Let's face it, growing your SaaS business and boosting revenues will not be as straightforward as it would have been a few years ago. But, while marketing strategies in such a dynamic new industry evolve, one thing remains clear: SaaS is all a game of numbers.First off, your product team must commit to creating a software service that is ten times better than what is on the market. Your business must attract more new customers than those canceling a service. You will have to work harder and use more innovative strategies than the competition to stay ahead.In this whitepaper, we will cover what it takes to increase your customer base ten-fold and outdo the competition in the SaaS market. We will focus on critical business growth areas, including:
- Top key Metrics to help you understand the health of your SaaS business
- Financial metrics and proven ways to attract investors
- Common mistakes that may hinder the scaling of your SaaS business and how to minimize them.
- The importance of using the right tools in SaaS reporting and baseline metrics for 10x growth.
- Why your sales team can make or break your SaaS Business
5 Key SaaS and Subscription Metrics to Understand Business Health
SaaS businesses are all the rage now because entrepreneurs love the recurring revenue model. The financial benefits for recurring revenue and subscription model are great, and customers also tend to prefer it.Research by Gartner revealed that all new software entrants and as many as 90% of existing vendors prefer subscription-based models. Conversely, about 53% of customers interviewed pointed out the ease of opting out of a subscription as the top reason to choose subscription-based SaaS.The subscription-based business model that is ideal for SaaS businesses is relatively new. As a result, it can be quite a challenge to track, monitor, and analyze its overall health and performance. Here are the five core metrics every entrepreneur must use when running a SaaS business.
1. Monthly Recurring Revenue (MRR)
The most critical yet obvious metric to know how healthy any business is performing is how much money comes in every month. It is easy to tell whether the company is growing or not based on its profitability numbers.MRR refers to recurring revenue at the end of each month. To calculate this number in a SaaS business, take the total billings of current customers for the month and add the total revenues from new customers paying for the first month.MRR =Total Recurring Subscription Revenue + Total New Customers First Month PaymentsYou can track MRR on a three-month or six-month rolling basis to get a clearer picture of how the business is performing over time. If you have been in business for a while, you will want to ensure that a good portion of your MRR comes from existing customers and not new customers.A healthy SaaS business must focus on acquiring more customers than they lose in a month. Therefore, if your MRR begins to flatten out, it could mean you are losing customers faster than you are acquiring them. This will signify that you need to work on your churn rate.
2. The Churn Rate
The churn rate is a critical metric to determine the performance and health of a subscription-based business.The term churn refers to the number of customers that opt out of the service in a month. A subscriber is said 'to have churned out' when they unsubscribe from your software service. The monthly churn rate is the percentage of customers that leave over a month divided by the total number of customers at the end of the month.Churn Rate = Total Number of UnsubscribersTotal Number of Subscribers at the Start of the MonthThink of your business as a bucket with a hole at the bottom and the customers as water. Due to market dynamics, it is normal for customers to leave a service. That is the leak. You must add more new subscribers than the number of subscribers you are losing every month to fill the bucket.There are no two ways about it; for a SaaS business to grow, it must:
- Reduce the rate at which customers are canceling.
- Increase the rate at which it acquires new customers.
3. Average Monthly Revenue per Customer
This metric is also commonly referred to as the average revenue per account (ARPA). It is a straightforward measure of the average revenue that a business receives on an average month per customer. Different businesses calculate the ARPA differently, but the accepted approach is to divide the monthly recurring revenue (MRR) by the total number of customers.ARPA = MRRNumber of CustomersUsing the MRR figure, you factor in the subtle costs of discounts, trials, offers, and any other costs of business that eat into what the average customer pays. Therefore, it is not advisable to use the list price of the software service on the pricing page as it will not draw an accurate picture of the business's performance.
4. Average Customer Lifetime Value
The customer lifetime value metric (CLV) is the total amount of money that a business will receive from the customer from the acquisition through to when the relationship with the company ends. This metric is critical for analytical and marketing purposes.It may not be practical to wait for months – even years – to figure out the average CLV of a customer; the easy way to calculate CLV for the average customer is to divide the ARPA by the churn rate.CLV = ARPAChurn RateThis simple formula assumes that the typical customer pays the same price for service costs monthly over the subscription period. SaaS businesses that do not use this model can calculate the CLV using revenue and margin figures.
