SaaS metrics are different than their premise-based software ancestors
Most traditional software companies have changed business models from exclusively premise-based to at the least offer a choice between SaaS and server-based software. If you’re responsible for the revenue or operations of this kind of company, it’s likely that your metrics could use a refresh to help you manage the business better. Measuring and managing to widely recognized metrics is also important if you anticipate selling the business or seeking an investor to help you consolidate a niche category.
Usually the need to measure the business differently comes about as a result of an “oh crud” moment, where the reality of the business becomes apparent without telltale data being present in a management dashboard. In our client base, the instigation has generally come in preparation for a sale, recognition that churn is higher than expected (this also surfaces as a profit concern), close-win rates dropping, topline revenue not meeting goals or customer complaints finally reaching the CEO.
In the case of a privately held company preparing for a sale, an important motivator to adopt and manage to industry standard KPIs is that the valuation realized will be greater the more favorable your KPIs are compared to your cohort (profit measurements alone are not enough to drive top tier multiples).
By measuring, reporting and responding to a small set of KPIs, you can avoid a lot of heartache down the road. There is a lot that you can and should measure, but if you’re not focused on these core metrics, you’re likely heading for an unpleasant surprise sooner rather than later.
Here’s a subset of KPIs that every SaaS CEO should be monitoring:
- Customer lifetime value ($, monthly)- Provides a historical basis for what value can be expected for new sales. Useful to estimate forward-looking value of revenues. Needs to account for all revenues until cancellation/non-renewal. Can be derived by multiplying average contract value by average customer subscription duration at cancellation. Trends in this data are telling about average selling price (which itself is important as an indicator of product differentiation, pricing discipline and competitive pressure).
- Customer acquisition cost ($, monthly) - Indicates how effective sales, marketing and channel activities are. Can be reported by channel (e.g., affiliates vs. direct). This cost is all sales and marketing costs attributable to revenue generation. If the cost of getting new customers improves over time, keep doing what you’re doing (and more of it); if this number is deteriorating, it’s cause for concern and management attention.
- CAC payback period (months, monthly) - Important to know how long it takes to earn back your investment in acquiring new customers. This has implications for cash flow and is another way of measuring the effectiveness and reasonableness of marketing/sales investments.
- Percent of sales no-touch, inside sales, via affiliates/channel (percent by revenues, monthly) - High-performing SaaS organizations generate a significant percentage of revenue from inside sales or automated means. The lower the unit of sale, the more you’d want to increase the number of sales that occur without a salesperson being involved.
- Sales per employee (dollars, trailing 12 months, monthly - This can help you evaluate if you are under- or over-staffed compared to your peer group. It’s also important to pick your peers carefully; a venture-funded high-growth startup will have a lot more people per revenue dollar than a more mature software company that’s recently transitioned to SaaS and is geared toward a slower growth rate. If the business is highly seasonal a TTM metric will be quite lumpy and may not be as valuable (so use annual and track only 2-4 times per year)..
- Percent of reps meeting quota (percent, monthly) - Helpful for management to know how the sales team is performing from a number of standpoints (is quota too high, how is comp plan working, are reps having harder time as leading indicator). I personally think this is very important for the CEO to watch as its impact will be pretty immediate and early action can help him/her course correct before too much damage is done.
- Active [SM1] customers last 30 days (Percent, monthly) - Indicates how many people are using your service each month, a great leading indicator of churn. While the customer experience automation community goes much deeper, this is one KPI a CEO really needs to keep an eye on. If the software remains useful, your customers will spend more time with it over time (the amount of time depends on the kind of software or information service you provide, so this is an internally-referencing relative measure vs. one you can benchmark).
- MRR from active customers (Percent, monthly) - Tells how much revenue comes from inactive customers, a compounding risk factor for churn.
- Simple churn (percentage, monthly) - The number of churned customers tracks the health of a SaaS business as directly as any other measure. Simple churn is the number of customers who cancel divided by number of clients at the end of the month. There’s a good discussion of different churn formulas on the Profitwell blog at this link. We agree with the maxim that simpler is better for this number.
- Customer satisfaction (CSAT or NPS, ideally monthly) - Regardless of the metric, an ongoing program to measure a statistically significant subset of customers for their overall happiness is of great predictive value. Longitudinal and lightweight studies can be complemented with periodic deeper dives on drivers of satisfaction to give a clearer picture.
- Total ticket volume (monthly, percentage) - A simple measure of how many customer service tickets are open each month. Can be expressed as a ratio to the total number of customers to provide a bit more insight into the penetration of issues into the base. Caution is needed here for fast growth firms that will find their customer service teams fielding reasonable questions from a client base that’s relatively young. You might want to eliminate training type calls from this measure to isolate for problems.
- Most common issue - SaaS software can be very complex and it’s not always obvious what causes customers the most grief (and churn for you). Implementing a ticketing software product that enables you to build reporting based on tags (meta data) for the issue type will help you track what ails your client base. Mapping complaints to cancellations will help allocate resources to the most important issues. While this isn’t necessarily a KPI, it’s important for management to know.
Accrued effective churn (rare applicability) - This is the one non-standard KPI on our list… and it’s only for a special case. If you have a sizeable number of customers who lapse and then restart their subscriptions (i.e., go dormant for a few months or more between times you are collecting revenues), then you need to find a way to account for these people that is applicable to their behavior (they aren’t new revenue though they could look that way). Basically, you are removing them from your churn calculations (contact me if you need help figuring this out). A good question to ask is what’s wrong with your business model or pricing if you have a lot of lapsed and subsequently renewed customers.
Reporting SaaS KPIs
The dozen metrics above should be presented on a spreadsheet with bar charts that help management to discern trends. You might want to further break out these measures by product or sales channel to illuminate differing contributions to performance. You can use decision support tools if you like to jazz up the display.
Sometimes it’s helpful to have a key chart that summarizes the metrics that drive SaaS revenues. A stacked bar chart that totes up revenues associated with new contracts, upgrades, current clients, downgrades and churn as a bar chart is very powerful and helps focus management attention on underlying issues (monthly, by category, showing above and below the line numbers).
The most important thing is to generate whatever KPIs you agree on, on a regular basis. This means that the collection of the data must be as automated as possible so that the investment required doesn’t exceed the perceived value of the exercise (and also ensures numbers are reported in a timely manner). This exercise itself can cause you to consider changing underlying accounting and sales systems if it’s too hard to get to the numbers.
We look at KPIs when we perform a Top-Down Marketing Audit, a 360-degree review of just about everything that contributes or takes away from a SaaS software firm’s performance. Want to know more about it? Contact us to learn more.
Suggested sources for further review: