Measuring the health of early-stage Saas businesses might not be as straightforward as consumer tech businesses and can be varied depending on the type of problem you are solving. Also, no one metric can tell the whole story of the business today and it's potential tomorrow. Alice Besomi, VP Investments at Jungle Ventures, shares what investors look for in Saas businesses and the metrics which can best help answer those questions.
Metric: Monthly Recurring Revenue (MRR) & Growth
Your MRR, & how quickly it grows month to month or quarter to quarter, is the single clearest indicator of product-market fit. It provides an objective view of whether there is a genuine demand in the market for your idea.
MRR can of course be translated into ARR — Annual Recurring Revenue.
In reference to ARR we often talk about the ‘Triple Triple Double Double Double Rule’. Triple Triple Double Double Double is the rate at which your ARR must grow in order for your business to transition from $1million to $100million in about 5 years.
Metric: Churn Rate
The predictability of your revenue is really dependent on how long you can keep your customers active, so beware of the ‘leaky bucket’. To understand the sustainability of your growth it is crucial that you keep an eye on whether your customers are willing to pay for your product in the long term. If much of the money & energy you spend on new customer acquisition is making up for your loss of current customers that is certainly a cause for concern.
Remember that Churn should be looked at in 2 ways.
Firstly there is your Customer Churn, the rate at which you are losing business, & secondly there is Revenue Churn, the frequency of downgrades & level of lost revenue combined.
Looking at both of these will give you the greatest confidence in your projections.
Metric: Quick Ratio
The Quick Ratio, sometimes known as the ‘Acid Test Ratio,’ tells you how profitable your growth is.
Quick Ratio = New or Upgraded MRR / MRR lost
The higher the number the healthier your business.
The best SaaS companies in the world will be running at a Quick Ratio of over 4 so we always aim to help our early-stage founders hit this number.
Once you hit 4 the volatility of your business resulting from any churn is greatly reduced & you become a very attractive proposition for future investors.
Metrics: Lifetime Value (LTV) & Customer Acquisition Cost (CAC)
LTV indicates how much profit you will get from each customer before they stop using your product. Your CAC should be looked at on a blended level meaning you have to add up all the costs involved, from sales to marketing & beyond, before you can get an accurate picture of how hard your budget is working.
To shine a light on the current profitability of your business model you need to look at LTV & CAC in conjunction.
Divide your LTV by your CAC & if you are achieving a minimum of a 3:1 ratio then you are in a good place.
There are of course other metrics that add layers of understanding as to the profitability of your business. For example you might want to track your Magic Number, which tells you how many dollars of ARR you create for every dollar spent on Sales & Marketing, or your CAC Payback Period, which shines a light on the number of months it takes to earn back the money you invest in customer acquisition. Just remember, don’t go too far down the rabbit hole. It is easy to get lost in the numbers.
Metric: Gross Margin
The beauty of SaaS business is that they enjoy a fairly high gross margin of between 70–80% so it is simple to benchmark against some of the best performing companies. To determine your gross margin make sure that you are incorporating every direct cost including those related to hosting, data communication expenses like sms verification, customer service, credit card processing & embedded 3rd parties services.
Lastly don’t forget to look beyond the financials & get an understanding of whether your customer really loves what you do. Your Net Promoter Score (NPS) is a brilliant way to take the pulse of your customer & track whether you are building an army of advocates able to help you take your business to the next level.
When all of the above is overlaid against your Customer Cohort Analysis you will be able to focus on the most profitable customer segments & build a business that will stand the test of time.
Watch the full video here