As SaaS companies scale, there are a variety of key metrics that are needed to fully understand organizational health and determine the best ways to optimize the business. The importance of these metrics change throughout the company lifecycle, as do the underlying processes that produce them.
Let’s first take a look at the key metrics that all top SaaS companies are tracking and their importance throughout the company growth lifecycle. Unlike a traditional software company that would be more focused on GAAP financial metrics, the following metrics combine financial and operational data to help better evaluate the health of a SaaS business. David Skok does a great job in writing about theses in his For Entrepreneurs Blog. This builds upon that by laying out the metrics by stage that companies need to focus upon.
Super Early Stage to Early Stage Companies
Companies in the formative Super Early Stage are looking for product/market fit, and are often less detailed in their financials. As firms move into Series A and early stage, they are looking for initial traction. The metrics for these companies to understand include:
- What is their Monthly Recurring Revenue (MRR) or their Annual Recurring Revenue (ARR)?
- What is it costing these companies to bring on new customers? Customer Acquisition Costs (CAC) will include all the Sales and Marketing costs required to close a deal.
Early Stage to Growth Stage Companies
As traction turns into expanded growth in Series C or D and Mezzanine rounds, the management teams are diving more into efficiency. The metrics companies at this stage need to understand include:
- What is the company’s Gross Margin?
- What is the ratio between their Customer Lifetime Value (CLTV) of revenues to the business compared to what it cost to acquire them?
- Who is staying with the company when it comes time to renew, and who is leaving via Churn? This can be tracked and managed on a customer count or a dollar amount such as ARR.
Growth Stage to Public Companies
For that magical moment of the IPO and beyond, new metrics emerge as companies face the public markets and need to give more visibility to the future. These companies need to understand:
- What are their deferred revenues and the earnings before interest, tax, depreciation, and amortization (EBITDA)? These are key measures of a company's operating performance.
- What are the overall company expenses and the year over year growth on the number of customers?
As you can hopefully see, in the SaaS world, it is critical to understand which metrics really matter and at what stage of company growth. There is an evolution of sophistication over time that matches the complexity and expansion that happen as companies find their way through crossing the chasm, into the bowling alley, and then through the tornado.
Be sure to check back for Part 2, where we’ll look at the financial process automation lifecycle that has emerged for SaaS companies.