Do SaaS Metrics Confuse You?
SaaS is still somewhat new and frankly traditional Financial Statements don’t work very well for reporting the financial nuances of this subscription-based business model. Instead, investors turn to these SaaS Metrics to assess performance.
Unlike Financial Statements, SaaS Metrics are not regulated by the accounting industry and therefore they are not formally defined. You can find guidance by simply performing a Google search but be careful as most are authored by content marketers not accountants so there are plenty of misstatements.
Here is a rundown of SaaS Metrics that you really need to know for B2B Enterprise SaaS companies:
MRR (Monthly Recurring Revenue).
One of the common mistakes with MRR is that it can be sometimes overstated. All revenue is not recurring so you must filter accordingly. You don’t want to find out in the due diligence stage that you have been overstating MRR as this economic unit is a key ingredient in other key SaaS Metrics. SaaS Metrics all inter-relate.
Here are the 4 common overstatements with MRR reporting:
Including trial periods - they are not a recurring commitment. Track it separately.
Too soon! – your clients need access to the software first. If your solution requires technical integration that hasn’t happened yet it doesn’t yet qualify as Revenue. And it doesn’t matter if they’ve already paid.
Including one-time fees (onboarding or customization fees) - these are NRR not MRR.
Excluding Discounts. If you discounted your subscription to close the deal your MRR should reflect the amount actually paid.
Once you have MRR you can measure your Month over Month MRR growth rate which conveys your growth velocity.
With an understanding of MRR you can now calculate ARPA (Average Revenue per Account). This is the ratio of MRR by customer count.
Now – there is a catch. Founders often consider ‘free’ users as customers. You should instead define a customer as a distinctive entity or logo that is paying you a recurring subscription fee.
Churn rate is defined as the opposite of retention and can be expressed in two ways.
Logo Churn: the ratio of how many customers are leaving to the total customer count at the beginning of the period
Revenue Churn: the ratio of lost MRR to the starting MRR.
The first one is a “number” and the second one is a “dollar value” . Both are then usually expressed as a percentage. Unless all customers are paying the same MRR you’ll need to track both as they each present distinctive perspectives.
The key and common issue is withFounders resistance to recognize an account as churned. The easiest way to think of this is as an “on/off switch” – MRR/Churn, MRR/Churn.
If the customer no longer meets the criteria for MRR due to an expired contract, a failed renewal, an account in arrears by more than 90 days, a bankruptcy, etc. then it has churned. It is not limited to just unhappy clients who formally cancelled their subscription.
Once you confirm Churn. You can now calculate your LT (or lifetime). LT is the number of months a customer stays with you. 1 divided by your monthly churn rate = lifetime. For example if your monthly churn rate is 1%, then your lifetime is 100 months. The thing is that you have to decide which Churn rate best represents your average customer experience or you take the average of the two methods to calculate Churn.
SaaS Gross Margin
SaaS Gross Margin % is your recurring revenue minus the expenses directly supporting your subscription revenue. These generally include support and hosting - fairly straight forward.
LTV (Lifetime Value)
Lifetime value is ARPA x Gross Margin % x LT.
Note – if your churn rate happens to be under 1% per month then capping your LT at 100 is best practice for calculating LTV.
CAC (Customer Acquisition Cost)
Simply Divide your sales and marketing costs by the number of new MRR logos added during the period. We prefer New MRR logos over contracts signed because not all signed contracts actually successfully result in paying customers.
Finally, now you can compare your LTV to CAC - which earns you your SaaS metrics champion badge for today! Generally you are shooting for a 3:1 ratio to prove a decent return on investment for shareholders.
If you need assistance setting up a Metrics Dashboard that fits your SaaS business please get in touch with us at numbercrunch and we’ll give you a hand. We have a team of Virtual SaaS CFOs who can parachute in and get it all sorted out for you.