When fundraising, investors will want to know certain key trajectory measures unique to SaaS companies. Key performance indicators (KPIs) are defined as the quantifiable measures used to determine how well a SaaS or recurring revenue organization meets its operational and strategic goals. Too often SaaS finance leaders don’t look at KPIs through the same lens as the investors.
CEOs, CFOs, and executives who look at KPIs to answer the question “how did we do?” need to ask “how will we do?” instead. Rather than a rear-mirror view of performance, the right batch of KPIs can help SaaS providers predict business success, reveal the challenges ahead, and help data-driven technology organizations gain real competitive advantages to win their market. Predictive KPIs help executives lead the organization rather than just react, shifting the focus from short-term objectives to longer-term visions. Instead of numbers to hit, these KPIs can help steer towards massive growth.
Predictive KPIs are those designed to inform and influence decision-making. Predictive KPIs will vary throughout an organization’s lifecycle as the strategic focus changes:
- At the start-up stage, the focus is on how well the SaaS company executes its business strategy. For example: Cash flow – SaaS companies at a breakeven point or cash positive are in a much better position to grow. While a negative 50 percent margin is acceptable at the start-up stage, breakeven or better is a strong predictor of future success.
- Once past the start-up stage, SaaS organizations can focus on how well their customers are engaged with the company to measure adoption. For example: Committed annual recurring revenue (CARR) – This KPI accurately measures the health of a SaaS organization and shows its monthly annual revenue cadence by recognizing signed deals and netting out known or projected churn. Growth in CARR of 100% or better is a solid indication of future performance.
- Predictive KPIs for the growth stage of a SaaS organization’s lifecycle typically focus on metrics linked to company expansion. For example: Customer lifetime value (CLTV) – As a predictive KPI, increases or decreases in customer lifetime value can show where the organization is headed on future return. If the customer lifetime value is decreasing, the company will need to add more customers at a higher rate to achieve its results. A healthy SaaS provider will achieve a 3x on CLTV while best in class achieve a 5x.
- SaaS and software companies that have reached the maturity stage focus on efficiency. For example: Cash conversion – The cash conversion score is a calculation of committed-annual-recurring-revenue to capital-raised-to-date (debt and equity) minus the cash on the balance sheet. This measures the return on invested capital and shows how well these dollars convert into recurring revenue. Best-in-class SaaS organizations post a cash conversion score of 1X or better.
- Following the maturity stage, there comes a time when a company either needs to reinvent itself or face Net promoter score (NPS) – This KPI measures customer loyalty from a range of -100 to +100 based on asking customers how likely they are to recommend the organization’s software. A low NPS indicates the company is at a crossroads and must either make some transformational changes or accept future losses and business decay.
- The end goal for any company or organization is growth. We’ve shared some predictive KPI examples but finding the most useful and meaningful KPIs for your business can be a challenge. Your KPIs will depend on the organization’s goals, business model and processes. Some KPIs are almost universally applicable, while others will vary by delivery and billing model.
First, we suggest starting by identifying a value outcome – your organization’s guiding north star. For public companies, it may be driving shareholder value. Secondly, identify the strategic drivers, then identify the tactical drivers. Lastly, map financial and operational metrics to the tactical drivers.
Start by pulling in organizational leadership and focus on what to measure rather than how. Then by building your finops tech stack with a modern financial management system as the foundation, you can automate KPIs and update these in real time. This gives you the ability to create reports and dashboards that automatically combine operating dimensions with financial data so you can analyze KPIs for each product offering, operating entity, location, region and other units.
Our eBook Predictive KPIs for SaaS and Software Companies lists more than two dozen examples of KPIs to help finance leaders get started with finding the best KPIs to help predict and plan for growth.
You can also visit our SaaS resource center to find additional information that can help you as you map out the metrics that will matter most.