Why are SaaS metrics so important?
The coronavirus (COVID-19) outbreak has resulted in business uncertainty and disruption across the globe.
But as lockdown measures begin to be eased and your Software as a Service (SaaS) business looks to get back on track, you’ll have realised the need to become more agile and make smart decisions quickly.
That’s where using the right SaaS metrics will come in.
Another thing of key importance to SaaS companies is funding. The business is growing but it’s reaching the end of the runway (the money you have minus the money you spend) – and needs extra funds to continue operating.
Or you might need funding to develop the product further. The strategy is clear, you know how much money to get to the next stage, but getting another round of venture capital (VC) funding is needed.
However, getting VC funding is a lot of work, and you’ll need to have a strong case to win over investors who will give money to your business.
This is where finance comes in.
As a finance leader, one of your responsibilities is to create key SaaS metrics that every investor will want to see before they make any decision to invest.
There are five specific metrics that you’ll need to focus on as your business looks to get back on track. Read on to learn more.
1. Cash management
At a very early stage, your fledgling SaaS businesses will be looking to win customers who are so happy with what you have to offer that they’re willing to become advocates.
Seed funding is the first official money that you’ll raise – the early financial support that will ‘seed’ the business.
At this stage, the critical metric is cash management.
You need to make sure you don’t run out of money before you prove the worth of your SaaS product and find a suitable market with prospective customers willing to hand over money for a service.
At this stage, it’s highly unlikely that your SaaS business will have a finance department. Cash management is outsourced to an external accountant or done internally with necessary accounting software.
2. CAC payback
Once your SaaS business has developed and hit key performance indicators (KPIs), such as user base numbers or revenue, the next stage where money can come in is via Series A funding to grow and develop the service.
This is the point where your company needs a business model that has the potential to increase profit in the long term.
You might be looking at getting £2m+ funding and this requires a senior finance leader who can build processes.
As a finance leader who is part of a SaaS company looking for Series A funding, you need to provide a metric that can prove the SaaS revenue model, which is customer acquisition cost (CAC) payback – the number of months it’ll take back the money invested in acquiring customers.
This period will determine how much money your SaaS company needs to grow – the shorter the period, the more profitable the business.
To calculate the CAC payback period, you need three other metrics:
- Customer acquisition cost (CAC)
- Average revenue per account
- Gross margin per cent
To get the number of months it takes to recover CAC, divide the customer acquisition cost by average revenue per account, multiplied by gross margin per cent.
You should look at a CAC payback of less than two years and you’ll need to put in processes to achieve this number. For example, good cash-to-quote processes can increase cash flow, while for high-volume billing, a card processor can speed up cash flow.
As this stage, you’ll want to look at financial cloud management software.
You could, for example, achieve native synchronisation between Salesforce and financials, allowing the item master to be synchronised, so the billing rules and revenue recognition schedules are known and automated.
You can also start to operationalise financial planning and analysis.
3. Net change in CMRR
After getting Series A funding, your growing business will require the services of a CFO.
When you reach that position, you need to have set up a robust process that covers the entire customer lifecycle, from the original sale to upsells, down-sells and renewals.
This information allows you to forecast.
Series B funding is about getting your business past the development stage, where you will have already built a substantial user base and proven to investors that you’re in for the long haul. You might be looking at raising an eight-figure sum.
To do this, you’ll need to determine the SaaS net renewal model. You’ll be looking at keeping growth above 50% and that you’re keeping your customers.
The metric investors will want to look at is Net Change in CMRR (which stands for Committed Monthly Recurring Revenue or Contracted Monthly Recurring Revenue).
There’s no fixed rule of formula to what this value is, but the measure should factor new sales, renewals, add-ons and churn.
If you can simplify all this to a Net Change in CMRR figure, you can get all the main parts of a business (product, sales and customer success, for example) working in the same direction.
You can begin pressure-testing a quote-to-cash process that can scale, which can reduce churn by up to -5%.
Most businesses with land-and-expand or high-annual-contract-value (ACV) models put in a configure-price-quote (CPQ) solution at this time to start bundling products and services.
CPQ software is a sales tool designed to help you produce accurate and highly configured quotes making all the complex product, pricing and business rules centralised, automatic and available in real time.
Sales has everything they need in front of them.
A CPQ solution also allows you to handle multi-element arrangements, and to document performance obligations, both explicit and implicit.
When a finance team builds the quote, and volumes are high enough, there’s a need to automate it. Salesforce integration is useful and links the item master records out of the Salesforce contract into the financial system.
When the quoting process is automated, finance can also automate billing with all the myriad options it wants to offer customers to create the most value and maximise monetisation.
4. Gross margin
Businesses that are looking at Series C funding are already somewhat successful.
Most will end external equity with Series C, but some could go beyond to help develop globally and boost funding in preparation for an IPO (initial public offering).
For Series C and beyond, you’ll be looking at growing to £100m in SaaS gross profit.
The key objective for you is gross margin – you’ll need to show the business has grown more than 40% with a repeatable process for getting the product made, sold and supported, and that you’re an efficient and profitable machine.
You should track profit and not revenues because some business models are low margin, such as some examples we see in the sharing economy.
By this time, you’ll have refined teams and systems, and there’s more operational rigour.
You’ll have tightened the close to get data to the financial planning and analysis team much faster, and deepening cohort analysis.
Measuring complex metrics get more nuanced when analysing cohorts, such as gross revenue churn vs net revenue churn vs logo churn.
Treasury management is a priority, which includes building the rigour, controls and compliance for public company reporting.
5. Capital efficiency
After funding rounds, the next obvious route to funding is to get acquired or go public as an IPO, which means you’re ready to expand the SaaS product line or go global.
Public investors will demand high revenue growth from SaaS businesses, which means you’ll need to show you can grow quickly at scale and you have either created a new market or captured proportion of an existing one.
You won’t necessarily be profitable but you’ll need to show you are quickly gaining in customers who are signing contracts with high margins and recurring revenue.
Investors will need to be confident profitability will come.
A key metric then is capital efficiency – the ratio between your expenses and the money you spend to make a product or service.
It shows how efficiently you’re spending – the more efficient you use capital to develop your product or service, the better the chance you can gain profitability and make returns for investors.
By this time, you’ll need to have measured and built a system to increase the average revenue per customer and increased the number of product lines used per customer.
You’ll need to track what foreign money exchanges will do to your gross profit, and have controls in place to show adequate governance for your financial systems.
Final thoughts on SaaS metrics
Using the right SaaS metrics can really help your business when it comes to making smart decisions.
By having a good understanding of which ones you should be tracking, you’ll be able to improve the chances of getting back on track quickly, both to the benefit of your business and the interests of potential investors.
Managing SaaS metrics through the company growth lifecycle
Learn about the key metrics that are required to fully understand the health of your SaaS company and determine the best ways to optimise the business.