In a business landscape as competitive as the SaaS industry, you either WIN your market, or you simply exist among thousands of other companies. Do you ever wonder what sets the top-tier, stratosphere-layer companies apart? They give razor-sharp attention to their metrics.
In this blog post, we’ll 1) Help you understand SaaS metrics and how they can guide you to market dominance, 2) Cover core SaaS metrics that impact your cash flow, and 3) Explore how these metrics influence strategic areas like budgeting, financial planning, investor relations, and operational efficiency. We’ll even discuss how you can establish a metrics-driven business culture and choose the right tools for tracking your metrics.
Let’s get going.
Understanding SaaS metrics
Your SaaS metrics keep you aware of the financial health of your company. They give you a way of objectively tracking your financial performance and the outcomes of your various business strategies.
Your metrics and key performance indicators (KPIs) assist in the navigation of important processes and variables that impact your organization’s health. These range from:
- Churn and subscriber activity
- Changes in recurring revenue
- The profitability of different product lines
- How much you’re spending to acquire new users, and much more
Let’s dig a bit deeper. How do your key SaaS metrics relate to your role and responsibilities as a SaaS CFO?
The importance of SaaS metrics for CFOs
For recurring revenue SaaS CFOs, generating sustainable cash flow is always a central goal. Continuously evaluating your KPIs and comparing them to your financial projections and goals will give you an objective yardstick by which to measure success.
By analyzing your metrics before making financial decisions, you’ll find it much easier to:
- Identify and capitalize on trends: Your metrics alert you to trends in user behavior. On the negative side, that might mean larger-than-average churn volumes. On the positive end, it might be an uptick in the monthly recurring revenue (MRR) generated by one of your products. Your KPIs help you catch trends while they’re still forming so you can take appropriate action.
- Allocate your resources effectively: SaaS metrics keep you attuned to how well your budget allocations are working out. By continuously tracking your KPIs, you can gain a real-time sense of how your allocations need to be adjusted for your next budgeting round.
- Forecast future subscription revenue: Maintaining a sense of your likely future revenue is incredibly important in shaping your financial success. After all, improving something you can’t measure effectively is pretty tough. Your metrics lay the foundation for robust, actionable, and profitable forecasts.
Now, we’ll dive into some of the most important metrics for helping you WIN your market.
Core SaaS metrics
In order to use your SaaS metrics as profitably as possible, it’s important to get some context on your KPIs. What are your different metrics used to monitor, and what strategic advantages do they yield?
Let’s analyze some KPIs that every SaaS finance leader should be paying attention to.
Customer churn, also known as logo churn, refers to the percentage of customers who cancel their subscriptions within a given period.
High churn rates can significantly impact your company’s revenue and profitability, so it’s crucial for CFOs to focus on customer retention.
To calculate your company’s churn rate for a given period, divide your churned customers by the number of users you started with.
Slashing churn is important because user retention is much more cost-effective than constantly chasing new business. It also helps establish long-term relationships and customer loyalty.
By analyzing churn rates, CFOs can identify trends and develop strategies to improve customer retention.
Monthly recurring revenue
MRR is a crucial metric for CFOs in the SaaS industry. It refers to your organization’s predictable and stable revenue from committed monthly subscriptions.
By tracking MRR, CFOs can effectively monitor revenue growth and identify any potential risks as they arise, such as decreased engagement or higher amounts of subscription cancellations.
Analyzing MRR trends also facilitates informed decision-making around pricing strategies and expansion plans. Furthermore, MRR provides valuable insights into your SaaS business model’s stability and long-term sustainability.
Regularly reviewing your MRR can help you maintain a comprehensive understanding of your company’s financial performance to optimize cash flow.
Your MRR contains a few subcategories within it. These MRR subsets reflect the impact of different types of customer behavior on your monthly revenue.
- New MRR: Your new MRR is the amount of additional recurring revenue you gained from new user signups over a particular month.
- Expansion MRR: This metric tells you the cumulative impact on your MRR from account upgrades or cross-sells.
- Contraction MRR: In contrast to expansion MRR, your contraction MRR tells you how much money your company lost to subscription downgrades. Note, however, that these users have not yet churned.
- Churn MRR: Your churn MRR tells you the dollar amount your company lost to logo churn in a particular month.
Your MRR alone won’t give you a fully rounded view of your company’s cash flow. For that, you need to consult your MRR subsets.
Customer acquisition cost (CAC)
Your customer acquisition cost (CAC) tells you the amount you spend acquiring each new user. It’s a crucial KPI for helping SaaS CFOs evaluate the effectiveness of their customer acquisition strategies.
