Software as a service (SaaS) is a trend that is growing at an incredible rate, thanks to the accessibility and versatility of the software solutions coupled with online data analysis tools. Software as a service (SaaS) allows organizations to use such tools, without the need of running applications on their computer systems and data centres.
Naturally, due to the increase use of SaaS, there is an increase in SaaS businesses.
The basic setup of a SaaS business is the same as many other organisations, however a SaaS business can end up in trouble very suddenly if the performance is not monitored carefully.
It can be difficult to know how to measure SaaS businesses, as the metrics (a measuring system that quantifies a trend) for a subscription-based business are more difficult to quantify than a business with just physical assets. Due to this, a SaaS business is mainly the subscription base that you build over the years, making it difficult to quantify your assets. You should, therefore, aim to design effective performance models on top of the financial data and accounts you keep.
Specific metrics can then be monitored and analysed to access the performance of your SaaS business. Metrics should be chosen to measure the performance in relation to the organisation’s mission. The context also has a large impact on the selection of metrics used to assess performance. In this case, we will have the mission for our SaaS business as ‘To be the largest SaaS provider in the US”.
In this case, the key performance metrics your SaaS business should monitor are as follows:
Churn: A customer churn rate is the percentage of your subscribers who cancel or don’t renew their subscriptions during a given time. The sales structure for a SaaS business can be a huge outgoing, particularly if you have a sales commission structure. Therefore, if your customers keep churning your business may not be suitable. Your churn rate should be much lower than the volume of new customers you are serving.
Monthly Recurring Revenue (MRR): Revenue is essential for the survival and growth of a business. To be agile, you must monitor changes in your revenue on a monthly basis. For example, if the revenue was to decrease in August, key strategic decisions can be made to not see this pattern continue in September.
Net Promoter Score (NPS): This metric can be used to access customer satisfaction and therefore how loyal your customers are to your business. If a customer is satisfied and therefore loyal, they are likely to have a high customer lifetime value. A high customer lifetime value is a great indication of whether your business model is viable or not.
Cost of Acquiring a Customer and Customer Lifetime Value: Cost of Acquisition and Customer Lifetime Value are the two metrics that hold significant relevance when assessing the financial health of your SAAS business, as the number of subscriptions alone are not sufficient in tracking the business’s financial position.
Cost of Acquiring a Customer (CAC): Cost of Acquisition is the cost incurred by the company to acquire a specific customer. This metric is essential, as a SaaS business needs to know the cost to make key strategic decisions on how to reduce this cost to make the business more profitable.
Customer Lifetime Value (LTV): CLTV is the total net income a company can expect from a customer through its lifecycle. The metric is calculated by multiplying the average purchase value by the average purchase frequency to determine customer value. This metric helps you make decisions about your business and other factors relating to customers and most importantly, tells you if your business model is viable or not.
It is important to ensure that the CAC does not exceed the amount of value a business can derive from that customer. If your CAC exceeded your CLV, you are losing more value than what you are generating and therefore will not be operating at a profit.
Tracking metrics is essential for being able to make the correct decisions to align your people and processes with your organisational objectives. If this is done correctly, you can increase your profit and sustainability. Hence, it is wise to keep track of the metrics noted above to track the performance of your SaaS business.
However, these metrics are not all you should monitor, if you are preparing your business for potential investors or are looking for a series funding round. Jarvis Elliot would advise to hiring a specialist SaaS Accountant, who can design an effective SaaS reporting processes using a wider range of metrics enabling you to present a good picture to potential investors.