Key SaaS Metrics for Finance Leaders
Earlier this fall, CFO Connect partnered with Will Cordes, CEO & Founder of KPI Sense, to dive into the particularities of leading finance at a SaaS company. Check out our first post in this series, which covers the SaaS business model and best practices for finance leaders. Or, you can watch the full recording of Will's presentation here.
As you take a deeper step into the SaaS business model, you’ll find there’s some specialized metrics to consider. Ultimately, there is no one “golden metric”; rather, the relevant metrics come together to tell the story of your business, each one offering a new piece of the narrative. Knowing when and how to use them will help you deliver value to even the non-finance areas of your business. Since the information on calculating and defining each metric is readily available, we wanted to offer some insight and how to contextualize each metric around your business. If you'd like more information, including analyses and formulas of the metrics, check out KPI Sense's Metrics Deep Dive.
Key SaaS Metrics
The key to using customer metrics is understanding what is relevant for your own customer base. Customer churn, for example, shows you the number of clients (or logos) leaving your business. At face value, the number of customers you lose may make you worried. Instead, consider it in the context of your business. What is the Average Revenue per Account (ARPA) of those churned customers? Perhaps you lost 10 customers this year, if those customers were paying very low contract amounts, it would be a very different story than if you lost 10 of your highest-paying accounts. Maybe you see that the customers you lost were ones that have taken up the most of your support team’s time, so losing them may not be the worst case scenario. Either way, it’s important to consider some qualitative and quantitative factors you’ll need to consider for your customer base.
When looking at ARPA, then you can analyze if your customer accounts are growing over time, and if not, analyze the measures you can take to do so. The key here is that not every customer is the same - it’s crucial you track how performance varies with each plan or product type for your business.
Recurring Revenue Metrics
Recurring Revenue Metrics help you identify a broader trend of where your business is heading. As we know, Recurring Revenue is the backbone of SaaS, and these metrics can help you tune into the growth of your business. If you’re only looking at Gross Revenue Churn, for example, you’re only getting a picture of how many dollars have churned. This probably won’t paint the most flattering picture of your business! However, when Net Revenue Churn is taken into account, you’re able to see how your expansion and upsell efforts offset that original number. Chances are, you’re making back a great deal of revenue in your existing customer base, inching your churn closer to net zero, or even negative churn. Why focus on revenue that has left your business when your existing business may be earning those dollars back? Focusing on the right metrics can paint a more accurate picture. You can also take a more detailed look into the different types of churn here.
Recurring Revenue Metrics also allow you to identify certain opportunities. What can you do in expansionary opportunities to further exceed revenue retention? To positively impact your net revenue churn, consider how you can work with your existing customer base through improved Customer Success, upsells, or appropriate price increases.
Cash is king. Knowing where it’s going and why can help you optimize flows and assess efficiency. Cash burn is easy enough to understand-how much cash are you using in a specific time frame? Some important context, however, is centered around the immediate impact of Covid-19 and the residual effects into the future. It is likely your revenue has recently been impacted, causing you to take a closer look at your spend areas. If you are in the position, however, to continue paying your third-party vendors, you have a unique opportunity for a win-win situation. As many businesses have been negatively impacted, consider reaching out to your vendors to negotiate pre-payments in exchange for a discount. This way, vendors can benefit from the cash flow and you can benefit by saving money.
Your Days Sales Outstanding is another metric seeing change in 2020. While it’s helpful to know historically how long it has taken to receive cash from your customers, it’s pretty safe to assume your DSO will be elevated in the near future due to your own customer’s issues with cash flow. We recommend measuring your DSO over the last 6-12 months and then build in a % increase when preparing your own cash flow forecasts.
Customer Unit Economics Metrics
Revenue and costs in relation to one “unit”, or one customer. These help you answer the questions, on average:
How much revenue does a customer generate in their lifetime? (LTV)
How much does it cost to acquire them? (CAC)
How profitable is a customer to me at the end of the day? (the ratio of the two - LTV:CAC)
How long does it take to recoup the costs associated with acquiring the customer? (Months to Recover CAC)
While these metrics are pretty straightforward, on a deeper level, they help you understand the efficiency of your sales and marketing spend (see: Magic Number). Of course, if the numbers show your sales and marketing spend is not efficient, you can look and see what channels are best performing and work to optimize your cost-efficient acquisition channels.
If your metrics are so efficient that you’re generating great revenue with hardly any sales and marketing spend, you could be leaving growth on the table. If your company is in a position to do so, it’s probably a good idea to invest more in your sales and marketing spend. Understanding the nuances of not only what the metrics are but what they mean is so important-looking at the whole story to make recommendations for your business is how you’ll make sound, informed decisions.
Building a “CFO Mindset”
Understanding best practices and key metrics will position you to be a strong financial leader; However, a true SaaS CFO Mindset is a holistic approach to managing finance around the entire strategy of the business. This mindset should allow you to Decide, Create, and Evaluate:
How to enable company growth and profitability
Where to allocate raised money
Overall business decisions-not just financial ones (all choices have financial implications)
Monthly financial projections for short-term perspective of the company
Long-term financial projections for monthly review
Informed recommendations based on financial data
How long until more funding is needed
Which channels have the highest ROI
Risks and opportunities
Models and dashboards to make sure your company is on track
While the language of SaaS extends and reaches beyond other business models, it offers the ability to efficiently and intricately tell the story of your business. The more familiarity and comfort you have with operational best practices and key metrics, the more you’ll be able to use them in a way that predictably fuels your company’s growth.
As you continue to grow in your SaaS role, there’s a wealth of information to help you along the way. As always, feel free to reach out to the team at KPI Sense to review your current financial strategy, or for any questions you may have. If you’ve taken the first steps of learning to understand the SaaS business model, or even simply made it to the end of the post, you’re well on your way to effecting meaningful growth and change for your company.