SaaS company is a machine. To run your machine, you need metrics showing the health of your engine. What are SaaS metrics, how do they differ from your financial KPIs and how to build a relevant batch of metrics?
Having been a CFO of a multinational SaaS company, I can say following a batch of SaaS metrics have helped the company to almost triple the ARR and raise +5M€ equity financing from international VCs during the last two years. Yes, designing the dataflows and getting the metrics up and running requires lot of effort. But once you are there, the metrics will definitely help you to run your SaaS business.
SaaS business is not different, at least in the early phases. Like any new business, it may take years to get the first version (even MVP) to the customers. After that, it still takes time and money to get the first license agreement sealed and payment collected, regardless of whether you offer a B2C or B2B solution. Still all the time, you must be able to pay the salaries and accounts payable without any customer income. The temptation to offer professional services is strong, although you know every hour not focused on the product delays your D-day of the product launch.
In the later phases, SaaS business is different. Once you are able to cash in, you can print the product with virtually no extra cost. On top of that, you usually can ask for an advance payment for the entire license period. What soon happens in your cash flow statement is that your operating cashflow turns positive, meaning your customers are financing your operations. Congratulations, you have created a SaaS machine! Now your task is to secure and increase the revenue from current customers and acquire new ones.
To keep the machine running, you need to know what is going on under the hood. Your financial KPIs don’t tell you that. Yes, they provide you necessary information on cash balance, equity situation, revenue growth, burn rate and runway, but they don’t give you a hint of revenue retention, lead conversion efficiency or LTV:CAC Ratio, just to name a few.
These SaaS metrics reveal information behind the financial KPIs. They explain for instance why MoM revenue growth was only 2% even though MoM new sales alone grew by 5%. They also indicate signs of the future: constant decline in the number of active users clearly correlates with the cancellation risk.
Thirdly, SaaS metrics show you the state of your business and guide what to do. If your CAC payback period (months) is very high, let’s say 18, you need massive amount of working capital to cover the first one and a half years when each new customer brings you only losses. In that case, it may not be the right time to hit the pedal and hire ten new sales reps. Rather, try first to shorten the sales cycle and improve the lead conversion efficiency.
To build proper metrics, you need data. Company level data is not enough, because you need agreement and customer level data like price increases, downgrades, cancellations, add-on sales and number of logins. Sure, you need some company level data, too, to get for instance your Cost of Sales and Support & Upsell Costs. Anyway, be prepared to invest time to properly design the data flow from your CRM and accounting system to your metrics tool. Automate the flow as much as possible.
So, what metrics should you follow? The large number of metrics is not a goal in itself, but make sure the selected metrics offer different perspectives. I would group the metrics as followings:
- Sales and marketing efficiency
- Nr. of MQLs and SQLs
- SQL to demo meeting conversion
- Demo meeting to paying customer conversion
- SQL to paying customer conversion
- Total pipeline value
- Beginning ARR
- New ARR
- Price increase
- Expand sales
- Ending ARR
- MoM and YoY ARR growth
- Customer volume and size
- Nr. of customers
- Net revenue retention
- Gross revenue retention
- Cancelled revenue %
- Customer churn %
- Revenue under cancellation risk %
- Customers under churn risk %
- Total CAC
- CAC per new customer
- LTV per customer
- LTV:CAC ratio
If your customer portfolio is a mix of very different kind of accounts, group your customers in segments and follow the metrics by segment. Moreover, don’t forget some important financial KPIs:
- Gross margin
- Burn rate
- Change in cash
- Total cash
- Total equity
Are these metrics a privilege of SaaS companies? Of course not. Regardless of your industry, wouldn’t it be useful to understand what it costs to acquire a new customer or how much you can expect each new customer to bring you revenue over the entire customership?
So, where to start? You can study the area on your own, sure, but I still recommend utilizing the expertise offered by Greenstep. Members of the Greenstep CFO team have been involved in numerous SaaS metrics development cases, so they have hands-on-experience on the topic.
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