The stress has never been higher for SaaS CFOs to guide their peer CROs and CTOs through how to invest to win markets. Your organization relies on you to maximize cash flow, set attainable yet ambitious benchmarks, craft workable corporate budgets, and much more. Your SaaS metrics are a crucial common denominator in those processes, and they’ll be the focal point of our attention for this post.
We’ll start by explaining why your role is more important than ever and what your organization expects of you. Then we’ll discuss why your SaaS metrics are important and how they impact your profitability. So, keep reading if you’re ready to stay ahead of the curve and prioritize your SaaS metrics for lasting profitability.
The crucial role of a SaaS CFO
Whether you’re new on the job or an established SaaS CFO, you play a crucial role in financial strategy and decision-making for software organizations, overseeing financial operations to maximize cash flow and ROI. You provide valuable insights on revenue growth, cost control, and profitability, working closely with other departments and stakeholders to optimize company-wide financial performance.
Additionally, SaaS CFOs play a key role in raising capital and managing investor relations. Your expertise in navigating the complex business models of SaaS companies is essential for long-term success.
SaaS CFOs can make informed decisions to drive growth and minimize subscription cancellations by monitoring their metrics. Let’s peel back a few more layers before we get into the eight CFO metrics we’ll be discussing.
Understanding financial metrics in SaaS: an overview
Your SaaS metrics allow for a comprehensive analysis of revenue, customer acquisition, retention, and profitability. By providing insights into your SaaS business’s financial health and growth potential, metrics and KPIs enable CFOs to make data-driven decisions and ensure the company’s success.
Understanding SaaS metrics is essential for effective financial planning and analysis (FP&A) in the SaaS industry. CFOs rely on these metrics to navigate the complexities of subscription revenue business models and to inform revenue strategies such as pricing and billing optimization.
Overall, financial metrics are a vital tool in assessing the performance and potential of your businesses. And on that note, let’s dig into our list of essential CFO metrics for SaaS success.
8 metrics that can help SaaS CFOs win their market
By tracking these eight metrics, SaaS CFOs can gain vital insights into their business’s performance, make data-driven decisions, and drive lasting profits for their entire organization.
Each of these metrics will improve your understanding of your company’s financial health and ability to attract and retain customers.
1. Annual recurring revenue (ARR)
Annual recurring revenue (ARR) is a centrally important metric for SaaS companies. It measures the total revenue earned from annual subscriptions, providing valuable data on the company’s financial stability and growth potential.
Furthermore, ARR plays a key role in attracting external investments. ARR is one of the first things investors will look at when gauging the profitability of a SaaS company. But it certainly isn’t the only KPI they care about.
2. Monthly recurring revenue (MRR)
Your monthly recurring revenue (MRR) is an important companion to your ARR. It tells you the total recurring revenue generated from monthly subscriptions, providing clarity around your cash flow and, by extension, insight into customer sentiment.
Your MRR breaks down further into various MRR subsets. The two most essential of these include:
- 1. Expansion MRR: Your expansion MRR shows how much money you gained over a month from account upgrades and cross-sells.
- 2. Contraction MRR: Your contraction MRR encompasses all the monthly revenue you lost to account downgrades. It’s important to note that this is different from churn–these individuals are still doing business with you, but you should regard them as being at risk of churning.
By evaluating MRR, SaaS CFOs can assess the success of pricing strategies, promotional efforts, and the general success of your business model.
3. Customer acquisition cost (CAC)
Customer acquisition cost (CAC) is a metric SaaS CFOs use to evaluate the effectiveness of their marketing campaigns and customer acquisition strategies. It calculates the average expense incurred by your company to acquire each new customer.
By monitoring CAC, finance teams can identify opportunities to optimize customer acquisition costs and improve profitability. The lower your CAC is, the more capital you’ll have available for your company’s important plans and projects. A low CAC directly benefits every department.
4. Customer lifetime value (CLTV)
Your customer lifetime value (CLTV) tells you the total revenue a customer generates across their subscription lifecycle. CLTV helps determine the long-term profitability and value of various customer segments, enabling CFOs to make informed decisions about resource allocation and customer retention strategies.
With a focus on CLTV, finance teams should also monitor related KPIs such as user cancellations and total subscribers. As we emphasized before, metrics are more effective when you view them as an interconnected web of mutually evolving data instead of discrete units of information.
5. Average revenue per user (ARPU)
Tracking your ARPU is crucial for assessing the financial value of each of your users. You’ll naturally want to invest more time and cash catering to your highest-ARPU customers.
By monitoring and improving ARPU with cloud-based accounting software, CFOs can drive sustainable business success for the long run.
This metric is an important performance indicator and helps finance teams make informed decisions regarding add-ons, pricing strategies, and customer retention efforts.
6. Logo churn
Customer churn, or logo churn, occurs when customers grow dissatisfied and unsubscribe from your product. Reducing logo churn is of the utmost importance because it impacts subscription cash flow more than almost anything else.
SaaS CFOs who track their company’s logo churn rates with AI enjoy several competitive advantages over companies that track metrics manually.
- A single source of truth (SSOT) eliminates data silos, connecting your entire company. Every department will have access to fully updated churn figures whenever needed.
- Automation is more accurate than manual accounting. A manual mistake involving a metric as critical as churn can lead to serious issues.
- Cloud accounting software features full integration with dozens of the most important CFO metrics.
However, logo churn isn’t the only type of churn finance leaders need to watch out for.
7. Involuntary churn
Involuntary churn is a crucial counterpoint to logo churn. It refers to losing customers for reasons beyond their control, such as failed payments or expired credit cards. Measuring involuntary churn is important because it directly impacts your recurring revenue and CLV.
By switching to cloud accounting, you can send automatic dunning emails to users who involuntarily churn. A dunning email is a simple message letting them know their payment didn’t process and that you’ll try again in a few days. This simple procedure can prevent a surprising amount of revenue from being lost over a year.
8. Recovered customers
Recovered customers are users who have churned but later return to your SaaS product. By monitoring this metric, you can gain valuable insights into why customers leave and what brings them back.
It also presents an opportunity for you to improve your product or customer experience based on their feedback. Recovered customers can also serve as a powerful source of testimonials.
Are you prioritizing your SaaS metrics?
As a SaaS CFO, data is critical to your ability to lead your company to success. The software companies that dominate their markets today understand this and make their metrics a cornerstone of their organization.As a SaaS finance leader, the more you learn about your industry’s most important KPIs, the better equipped you’ll be to win your market. Our recent guide for SaaS CFOs unveils 9 of today’s most essential subscription metrics. You can read it here.
9 key SaaS and subscription metrics to understand portfolio company health
Learn these 9 indispensable metrics that shed light on the performance and profitability of SaaS and subscription-based businesses.
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