been and what you have achieved so far in terms of revenue. This is found in part 2 of this series (in case you’re new here—welcome to Part 3!)

TLDR: Your functional income statement shows exactly how you’ve achieved revenue in the recent past, and how your expenses have directly contributed to your growth. 

Quick note: when looking back and analyzing the past, you’ll want to segment your revenue based on your different product streams.  For example, if you sell both an enterprise-level product as well as one tailored to SMBs, you’ll want to track the enterprise revenue separately from the SMB revenue, as both might have different stories to tell.

Discovering How You’ll Achieve Future Revenue Growth

Starting the Process: How to Estimate Revenue

Now comes the fun part: thinking about your future growth. I recommend using a bottoms-up approach for this.  That means breaking things down into the different elements that drive your revenue growth. What sales and marketing initiatives, new hires, etc. will aid in the effort to bring in cash? There’s quite a few factors to consider, so a very simple way to begin thinking about it is this: how many new customers will you have? Multiplying this by your average revenue for each of them should give you the gist of your revenue growth.

While coming up with average revenue per customer should be pretty simple by looking at past metrics or your current prices, knowing how many new customers you expect can be more difficult.

Estimating New Customer Acquisition

The best way to confidently estimate your new customers is to understand how you sell. Do you have salespeople with quotas going and selling your product?  Do you rely on advertising to bring leads to your website where hopefully they then buy your product?  Do you use referrals?  Wherever it is, there is some way to break down your sales funnel into different drivers.

Some easy calculations to find your new customer numbers based on your acquisition channels:Sales Team:  # of sales reps x # of deals they can close a month = # of new customers

Marketing Leads:  # of leads to website x conversion rate = # of new customersReferrals:  # of active customers x average referrals they give a month x conversion rate = # of new customers

While the above may be simple math, breaking it down into the basic components allows you to understand which levers you can pull to generate more revenue.  What if you hired one more salesperson, or spent $5,000 more a month in marketing? How many new customers would that one sales head, or extra marketing spend, likely generate? (Important note: you’ll need to know this when it comes time to forecast your expenses).

Estimating Retained Revenue

Now that you understand your avenues (and expected outcomes) to new revenue, you’ll want to think about revenue from your existing customer base. Again, look back at historical retention (or if not in SaaS, reorder rates) and apply that percentage to calculate retained revenue. If you have a grasp on how much more revenue you plan to generate from upsells, aka expansion revenue, even better.

With this level of detail, you can complete your revenue growth projections: take revenue from your new customers and add the revenue from your existing customers. You now have a data-driven and defendable forecast for the future.

Using Revenue Estimates to Tell Your Story

From here, I recommend you take a step back and see what story this is telling about your company. You can do this by comparing your revenue to prior year results.  If you are a new business without much history, you can compare to your total addressable market (TAM) and your competitors.  Also, make sure your growth story is in line with the stage of your business (or if not, you can defend why you fit another story better).

The overall key here is to make this story defendable. Some common traps I’ve seen in revenue projections are:

Having optimistic but unsubstantiated claims:

“Next year we will grow 150%”

How do we know this? How did you arrive at that specific amount, 150%? What efforts will you take to get there, and based on your past performance is this even realistic?

Not knowing a go-to-market approach:

“Our company will bet 10% of the $100M total addressable market.”

Once again, even though the TAM is shown, there are no concrete plans or metrics showing your company’s capacity to achieve 10%.

Ideally, you should be telling a story like:

"Next year we will double our revenue by retaining 95% of our prior year revenue and adding 300 new customers (at $20,000 annual subscriptions). This will require us to hire 2 more sales reps as our current sales rep closed 100 deals last year herself."

This story makes future revenue assumptions based on the actual historical company performance. If, in the past, this company’s metrics have shown 95% retention, it is very safe to assume that they can count on 95% of the previous year’s revenue from existing customers.

Additionally, this company has an understanding of how they’ve achieved growth: in this case, their sales team. If one salesperson has demonstrated the ability to close 100 new deals, it’s very believable that adding two additional heads to bring their team to three will bring in 300 new customers. They can count on the past performance of one salesperson to estimate the performance of others.

A detailed story with data to back up its claims is clearly going to be more believable to any board member or investor. This “story” is written by the data—no frills, weak claims, or lofty assumptions needed. The key is knowing how to “listen” to what your data is saying.

If you ever need help translating what your data is saying, I’m always ready to answer any questions you might have! Get in touch here.

Get Started Today

Get Started