If you sat down with an investor today, do you know what kind of metrics and KPIs they would require to gauge the health and potential of your SaaS business? Seeing things from an investor’s perspective might change which metrics you choose to track each month — or it might even change how you run your business.
A Startup Investor’s Perspective
Fulcrum Equity Partners, a growth equity firm focused on providing expansion capital, operating expertise and relationships to rapidly growing companies, has been investing in SaaS businesses as far back as the early 2000s when they were called ASPs. We recently spoke with Chad Hooker, a senior associate with the firm, to get his thoughts on the KPIs metrics that can move the needle on securing capital and indicate that a SaaS company is a good investment.
The metrics important for SaaS success can be broken down into three main categories: revenue growth performance, momentum and velocity, and customer success. Let’s break those down.
SaaS Business Revenue Growth Performance
Revenue growth performance metrics provide visibility into the health of your business and its potential for growth. This includes Monthly Recurring Revenue, Average Contract Value, Customer Acquisition Costs and Customer Lifetime Value.
- Monthly Recurring Revenue (MRR): MRR is the value of the contracted recurring revenue components of your term subscriptions normalized to a one-month or annual period. According to Hooker, MRR is the best leading indicator of overall business performance. “Quarter-over-quarter bookings growth gives us valuable insight into the momentum and velocity of your business and its potential for growth.”
- Average Contract Value (ACV): ACV is a measure of the average revenue generated per customer and is usually calculated on an annual basis. A growing or contracting ACV is a good indicator of the value you’re providing to customers. It’s also critical for your sales and marketing because it provides visibility into how many leads and opportunities are needed to achieve your goals.Tracking ACV over time is valuable for understanding evolving customer behaviors. “It helps drive decision making for your product roadmap and sales, marketing, customer success and retention strategies,” said Hooker. “It’s also useful in measuring the success of land-and-expand growth strategies, upsell initiatives and your ability to deliver more and more value to customers.”
- Customer Acquisition Costs (CAC), Customer Lifetime Value (CLV) and CAC Payback: CAC, CLV and CAC payback impact how you allocate sales and marketing spend and are valuable in understanding how much your company is making from each new customer and how long it takes to surpass the money you spent to acquire that customer.“CAC, CLV and CAC payback indicate sales and marketing performance and help us understand the efficiency of a company’s growth model,” Hooker shared. “We spend a significant amount of time analyzing the scalability of a sales and marketing organization and these metrics are great validations that additional investment in sales and marketing activities will drive value creation.”
Forecasting SaaS Business Performance
Momentum and velocity metrics help predict future performance and build more accurate forecasts.
- Lead Generation: Consistently generating marketing qualified leads (MQLs) and sales qualified leads (SQLs) is essential for growth. A true marketing “mix” will have a variety of different methods for acquiring new leads. Tracking which methods and demand generation activities are producing the best results is important so you can continually weed out and replace programs that aren’t working.
- Pipeline Conversion: Once you’re generating leads, you’ll need to convert them into customers. A strong sales and marketing technology stack, sales process and content generation engine to engage and nurture buyers at every step are critical for pipeline conversion.Accelerating rapid growth in a SaaS business involves lead generation, CRM, marketing automation and a strong understanding of conversion metrics. “An infrastructure to produce and track your pipeline of prospects and a history of converting those prospects into customers is critically important in raising capital,” said Hooker. “We look for businesses that truly understand their sales and marketing funnel with strong lead generation and pipeline conversion rates that provide visibility, comfort and high predictability of future revenue growth.”
SaaS Business Customer Success
For SaaS businesses, establishing positive customer relationships is especially vital. From onboarding and implementation to adoption and support, every touch point can impact whether or not you retain that customer over time. Measuring and setting goals around churn and retention, expansion revenue and cohort analysis will help you track the health of your customer base and thus, grow your business.
- Churn: Churn can happen for a multitude of reasons, but as one of the most important indicators of the health of your business, you need to understand what’s causing it. As your company expands and the size of your subscription base grows, revenue lost to churn can also grow, requiring more bookings from new customers to replace what was lost.“We pay very close attention to churn because customer retention is at least 95 percent of SaaS business revenue,” said Hooker. “In a SaaS business, everything is amortized over two- to three-year contracts, so high retention and strong renewal rates are key value drivers and crucial to increasing CLV.”
- Expansion Revenue: Generating revenue from existing customers is a good indicator of whether they’re receiving value and expanding their use of your product. Expansion revenue includes customers who upgrade to a more robust plan or those who pay for additional users or features.“It takes significantly more time and resources to acquire and onboard a new customer than it does to retain and upsell existing ones,” said Hooker. “We look closely at expansion and upsell revenue metrics and ascribe high value to businesses that can grow organically by expanding existing customer relationships.”
- Cohort Analysis: Grouping customers by product, vertical, sales channel, deal size, etc. is known as cohort analysis and helps uncover trends in specific customer groups. For example, if a large number of customers are churning in the first or second month, you may need to address your onboarding process. Customers of emerging SaaS companies typically vary in size, so cohort analysis by deal size can highlight which “group” has the lowest churn rates.“Customers have different needs and understanding these needs across cohorts can help improve customer relationships, go-to-market messaging, predict upsell/expansion opportunities and combat churn,” Hooker shared. “Customer behavior across various cohorts gives us valuable insight into how different customer segments are interacting with your product, sales and marketing teams.”
While VCs and private equity professionals don’t expect CEOs of early-stage companies to be CFOs, they do expect financial data that provides insight into your company’s past performance, present standing and future plans. Taking a step toward sound financial operations early on will ensure that you can easily and confidently show VCs and private equity professionals why your business is a valuable investment.
While these metrics might not be as important in the early stages, they will be important as your business grows from early stage to emerging to growth stage (seed, series A, series B+). By measuring and collecting them at an early stage, you’ll benefit from having historical data to track your progress and as you grow, use these metrics to drive decisions and help scale the business. And eventually, you’ll also be able to deliver those metrics investors will want to see.