Is my business financially viable? What business levers will drive improved performance? Am I tracking the right financial data?
What is a key performance indicator?
Obsessing over data is practically in the job description of a SAAS entrepreneur. But if you’re not drawing a link to the business drivers out of those numbers – or if you aren’t collecting the data in an organized, efficient and consistent way – much of that information is just noise. That’s the difference between a metric and a key performance indicator (KPI). A KPI tells you something important about your business – something that will show you what steps you need to take to improve outcomes in the future - and then measure that improvement ongoing to check and quantify your progress..
If Metrics Are The Raw Data – KPIs Are The Intelligence Of course, you have to know what is going on before you can determine why. This has two big implications for your company:
You must measure the right things.
You need real-time visibility into your key metrics and KPIs.
What KPIs Should Tech Businesses Measure?
SAAS companies are different from traditional software companies and other types of sales-based companies because they depend on recurring revenue for the lifeblood of their business. In other words, the longer a customer stays with you, the greater your return on the money you spent acquiring that customer. In terms of budgeting marketing spend (customer acquisition), the greater the spend by each customer over their lifetime, the more you can afford to spend on acquisition (see 8 below).
For that reason, many of your most valuable metrics will relate to customer acquisition and retention. You probably have a good idea of what these metrics are already. Still, it’s important to spend some time documenting them and making sure you have a solid methodology for tracking them and drawing insights from the raw data over time.
With that in mind, let’s review ten key SAAS metrics that will help you keep your finger on the pulse of your company:
1. Churn / Attrition Rate Churn measures the rate at which customers pack their bags and leave (to be blunt). You can measure it in terms of total customer churn or revenue churn. While it’s not quite as sexy as some of the more sophisticated metrics that show you specific details, churn lies at the heart of your business performance. Think of a high churn rate as a distress signal. You know there’s a problem, but you haven’t yet figured out where the problem is. A high churn rate should prompt additional questions such as: Why are we churning?
Is it a product problem or a service problem?
Are we targeting the right audience?
What are the signs that are a customer is about to leave?
If you are doing a bang-up job with sales but a mediocre job with retention, that will show up in your churn rate.
2a. Monthly Recurring Revenue (MRR) MRR measures recurring revenue streams over time. It shows you how your business is building momentum (or not). Don’t include one-time fees or professional service fees (unless the service occurs every year of the contract) in your MRR calculation; this is strictly a measure of revenue components that recur from month to month. A growing MRR means you are adding new customers and they are staying with you. On the other hand, if you are adding customers but your MRR is remaining stable (or worse, falling), it means you are experiencing revenue churn and you’ll need to figure out why.
2b. Annual Recurring Revenue (ARR) ARR zooms out so you are looking at recurring revenue streams for the year instead of for the month. It is a crucial metric in the valuation of your company for M&A transactions. When ARR is stable and demonstrates growth, it increases your multiples and boosts confidence in your business model on the part of the buyer. It is important to know how much of your (largely regular and recurring) overhead costs are already met by your annual recurring revenue. Knowing that these are largely taken care of from existing customers and contracts is very comforting and worth tracking (see 7 below).
3. Non-Recurring Revenue Non-recurring revenue includes all of the one-time service fees and revenue components that don’t occur on a monthly basis. Keep this information separate from your recurring revenue calculations. Non-recurring revenue is less scalable and has lower margins than recurring revenue, which means it won’t add to your valuation for M&A purposes. Still, among publicly traded SAAS companies about 20% of revenue streams come from non-recurring sources on average. That makes it an important source of cash flow, and non-recurring premium services can also be important factors in customer retention.
4. Recurring Vs. Non-Recurring Ratio This metric looks at the balance of recurring revenue and non-recurring revenue. We recommend aiming for an 80/20 split. Of course, early-stage fast-growing companies may initially see closer numbers, but it shouldn’t be a long-term scenario. A clear plan to move closer to that desired ratio over time will help you keep your eye on the prize as you start with a specific goal in mind.
5. Orders Unfilled orders received from customers help you project how much revenue you can expect to earn over time based on new customer acquisitions. Because they are a future projection and not a realized revenue, however, they do not directly impact your financial statements. But it was important enough that all the IT multinationals I have worked with report Orders and Backlog (unfilled orders) in their monthly management reporting packs.
Orders also demonstrate the effectiveness of your sales process. By comparing them with other metrics such as MRR, ARR, and churn, you can evaluate the performance of your customer service and product delivery processes.
Tip: Be sure you don’t confuse orders with billings. Orders indicate the value of the contracts you have closed (how much your customers have contracted to pay) and they look forward over the total life of the contract. Billings track the invoices you have already sent and may occur at different frequencies (monthly, quarterly, yearly). If you use orders and billings interchangeably, it will be much more difficult to calculate your MRR and ARR.
6. Gross Margin Gross margin tells you how much revenue you have left after accounting for the cost of goods sold. In SAAS companies, these costs may include support, services, customer success, cost of operations, and any other outlay involved with providing the subscription service. A high gross margin is critical for startups because it means you have plenty of revenue available to invest in the growth of your business. It also plays a significant role in valuation since it indicates how much profit can be expected.
7. Net Burn Your burn rate is how much money you lose over time. Gross burn includes expenses and all other cash outlays. Net burn is calculated by subtracting gross burn from total revenue, and it’s a clear indicator of profitability. If your company is making money and growing, you should have a negative net burn rate. Positive net burn occurs only when you spend more than you make.
8. Customer Lifetime Value (LTV) Customer LTV tells you how much money you generate per customer on average over their entire relationship with your company. Use this metric to determine how much you can spend on customer acquisitions and still remain profitable. Since maintaining existing customers costs less than acquiring new ones, increasing LTV can be a great way to boost profit and drive growth.
So, once your hunters have gone out and acquired the new customers, it is important to hand over to a farmer, who has a program to upsell and grow each customer account.
9. Customer Acquisition Cost (CAC) How much do you spend to gain one new customer? That is your total (or blended) CAC. Calculate it by dividing the total acquisition cost by the number of new customers acquired across all channels. This can be useful, but it’s a bit broad. It doesn’t, for example, tell you whether your paid advertising campaigns are generating enough new customers to be profitable. For this reason, investors prefer to look at paid CAC (the cost of new customers acquired through paid marketing) when evaluating your business. It’s a more useful indicator of whether you will be able to scale up your customer acquisition budget profitably.
10. Customer Lifetime Value (LTV) vs Customer Acquisition Cost (CAC) Ratio The difference between LTV and CAC is clearly the basis of your business proposition. If it costs you anything like the LTV just to land the customer in the first place (CAC), then you have a real problem on your hands.
Whilst spend in new business lead generation might be an investment you can live with over a short period, if the churn in customers lowers the LTV for long enough to affect this ratio, then consideration must be given to reducing churn, increasing prices, or lowering CAC through tightened acquisition costs.
Once you have an understanding of these KPIs, what's next?
The KPIs may show that everything is going great and you're optimising your customer service, sales and R&D and support spend.
In simple terms, if your product sells itself and you are growing successfully with very low sales spend (low CAC), then you can afford to keep your price low. If you have a product that requires an extensive sales effort, then there is a limit on how low you can price before your customer acquisition costs outstrip your revenues. There will be extensive and nuanced analysis where you need to consider CAC, LTV, net burn and of course your competitors in the market.
コメント