Your CAC considers marketing expenses, sales commissions, and other related costs of bringing in new business. Analyzing your company’s CAC over time allows you to finetune your customer targeting for maximum signups with minimal sales resistance.
Lowering CAC is a key objective for SaaS CFOs, and it can significantly impact your company’s financial health. By reducing customer acquisition expenses, SaaS businesses can achieve higher gross margins and improve their free cash flow.
Over time, this allows companies to reinvest in important business areas like product development and customer service, contributing to long-term growth and success.
Customer lifetime value (LTV)
Customer lifetime value (LTV) is a crucial metric that quantifies the total average value each customer brings to your SaaS company over their subscription lifetime. The goal is always to get this metric as high as possible.
CFOs use LTV to gauge the profitability of acquiring and retaining different customers. It’s also frequently used to create the “LTV to CAC ratio.” A 3:1 ratio is good, and a 4:1 ratio is ideal.
Your LTV to CAC ratio gives an extremely useful snapshot of how efficiently and profitably your company is operating.
Calculating your CLV can help you know which customers to prioritize in your retention and customer satisfaction initiatives. It’s a no-brainer that keeping your happiest customers happy is the path to sustainable subscription cash flow and eventual market dominance.
How do your KPIs influence financial decisions?
CFOs rely on their metrics for vital insights that drive strategically important activities, from financial planning and analysis (FP&A) to budgeting and investor relations, and many more.
Let’s walk through some of these in more detail to help you see why KPIs hold so much potential for boosting your bottom line.
Budgeting is a critical aspect of every CFO’s role, and SaaS metrics are integral to it.
By carefully tracking your CAC and LTV, you’ll know exactly where budget allocations will have the largest impact. Remember the LTV to CAC ratio we just talked about? That KPI ratio plays a massive role in guiding budgetary decisions and strategic planning around user acquisition, marketing, and customer success.
Consulting your metrics prior to budgeting also helps ensure various stakeholders have enough cash to meet their departments’ business objectives.
Forecasting and FP&A
FP&A is closely interwoven with forecasting. Most FP&A objectives–such as optimizing pricing, reducing risk exposure, and analyzing industry trends–involve forecasting to some degree. And your KPIs are directly related to both FP&A and forecasting.
Below are a few ways that CFOs forecast their metrics to inform their FP&A decisions. Among other reasons, CFOs forecast their KPIs in order to:
- Mitigate financial risks: Automated forecasts can identify users at high risk of churning so you can refer them to your customer success team.
- Figure out what you’re doing right: Discover top-performing products and product lines by forecasting future MRR and expansion MRR.
- Provide strategic support and share insights: Stakeholders in virtually every department rely on you for data in one way or another. By running regular forecasts with your KPIs, you can help other leaders at your company maximize their success, streamlining overall cash flow.
What else can your SaaS metrics help you streamline?
Investor relations and fundraising
Many SaaS companies raise venture funding to help them meet their objectives more effectively. If your company seeks external funds, your metrics will be the first place investors look when considering committing capital to your business.
Showcasing your key revenue metrics like ARR and MRR will help prospective investors see why your company has what it takes to achieve sustainable cash flow.
Your CAC and LTV are also a huge deal to investors because those KPIs reflect how efficiently your company handles its resources and how loyal and profitable your users tend to be.
Demonstrating a solid understanding of SaaS metrics and their impact on your business can significantly contribute to successful investor relations and fundraising efforts.
Establishing a metrics-driven culture at your company
Here’s the thing: metrics won’t come to the forefront of your business unless you put them there. You should take responsibility for creating a culture that prioritizes data-driven decision-making at all levels.
You can help other stakeholders and employees understand the value of KPIs by:
- Regularly updating employees on KPIs as appropriate, fostering alignment, transparency, and accountability.
- Celebrating metrics-related achievements to create a culture of success and motivation.
- Encouraging cross-functional collaboration around SaaS metrics by leveraging insights from other teams and sharing yours.
- Embracing modern tools that use AI to track and analyze your metrics.
By going the extra mile to create a culture centered on metrics, you can ensure you always have what you need to drive growth, make strategic decisions, and generate sustainable cash flow.
Start dominating your market today
Your SaaS metrics are a vital ingredient in achieving long-term financial success. They help you measure progress toward your objectives, gauge customer satisfaction, and pave the way to optimized business operations for streamlined cash flow.
To learn even more about how your metrics and KPIs can guide you to market dominance in any financial climate, check out our ebook for SaaS CFOs: Navigating the Market Downturn with Better SaaS Metrics.
Navigating the Market Downturn with Better SaaS Metrics
Learn how your metrics and KPIs can guide you to market dominance in any financial climate by checking out our ebook for SaaS CFOs.
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