Software on-premise is an old business model. Big corporations like Microsoft have noticed this fact and started to deliver their software in the cloud. The success of the services of Salesforce, LinkedIn etc. is based on their scalability and the possibility to get endless feedback loops. SaaS is definitely one of the fastest growing markets. Forbes estimates a 106B dollars of revenues in global SaaS market for 2016. The five-year CAGR (compounded annual growth rate) from 2013 to 2018 is estimated to be 30%, which is six times the overall 5-year CAGR for enterprise IT.
How SaaS Differentiates from Other BusinessSaaS businesses base their success on the recurring revenue. Customer retention to them means a constant challenge, because the customers are flexible to leave (churn) whenever they don’t see a significant service value for them. Because SaaS businesses have to make huge investments in the beginning without getting significant revenues at first, they often face negative cumulative cash flows at the start. Upcoming subscriptions and increasing monthly revenues then cover up for the initial investment loss. But profit / loss occurs in waves.
The Importance of Growth especially in SaaS BusinessAfter the break-even is reached and first profits are made, further investments need to be done in order to scale the business and for sales & marketing. This will cause another period of loss, hopefully following by another growth in subscriptions leading to higher profits than before. The constant demand for growth follows the fast and aggressive nature of the digital markets, making it important and lucrative to reach a dominant design-position.
Different Rules - Different MetricsTraditional business metrics are not that helpful when measuring the success of your SaaS business. But don't worry, we've got you a good overview of the important ones. The following metrics are applicable to any SaaS or digital subscription business and are considered to be the most important ones for those businesses.
Customer Acquisition Cost (CAC)
Definition: Cost of Acquisition for 1 Dollar in Revenue
CAC = S&M Costs / $ Revenue
When comparing the efficiency of different Customer Acqusition channels it is important to include CLTV in the equation.
Measures to reduce CAC
Industry-Specific Target: CAC > 1
Lead Velocity Rate (LVR)
Definition: The speed of growth of the number of (qualified) leads in a company. The Qualified Lead Velocity Rate measures only leads with further specifications in addition to contact details.
LVR = ((Leads Current Month – Leads Previous Month) / Leads Previous Month) * 100
Definition: The number of transactions in proportion to the number of visits on a page. It measures the efficiency of the inbound sales process on the page, or the conversion of inbound leads to customers.
ConvR = #Page Transactions per Unique Visitor / #Page Visits per Unique Visitor
The conversion rate can be calculated between every steps in the sales process. The trial-to-paid conversion rate for example measures how efficient page trials are translated into paid customers.
Time to Value
Definition: The Time to Value measures the responsiveness of the provider to a request of (tangible or intangible) value.
TtV = Period between request for value and delivery of value
Customer Lifetime Value (CLTV)
Definition: The lifetime value of a customer based on its current value and its projected future value. It measures the discountet present value of those transactions. This measure is relevant in terms of budgeting CRM.
CLTV = Discounted average monthly revenue of a customer for a given a time period *12 or 24
Measures to increase CLTV:
Industry-Specific Target: CLTV > 0
Return on S&M
Definition: The return on sales & marketing expenses.
RO(S&M) = S&M / Gross Margin = S&M / (Price-COGS)
Committed Monthly Recurring Revenue (CMRR)
Definition: Value of a service based on a monthly subscription model. “Committed” in this case means that we just look at the recurring portion of this monthly value. This is in order to have a good estimate for the real monthly revenues in a monthly subscription model. CMRR is a valuable growth indicator for SaaS businesses.
CMRR = Monthly payments of your customers – setup and commitment fees
Measures to increase CMRR:
Industry-Specific Target: CMRR >50%
Definition: The churn rate defines the relative amount of customers who leave the service (=churns) in a given month. It is the value of the business not renewed.
MRR CR = (Churns Revenue / Customers Total Revenue) * 100
Churn rate added to renewal rate gives a 100%
It is important to consider on what base these rates are calculated. The above is calculated based on revenue (MRR Churn Rate). Other options include the number of customers (Customer Churn Rate; might be innacurate due to a variety of value per customer).
Measures to decrease Churn rate / increase renewal rate:
Increase Customer Engagement. Customer Engagement can be used as a measure to predict future churns. It should be measured foremost regarding the use of key product features (e.g. Facebook: Uploading pictures). The identification of key product features should be based on the question which features provide the most value to customers. Measures of the use of key product features are company-specific.
Industry-Specific Target: Churn Rate < 12%
Free Cash Flow (FCF)
Definition: FCF is an indicator for the ability of a company to pay back credits.
FCF = Operative CF + Investitive CF
With initially high S&M costs and slowly incoming customer value, subscription based models generally face a problem with FCF on the start.
Special Thanks to BearingPoint