Using Treemap Visualizations to Better Understand Gross Burn Rate
A treemap is an effective way to visualize hierarchical data, which makes it useful when looking at expenses because we can easily get an understanding of the size of each category. When I work with SaaS companies, and many that are in high-growth phases, I often hear the question: can you help me better understand my gross burn rate? (I define gross burn rate as a company’s total costs.) Let’s look at the following treemap example of the expenses of a growth SaaS business to answer the question.
Sales and engineering payroll are the two largest items. They are 32% and 25% of sales, respectively. Spending on these areas makes sense because as a product gains traction, investment is needed in new SDRs and AEs to grow sales, and retention of talented engineers is always a top priority. G&A payroll at 18% is an area to keep an eye on to make sure you get leverage as sales grow (ie. percentage should drop). Product Payroll could be combined with Engineering Payroll to create the R&D category. 40% of revenue spent on R&D in a growth company which continues to build out product features is not unusual. Over time, this is another area to see leveraging of expenses. Marketing payroll is 9% because this example is a B2B company with a higher touch sales process so primary investment is in sales with a lower amount for marketing to generate leads. Customer success payroll, which is included in Cost of Revenue, is 14%. It can take more time to figure out the right number of CS headcount as it may not be immediately known the correct CS to customer ratio. Hopefully there is some scalability here with a product that once the customer is onboarded, there is less continuous servicing needed.
In this example, expenses are 156% of GAAP revenue. Payroll, the main area for fixed costs, is 113%. The 2 areas with highest variable expenses are the Sales Payroll category (commissions) and direct cost of revenue (AWS, other hosting costs, payment processing, etc). If our sales continue to grow and we want to focus on gross burn reduction, we could plan on holding headcount steady or reducing the headcount growth rate relative to sales growth to accomplish this goal.
In general, when we look at gross burn rate, while it is helpful to examine expense items, to perform a complete analysis, we should also look at our company’s unit economics because these metrics help us understand if we are scaling efficiently.