I often talk about B2B SaaS metrics from the perspective of what investors want.
If you don’t have easy access to the metrics they expect (or, worse, if they’re wrong), your valuation could suffer, and that’s the last thing SaaS founders, CEOs and CFOs want to hear.
But on occasion, I’ll hear prospects say they don’t need SaaS metrics because they’re not raising capital yet. That’s when I realized we need to talk more about the value metrics and analytics brings to operating your business and making data-driven decisions.
You need SaaS metrics to manage and grow your business, to make well-informed decisions for your future and to find leaks in your business before losing significant streams of revenue.
Instead of looking at metrics as just a requirement for raising capital, here are a few of the many reasons why I think every SaaS CEO, CFO and founder should have on-demand access to accurate SaaS metrics.
1. SaaS Metrics Give You Insights You Can’t Get from Recognized Revenue
Recognized revenue is the revenue you’ve earned from a contract at a given point in time based on what you’ve delivered of your product/service. It’s the core of accrual accounting and necessary to be GAAP compliant.
However, it’s not great for business insights.
Based on your agreement with your customer or revenue recognition policies, you could start a $120K contract in the middle of January, which means you’d be recognizing $5K for January, not $10K.
If you were to report your income for January based on recognized revenue, you will be under-reporting recurring revenue by a good bit.
That’s why SaaS businesses use metrics like monthly recurring revenue (MRR) and annual recurring revenue (ARR). They’re not GAAP compliant, but that’s ok. These metrics are indicators of the momentum and velocity of your business.
Essentially, MRR and ARR strip away the fluctuations that can keep you from seeing the full picture of your business’ health.
Variations of ARR/MRRthat provide even more useful insights:
- New ARR/MRR – new sales to new customers.
- Expansion ARR/MRR – existing customers who expanded their subscriptions or licensed additional products or modules.
- Contracted ARR/MRR – existing customers who downgraded their subscription.
- Canceled ARR/MRR – existing customers who canceled their subscription.
Can you imagine trying to calculate the compounding effects of new business, upgrades, downgrades and cancelations every month based on recurring revenue? You won’t. Metrics fill that gap.
2. SaaS Metrics on Customer Success Keep You From Reacting Slowly
In the age of subscription businesses, happy customers aren’t just vital, you simply won’t succeed without retaining customers long-term. That’s why customer success metrics are required by investors, but you should also use them, too, to build your business.
Churn is a metric CEOs, CFOs and customer success executives will spend a lot of time analyzing, particularly net revenue churn and gross revenue churn. You can’t calculate either of those without accurate churn, contracted MRR, expansion MRR and MRR at the start of the period.
Expansion and Upsell Revenue Metrics
Expansion and upsell revenue metrics are good indicators of whether your customers are receiving value from your product and increasing their use of it. When expansion revenue outpaces lost revenue from existing customers, you’ll reach net negative churn (or net effective retention). It’s what we like to call the holy grail of SaaS because your new and expansion revenue is larger than your lost and contracted revenue.
And then there’s cohort analysis. Although not a metric, per se, cohort analysis is when you group customers by product, vertical, sales channel, deal size, etc. to uncover trends in specific groups.
For example, if a large number of your SMB customers are churning in the first or second month, you may need to address your onboarding process or reconsider other key factors that affect this segment. Emerging B2B SaaS companies typically have customers that vary in size, so cohort analysis by company size and churn can highlight problem areas.
Track the Health of Your Customers
Churn, expansion/upsell revenue and cohort analyses are key to understanding how well you’re doing at taking care of your customers and meeting their expectations and needs. When you see a spike in churn, take immediate action and you’ll have a much smaller fire on your hands than if you’re unaware of it for months.