Curious about what’s in fashion for SaaS metrics in 2023? Well, step aside vanity metrics, we’re shifting away from metrics that demonstrate exponential growth in favour of those that demonstrate a more conservative style towards profitability, expanded cash flow runways, and milestone-based investments.
If you are a SaaS founder, you’re likely familiar with the concept of SaaS metrics – even if you don’t feel confident that you clearly understand what these metrics are. SaaS metrics are key performance indicators (KPIs) that provide powerful insights into the financial performance of your business. Once you are generating annual recurring revenue of $1Million you’ll be expected to report SaaS KPIs with confidence so there is no time like the present to learn what metrics are important to your business model, especially considering the current uncertain economic times.
As the SaaS business model matures and the funding landscape changes, we see shifts in the relative importance of some SaaS metrics over others. In 2023, the key difference is a move away from accelerated growth, and towards a list of sustainability. For example, demonstrating prudent spending and a path to profitability is getting more front-row attention than month-over-month exponential revenue growth.
Understanding these concepts is important but what is even more necessary is their accurate calculation. To support this, you’ll want CFO involvement. Fundraising comes down to earning the trust of investors so investing in professional support to ensure you are calculating your SaaS metrics properly is crucial and highly recommended.
Below are the top metrics you’ll want to be calculating, each month in 2023.
Numbercrunch’s top 10 metrics for 2023:
- Cash Runway – With uncertainty in the markets, investors are more interested than ever in understanding how long your business can survive before the next cash injection. Divide your cash on hand by your monthly burn to determine the number of months remaining.
- Cash Monthly Burn – Cash monthly burn refers to the net change to your cash balances each month. For businesses that invoice customer subscriptions monthly, that is likely synonymous with EBITDA (earnings before interest, taxes, depreciation, and amortization). For companies that invoice customers annually in advance, you would subtract your monthly operating expenses from the average monthly billings.
- Months to EBITDA positive – Not that long ago, we could completely ignore profitability in SaaS because investors could generate healthy returns without their investments ever reaching profitability. Now EBITDA (earnings before interest, taxes, depreciation, and amortization) is back on the table and discussed in every financial meeting. You need to keep your financial projections current so that you can convey when you will reach ‘profitability’. EBITDA positive is another (and more lender-friendly) way of saying profitable.
- Net Dollar Retention – This is also called Net Revenue Retention. This metric rose in popularity in 2020 and continues to go strong. It refers to the amount of revenue you are generating over time by the same customer base. If you have a net dollar retention of 120% you are essentially demonstrating to investors that if you do not invest further in acquiring new customers, your revenue will still grow by 20% year over year. This is very important because, in a conservative market, it proves you could cut spend and still grow revenue.
- CAC Payback – Customer acquisition cost (aka CAC) payback period refers to the number of months it takes for a new customer to pay back the costs associated with their acquisition. This metric speaks to the feasibility of your customers to fund your growth. If you have a CAC Payback of under 12 months, and you invoice customers annually in advance, you are essentially able to fund sales and marketing investments with cash from new customers alone. In other words, you may not require additional capital to fund revenue growth.
- Revenues outside of Canada – Many government grants are in place to increase Canada’s innovation play, globally, so you’ll want to focus on increasing export sales early on. In addition, there are tax implications in many jurisdictions that you’ll need to pay attention to, so plan early to track revenue by country and state to enable grants and ensure tax compliance.
- Sophisticated up-to-date sales forecasting – One of the weakest areas of reporting we see in SaaS scaleups centers around sales reporting. Don’t stop at recording sales only when deals close. Ensure your business has sales forecasting in place in terms of deals, the average time to close, win/loss ratios, average revenue per client and any other target market demographics that will forecast your revenues for the next 12 months.
- T2D3 ARR growth rates – Despite the increased focus on profitability, you’ll still be expected to generate a financial model that will eventually deliver exponential growth. T2D3 stands for Triple Twice, Double Three Times and it refers to Annual Recurring Revenues (ARR). Once you hit $1-2 million in ARR you’ll want to demonstrate the potential to triple, triple, double, double, and double, your ARR to surpass $100 million in annual revenues.
- Churn – You’ll need to know your churn rates, calculated in terms of dollars as well as customer count. This is easy to calculate if you are compiling MRR by client, each and every month.
- LTV/CAC – Every SaaS business needs to measure its lifetime customer value consistently and against its customer acquisition costs. A ratio of at least 3:1 is required to demonstrate your business has the potential to generate financial returns.
This is just a sample of the many SaaS metrics that are important and that should be considered. Our goal is to support entrepreneurs with timely and ongoing education so that you’ll be ready to be ready. If you have questions or need help tracking or calculating any of these metrics, the numbercrunch team has our sleeves rolled up and we are ready to assist you.