To help entrepreneurs better understand the acronym-filled world of SaaS metrics, we’ve been publishing a regular series on key SaaS Metrics.
We also recently hosted a webinar on SaaS metrics with our own Investment Director, Branden Harper, and David Ryan, the founder of SaaS Optics, a provider of financial tools for managing SaaS, software, and other subscription-based and recurring revenue businesses. During the webinar, David outlined five key principles—we like to call them Dave’s Rules.
1. There are no standard rules.
Unlike tracking your basic financials, there are no standards for what SaaS metrics you should be tracking, let alone how you should be tracking or calculating them. There’s not even a central authoritative body issuing guidelines for what you should do. “It’s really the wild west when it comes to tracking and analyzing SaaS data,” says Ryan.
2. You make your own rules.
In the absence of any established rules, standards, or guidelines to follow when it comes to tracking and analyzing SaaS data for your subscription-based business, you need to create your own. That means you need to decide what you will track, how you will track it, and what sort of analysis you will perform. Because these rules originate with you, it’s your responsibility not just to create them but also to document the specifics of what you’re tracking, what you’re including (or not including), and how you’re doing your calculations. It’s also your job to justify why you’re tracking what you’re tracking and why you’re making the choices you are when you do your analysis.
This sort of clarity will keep your data consistent from month to month and enable you to see important trends. It will also help you communicate your metrics to those outside of your company.
3. You must speak “subscription metrics” when you speak with capital markets.
Ten years ago, very few venture capitalists concerned themselves with subscription metrics. But, that’s no longer true today. Every VC you speak with will expect you to be fluent in the subscription metrics of your company. That’s because these measures have a huge impact on how VCs value your company.
VCs aren’t the only ones who expect you to know your subscription metrics inside out. Entrepreneur-friendly lenders, such as Lighter Capital, decide whether or not to lend to a SaaS startup—and how much they will lend—based on key metrics like monthly recurring revenue (MRR).
And finally, those who are looking at acquiring your company will be keenly interested in your metrics as well. Measurements like MRR and customer lifetime value (CLTV), and trends in that data, will help them determine the long-term financial prospects for your company.
4. Analyze by segment.
It’s easy to write this one off if your company just has one product and sells that product for the same price to all your customers—but do it anyway. There are many different segments within a product that you can analyze. Even if you just have one product with one price, you can segment by geographic region, the size or type of customer, or which sales rep made the deal. Doing this sort of segmentation will help you clarify where you should focus your efforts—and which areas you should de-emphasize or improve upon.
5. Know your business model.
While there are some key metrics that all subscription-based SaaS companies should be tracking, such as MRR, churn, customer acquisition cost (CAC), and customer lifetime value (CLTV), the exact nature of how you track and calculate them will vary based on your business model. Plus, there may be other metrics you need to track.
When you track and analyze metrics based on your business model, the metrics you choose should provide you with information upon which you can you act. Is the business growing and developing the way you planned? Is your model viable? What’s working and what needs an overhaul? You have the power to answer these questions accurately. The answers are right there in the data. Analyze your subscription metrics with a keen eye on your business model and objectives, and you’ll get the information you need to make the best choices for your company’s future.
The webinar also covered five metrics that many SaaS businesses track. Check out the webinar slides and recording.
David and the team at SaaSOptics provide financial tools for the management of SaaS, software, and other subscription and recurring revenue businesses. Delivered as a SaaS solution, SaaSOptics addresses renewal management, revenue recognition, invoice automation, and subscription analysis for customers that wish to remove risk & inefficiency from their financial operations and increase the real valuations of their businesses. To learn more about the services they can provide visit saasoptics.com.
Want More SaaS Metrics?
This guide explains the core metrics used to measure SaaS company success. Using simple examples, we’ll show you how to calculate each metric, and describe why specific indicators are important to investors.