It seems that every time I speak to a startup claiming to sell some sort of SaaS product, the majority of the time, the founders have a hard time understanding the fundamental data that will help them succeed. I’ve decided that rather than try to explain all of this repeatedly, I would provide a comprehensive look at the key metrics that SaaS-based startups need to understand and optimize to run their companies.
What is SaaS metrics?
SaaS metrics focuses on understanding the key factors that drive a SaaS business. Unlike traditional business metrics, SaaS data contains a number of key variables that companies need to monitor consistently as they can have a substantial impact their future performance.
What SaaS company are we?
There are two types of SaaS companies:
– Companies who make their revenue primarily off of monthly contracts. In this instance, the revenue focus will be on the Monthly Recurring Revenue or MRR.
– Companies who make their revenue primarily off of annual contracts (where some contracts can extend beyond one year. In this instance the revenue focus will be on the Annual Recurring Revenue (ARR) and Annual Contract Value (ACV).
In either SaaS business, you will face significant cash flow losses in the early years. This is due to the heavy investment upfront to acquire a new customer. Hopefully, you work hard to recover the profits from the investment and surpass that investment loss with revenue over the lifetime of the customer. This is the light at the end of the tunnel. Our goal as SaaS businesses is to generate enough profit/cash from the installed base do cover the investment needed for new customers. At that point, the business should turn profitable and you have to make the decision based on your SaaS metrics on how to react at that point.
How to Measure your SaaS data?
In any SaaS business, we’re attempting to make multiple sales to the same customer. First we make the initial sale (customer acquisition). Then, we work to keep the customer in order to maximize the lifetime value (customer retention). Finally, we focus on further monetizing on these customers once they’re in the door (customer monetization). Tracking and understanding as much data as possible within these multiple transactions will help decrease these costs of sales. There are numerous parties responsible for all of these steps in the sales process and helping each one understand their key metrics will help drive business profitability. I’ve built the below diagram to help you have a visual understanding of your SaaS metrics goal.
The SaaS metrics cheat sheet:
Each month there are three variables that contribute to how much MRR will change relative to the previous month.
1) New MRR: what happens when a new customer is added
2) Churned MRR: what happens in the existing customer base that cancelled their subscription.
3) Expansion MRR: what happens from existing customers who expand their subscription
4) Net MRR = New MRR — Churned MRR + Expansion MRR
You can track these variables using a chart that combines the three elements of MRR and the Net New MRR. I like to add dotted lines for the business plan approximation graphs of this data so that I can track I am doing against the plan for each of the four lines. You should also make a table of this data if you want to view year over year growth rates.
Why do we need SaaS Metrics Guidelines?
The information provided in our company’s performance analytics will help us decide which direction to take, how fast we should be moving, and where the potential cliffs that can cost us a lot of money are. Below are the top three reasons why you should be using SaaS metrics.
1. In marketing/sales, you want to stay on top of your different lead sources so that you can decrease your sales costs. Remaining agile throughout the channel discovery processes is critical and real time information is critical in understanding the variability in the data. Different marketing strategies (ie., Google Adwords, LinkedIn ads, Yahoo!) have different costs so understanding the connection between lead generation cost and return is critical. Once you start noticing that one strategy is leading to increased user sign up, you should be able to decide what are the variables in play that make users respond to that campaign instead of another. At that point, you could decide on whether it makes sense to hit the accelerator on those sources and quickly shift budgets to take advantage of your momentum.
2. SaaS metrics also help you in segmenting your clients by understanding all of the key variables affecting particular segments of your sales population. Remaining agile in our discovery of different customers/pricing models/industry verticals helps us identify and segment where the quickest return for our investment will be. As a result, the Highest LTV to CAC is quickly discovered and, funding permitting, we choose to accelerate that profitable path before it dries up.
3. Finally, SaaS metrics in real time is critical to outcompeting our challengers especially when it comes to digital campaigns. Since we use Factivate, we have no lag time in interpretation of data and we can decide on whether to accelerate the pedal, shift budgets in an instant, or tweak the model before expanding. Not having to wait for a report (post campaign) in this case has saved us thousands of dollars already.
Creating a Dashboard for your SaaS 3.0 Company that updates in Real Time
One of the most annoying things for me to do was to track our SaaS data and generate reports. I spent endless nights bringing together information from different data sources into my spreadsheet just to get an accurate picture of my business. I’m happy to say that this is no longer the case. Factivate, a cloud-based spreadsheet with real-time connectors and just-in-time reactions, makes this process incredibly simple so I will model how to create the SaaS 3.0 metrics dashboard using Factivate.
The dashboard below is designed for a company that primarily uses monthly contracts (MRR). It is updating information every hour automatically from various sources of information in real time and automatically updates my dashboards as well.
How to add Data Sources to my Spreadsheet
To add these data sources, you simply log into a Factivate spreadsheet and click on import to select the data source. Don’t worry, you don’t need to program at all. All you need is to have an account in the services you’re adding and the data will be added easily. Note that these are some of the information sources we try to collect and is not a comprehensive list of all of the information a SaaS company will collect. This very much depends on which indicators you want to monitor constantly.
to be continued…
Factivate is a software company part of the Google for Entrepreneurs community in Durham, NC. Factivate provides business users with a cloud-based data analytics platform that can sync with different online tools to create automated, real-time spreadsheet reports and web dashboards with just-in-time business reactions. The result of our intelligent spreadsheet is accurate data analysis that drives better business decisions while reducing manual spreadsheet report time and errors by a factor of 150+ hours/employee/year. Factivate requires no learning curve or programming knowledge. In sharp contrast to the complex and expensive business intelligence tools on the market today, if you know spreadsheets, then you know 95% of what you need to use Factivate–we’ve got the rest covered.