The Software as a Service (SaaS) industry finds itself confronted by opposing forces. On one side is opportunity. The COVID-19 pandemic pushed companies to adopt technology like never before, especially cloud-based SaaS products that facilitate remote work. Digital transformation arrived sooner than expected. That’s great news for an SaaS industry likely to see a sustained surge in demand.
On the other side is competition. As SaaS has ascended to the top of the commercial and consumer software markets, it has attracted waves of new companies, products, and concepts. Capturing customers and market share has never been harder in such a crowded field. And given the trend mentioned above, competition is likely to get even more heated.
How do SaaS companies capture the opportunities of this moment while outmaneuvering the rest of the field? First and foremost, by obsessing over financial metrics. Some companies have a better product, team, or vision than others. But success ultimately comes down to dollars and cents, and that’s the standard by which SaaS companies must evaluate everything they do. Starting with these key financial performance indicators:
- Committed Monthly Recurring Revenue (CMRR) – Offering a better perspective on financial health than MMR alone, this metric takes the recurring portion of subscription revenues and factors in things like expected churn and scheduled upgrades or downgrades.
- CMRR Per Customer – Breaking down CMRR by customer provides valuable insight into the lifetime value of each customer.
- Annualized CMRR – Multiplying CMRR by 12 helps to forecast future revenues for the purposes of planning and budgeting or to help establish the company’s value.
- New CMRR – The amount of CMRR created since the end of the last reporting period, which can be tracked over time to indicate the company’s trajectory and velocity.
- Customer Churn – Tracking the rate at which customers cancel and leave informs the CMRR metric and helps anticipate future revenues. Changes in churn, especially increases, require immediate attention.
- Revenue Churn – Expressing churn in terms of revenue rather than customers gives context to the economic impact, making it explicit how much money has been lost when accounting for both larger and small customer contracts.
- Customer Renewal – Essentially the converse of the customer churn metric, tracking customer renewal rates speaks volumes about incoming revenues, the success of the sales team, the quality of the product, and more.
- Revenue Renewal – Any business built on subscriptions will want to know (and maximize) how much revenue they earn by convincing people to renew their subscriptions and continue paying for the software. It says something fundamental about their performance.
- Customer Acquisition Cost (CAC) – Comparing CAC, or how much the company spends on sales and marketing efforts, to metrics like CMRR and customer lifetime value generates valuable insights for revenue forecasting and process improvement.
- Payback in Months – Another way to think about CAC is to calculate how many months of revenue it takes to recoup the acquisition cost.
- New Customers – Given the cost and challenge of acquiring customers, the number of new customers signing contracts deserves unbroken focus. Each one is a win, and this metric trends closely with the health of the company overall.
- Avg New CMRR/Customer – SaaS companies learn important details about the customers they are attracting and the deals they are closing by investigating how much new CMRR each new customer accounts for.
One option is to pay financial analysts to track and report on these metrics on a set schedule. Another option is to monitor them in real-time and see updates automatically using Sage Intacct and the Digital Board Book: a dashboard filled with the above metrics (or others) that gives a self-explanatory snapshot of financial performance to stakeholders at the highest levels. It is designed to keep decision-makers focused on the metrics that matter, and keep those metrics updated and accurate without requiring input from the accounting team. It could not be more important – or more easy and accessible thanks to Sage Intacct.
See the Digital Board Book in action by scheduling a demo with RSM.