We heard it through the grapevine: many SaaS businesses are hunted to increase their frequency in financial reporting and simultaneously to report on SaaS KPIs such as CMRR vs MRR (as mentioned in our previous partnered blog post for Newion).
A short recap of their financial impact: the answers lie in the gap of MRR and CMRR figures. While newly acquired customer contracts often are effectuated with some price adjustments resulting in a contracted subscription price (KPI:MRR) those subscriptions hereafter usually undergo up and -down sells and are up for renewal. Altogether providing quite some complexity when it comes to customer contract management, compliance, and most importantly data being spread out over different systems - your CRM, financial system, and SaaS service.
Innovation within SaaS is often achieved by streamlining processes for being scalable, to keep developing the SaaS offering and launching new features, and naturally to be sure to consistently stay top-of-mind of (potential) customers. To do so reviewing the revenue figures of your business retrospectively, therefore, isn’t solely bound to plain bookkeeping any longer. On the contrary: with suitable systems in place, it can be relatively easy to measure the success of product features being developed: especially how well they’re adopted after release. While being aware of the relevance of customer data, the upcoming trend of Revenue Operations (RevOps) – to measure business marketing success- is a clear example of that, let’s reverse this later.
From revenue data to true profitability in SaaS
The foundation of understanding the financial performance of your business naturally starts off with absolute correct SaaS KPIs and metrics and the availability of its data, albeit depending on the size of your business the financial function involves financial planning, analysis, and forecasting, too.
Besides cost analysis of production, sales, and marketing, in a SaaS company, financial management will not only consider improving the cost-efficiency of day-to-day business processes, but one will need to analyze financial and business data holistically.
While maturing as a SaaS organization be sure to monitor the success of the newly introduced products or even product features. The key here lies in a deeper analysis of data benefiting the overall company’s success. Contrarily, when substantially increasing the wallet share of your customers by extending product ranges, apparent successes could result in the cannibalism of other products, and vice versa.
For this reason, to excel in a more mature SaaS business, it’s not only relevant to measure business performance solely from a revenue perspective but also to take a close look at product offerings in relation to those revenue figures in the long run.
Where are you in your data journey?
At their core - customer data typically beholds endless insights for basically any business. The rising trend of Revenue Operations (RevOps) – to measure demand generation impacts related to revenue, is a clear example of how customer and subscription revenue data can be utilized more effectively. As a result, analysis of customer revenue data beholds learnings for value creation in retrospect.
A common obstacle in data availability, however, is that CRM data is often limited when it comes to the configuration of pricing structures. Just the tip of the iceberg: another common pitfall of the CRM as the sole system for revenue dataflow congests converting created quotes to orders for invoicing seamlessly. Therefore, integrating product data into customer accounts and vice versa is an improvement point and still a step to take for many SaaS organizations. Why is it relevant? Synching specifically quote2order and invoicing data means to gain improved financial reporting capabilities internally to act on, and vice versa.
Defining SaaS pricing
While expanding to new markets – we repeatedly emphasize value propositions conform to markets or segments. At this stage, the topic of adapting pricing models to currency and to market value arises as well.
Though pricing is an important aspect when it comes to commercial operations and profitability, it is more often than not an overlooked topic. Especially product-led SaaS businesses however need to market a pricing model that is easily understood and communicated. At the same time, many businesses are currently evaluating the method of usage-based pricing. In the process of setting new price models, businesses (or, leaders) need to consider the value of the SaaS solution perceived by customers. Besides: which pricing comes into play for contracts from legacy offerings, and how has the SaaS service changed over time?
In general, it is advisable to separate one-off fees (such as onboarding fees) from monthly recurring fees if this makes sense for your business. On top of that, within the industry, many businesses opt for price models that include various price drivers. To illustrate: consisting of a platform fee, integrations, and usage for instance.
Financial reporting for internal purposes
Especially in the ‘advanced B2B’ space, businesses deal regularly with CMRR indications (which can be a new customer, expansion, contraction, or churn) and MRR (contracted value supposing renewal and ongoing value without any change). These KPIs increase the awareness of SaaS contracted revenue – the same goes for ACV and ARR figures. Negotiated contracts apparently include a variety of different billing terms and discounted months when driving growth through direct sales channels (CMRR).
They are dealing with monthly or yearly recurring revenue, and with contract renewals, being it is accounted for automatically or not. Although Cash is king and it can be interesting to look at how revenue is recognized in the financial backend accordingly, there are a few other aspects that business leaders benefit from by considering this very nature of their recurring business and its customer contracts.
Business functions: the why of SaaS KPIs and metrics (on repeat!)
Ultimately, some highlights of lessons learned from SaaS businesses’ exponential growth: a behind-the-scenes overview of the most common SaaS KPIs and metrics.
Finance: To understand business growth, one of the most valuable SaaS KPIs out there to measure is ACV (Annual Contract Value): both the average number as well as the % growth rate of ACV. Hence, the annual contract value indication of customer contracts provides the legwork for bridging and tracking ACV to revenue, to cash flow. The basis for financial operations within SaaS/XaaS.
Market: Churn figures (originally derived from the B2C space): practically to make sure that our business provides world-class customer value of service delivery and product. However, when there is a low churn but - at the same time - zero upsell regarding customer contracts, there is a strong indicator that there are missed opportunities to further expand customer contracts. It is also a positive indicator that the key target market must be sufficiently big to go into ‘hyper scaling’ mode.
Acquisition: Customer Acquisition Cost (CAC) is calculated by the accumulated costs of sales and marketing staff (including promotions, and infrastructures) in relation to the new ARR. CAC needs to be higher than 1 to indicate a good product-market fit and not to lose revenue when acquiring new customers. On the contrary, more investment in these forces is a necessity when the CAC temperature is, for instance, close to 5.
Customer Success: SaaS businesses suffer when there’s a disparity between CMRR and MRR figures. Not only revenue-wise but (heavily) discounted deals also result in difficulty around elevating value once again when the time comes for contract renewal. CMRR and MRR prove to be effective KPIs for communication across Sales and Customer Success teams. Viewing the same measurements, although with different aspirations.
Operations: Benefits and operational gains around SaaS KPIs, lie around having easy-to- access insights and to accomplish one single source of truth (SsoT) of recurring contracts and revenue data. Therefore: synching customer data, quote, invoices, and revenue recognized with the priced products (achieving SsoT – single source of truth), but its benefit also stands for enabling iterating pricing or billing terms on an order level for instance. To have a SsoT also allows for experimenting with pricing strategies without obstacles of feasibility in the back office, at the same time enable better estimations and forecasting.
Product: Finally, common SaaS KPIs - while capturing costs and expansion, highlight on the product level the traction of newly released features and propositions. Tying it all together: insights from SaaS KPIs connect the dots between the financial data of - invoiced- subscriptions, and the revenue streams deriving from the different product (features) for your business.
Where are you on your growth journey?
Many SaaS businesses aspire to retrieve subscription metrics out of the box and to achieve growth utilizing best practices of financial management from a revenue perspective.
Ready for a further dive into commonly used subscription metrics? Our key guide to B2B SaaS Subscription Metrics elaborates on subscription metrics, role of subscription management for KPIs, and their impact on profitability in the B2B world.