5. Customer Acquisition Cost
How much does it cost to acquire the typical customer in your SaaS business? This is an often overlooked yet critical metric to watch in a subscription-based business.The Customer Acquisition Cost or CAC is the total cost of sales and marketing for the month divided by the number of new customers acquired over the same period.CAC =Monthly Sales + Marketing CostsNumber of New Monthly CustomersA new SaaS business will, as expected, have high CAC because the costs of acquiring customers add up before the business picks up. However, this will begin to level out as more subscribers sign up for the service, even when the marketing and sales budget remains constant.
Attracting Investors: Key Financial Metrics for Every Stage of Growth From Early Stage to Series B and Beyond
A new SaaS business that offers an exceptional product and markets it right will ultimately need investors to grow beyond a certain point. As the customer base grows and initial capital dwindles, the business must expand its operations and objectives. In the early stages of the business, the founders typically rely on savings and loans or gifts from friends and family. After it has risen through the market ranks and proven the worthiness of its products and business model, the business can then let in real investors.
How SaaS Funding Works
Investors often fund a company for different reasons. Some invest in the entrepreneur. Others see the potential in the idea or business model. Most, however, invest with the expectation of a big reward later on.Investors may seek funding multiple times in 'rounds' as the business matures, grows in equity, and attracts more customers. It is common for a business in the software service industry to attract investors in the pre-seed stage and progress through the seed round, then continue with A, B, and C funding rounds.Analysts must undertake the company's valuation before any seeding round except the pre-seed round, which the founders themselves often fund. During valuation, analysts will scrutinize the different facets of the business. These include services on offer, business model, proven track record, market share size, and risk.The most important of all valuations, however, is the financial performance.Here are the most crucial financial metrics on which investors will evaluate every SaaS seeking funding.
It is the table stakes an existing business seeking funds presents to potential investors first. It is the total amount of money that the business generates from selling services and products.Revenue is not a monolith metric; it often contains a lot more insights when broken down by source, type, and even by product. For example, investors will want to know how much income the business generated over a certain period, how much of it is recurring, and how much revenue each product or service tier generated.Salesforce, for instance, offers a dozen products. Each of these products generates its own revenue. The company knows its finances well as it can break down the performance of each individual product over a specific period alongside the overall company-wide performance.
Cash flow is the total amount of money that a business has at a given time. It is an essential financial metric for anyone looking to invest in a company.A positive cash flow shows that the right amount of revenue reaches the business's cash reserves. It is also a clear sign of its liquidity, flexibility, and financial performance.
Gross margin is the total revenue left over after factoring in the costs of sales. Many businesses in the software field fall prey to the misleading figures of total revenue. They completely overlook the costs of producing the software. Gross margin is a realistic figure that investors can use to estimate the actual returns they can expect should they invest.An acceptable gross margin for a SaaS company in 2022 should be 70% or higher. The core factors that affect a business's margin are the nature of service they sell, how long the company has been in business, and its business model.
Customer Acquisition Cost Payback (CAC Payback)
Knowing how much it costs a business to acquire a customer is not enough to decide whether to invest in a company; investors also want to know the CAC payback period.The CAC payback period is the time (often in months) it takes a business to break even and recoup its customer acquisition costs. The shorter the CAC payback, the sooner the business and investors can begin making money from every new customer. Here is the formula for determining a business's CAC Payback:CAC Payback = CACMRR Gross Margin %The CAC payback period in the SaaS industry is between five months and a year. While businesses in their early stages are likely to have a higher CAC payback period, it should not be longer than a year.
Runway, or cash runway, is the time (in months) that a business has before running out of cash. A business with a longer runway has the funds and time to build and grow its customer base than another with a shorter runway.The business's revenue and expenses determine the duration of the runway. This metric tells a lot more than the financial state of a business. For instance, when the runway is short, either the business is spending too much money or is not making enough to sustain itself.
A burn rate is the amount of money a business loses per month. This metric is closely related to the runway metric in that the higher the burn rate, the shorter the runway. A company is said to be burning cash when its expenses exceed its revenue. Conversely, a negative burn rate is achieved when the business generates revenues higher than its expenses. This is an ideal case for a SaaS business seeking funding.When a business's burn rate is too high, it severely shortens its runway. The entrepreneurs can choose to:
- Scrutinize expenses and cut unnecessary costs.
- Find ways to increase revenue quickly.
- Get funding from an external source.
All these metrics are crucial in accurately gauging the financial performance of a SaaS business. While there are more metrics that an investor may want to know about, these financial metrics are a good start to understanding your business's finances better.