Let’s face it: As the CEO or leader of a growing Software-as-a-Service (SaaS) firm, you have your hands full. Whether you’re busy onboarding new customers, retaining existing customers, hiring to meet anticipated demand, managing your board or striving to keep investors happy, chances are good you’re managing an ever-growing – and increasingly challenging – list of priorities.
At the same time, you must also make sure your team is focused on the right goals. It’s easy to stay busy each day, and even easier to simply focus on that elusive next sale. But to build the type of value in your firm – value the market will ultimately reward – you must use data-driven decision-making to ensure you’re deploying resources where they’ll really pay off.
For example, the market places a premium value on profitable monthly recurring revenue (MRR), especially when top-line revenues and bottom-line profits are both growing at steady rates. Therefore, you need to keep a close eye on those metrics that influence MRR.
I can hear you saying, “All of this sounds great, but how do I make sure we’re focusing on the right priorities?” To help, this blog article will describe two metrics we believe are critical to any SaaS company’s success. (Be sure to keep checking this blog for future articles related to SaaS metrics.)
Two Saas metrics every SaaS company should monitor
1. New Bookings
The new bookings metric is the value of new customer contracts your firm has signed. This is important because new bookings “feed” future MRR – the top of the funnel that produces MRR down the road.
It is important to note that it’s not enough to just track revenue because SaaS revenues are recognized monthly, as part of the typical SaaS model. Additionally, the notion of monitoring overall revenue without separating existing revenues from new business might conceal potential issues that you really need to understand. For example, an increase in overall revenue might hide the fact that new bookings filled a big gap in lost business.
Setting new bookings goals and measuring your progress against these goals will help improve MRR. This is an important accomplishment: In the early stages of growth, you need to prove that customers will buy your product … and that you know how to sell it. New and existing investors won’t look further until you have steady new bookings results.
Also referred to as the customer retention rate (CRC) or simply “the renewal rate,” churn measures the contract value for customers who have stopped paying for your product or service.
Why focus on churn? Consider the fact that you can always add a ton of new business, but if you’re losing existing customers at a similar rate, you’ll never get ahead.
You should also keep in mind that there is some nuance with churn. For complete insight, you should measure churn by number of customers (e.g., if one of 100 customers terminates, this represents a 1% churn) as well as by contract value (e.g., one large customer whose contract value represents 10% of revenue represents a 10% churn).
You will also want to measure churn on both a monthly and annual basis. Monthly analysis will help you spot trends early on, before they become problems. Annual churn metrics help you keep everything in perspective. For example, when you consider the big picture, one big month of churn in an otherwise low year might not be as worrisome as you first thought.
The bottom line is that you want to prove that those customers who have paid for you service are willing to do it again and again, month after month and year after year. This will eventually lead to customer lifetime value (LTV) calculations, but remember, customer retention is the foundation of LTV. So focus on churn until you have it down cold.
Sure, there are more key SaaS performance indicators (KPIs) that you’ll want to watch, including customer acquisition costs (CAC), customer lifetime value (LTV), annual contract value (ACV), and many more. You may also be tempted to put the infrastructure in place to measure CAC – you definitely should keep an eye on these costs – but until you have a proven, repeatable sales process, monitoring CAC is premature since the sales process will continue to evolve as you experiment and hone your approach.
The same is true for these other SaaS metrics – until you demonstrate predictable, steady new bookings and renewable results, additional SaaS metrics are of secondary importance.
The accurate tracking and continuous reporting on critical SaaS KPIs is not trivial. Yet most accounting systems won’t measure them. In fact, you may need to integrate your general ledger solution with a third-party subscription management tool to produce sound metrics. But with proper planning, implementation, and management, you can have this information at your fingertips. In fact, you simply can’t afford not to watch these metrics each and every month.
If you’re interested in learning more about SaaS metrics, I recommend reading the work of David Skok, a venture capitalist and a leading expert on SaaS metrics. You might also find it useful to explore tools designed specifically for measuring SaaS metrics such as SaaSOptics. We are always happy to talk shop as well.
Or, if you’re wondering how you can gain these insights for your company – and reap the many benefits these metrics can provide – please see below.
THE DRIVEN INSIGHTS ADVANTAGE
Driven Insights is experienced in leading service businesses on the journey to leveraging financial and operating metrics to accelerate growth. Our bookkeepers and controllers are charged with much more than simply “doing the books” – they ensure each client understands and uses the insights we share.
Interested in learning more? See for yourself how Driven Insights can provide the insight and control you need to achieve your most critical goals by contacting us at firstname.lastname@example.org or 888-631-1124.