Put Your SaaS Business in an Investor’s Top-Right Corner.
It’s been almost five years since Marc Andreessen coined the term “software is eating the world” and the phrase is almost truer today. The number of SaaS companies continues to skyrocket, bringing more businesses into the market and making the sector more competitive when it comes to securing investment.
One way to stand out from the crowd is to have a clear and thorough understanding of your SaaS metrics. Measuring and analyzing this data will not only allow you to make smart and informed decisions, but also enables you to showcase your business to potential investors.
While every investor has their own set of criteria when it comes to making a decision, there are standard metrics for every business model.
An e-commerce site will need metrics like average order value, while an agency may track a contract’s length. For SaaS companies, there’s a sea of metrics to consider — monthly recurring revenue, engagement, lifetime value, churn, gross profits and more.
Here are the SaaS metrics we think you should pay attention to.
1. Monthly Recurring Revenue
For a SaaS business, there’s a lot of upfront investment. Not only do you need to build your product and spend money on acquiring customers, your customers don’t pay you immediately like a normal business.
Instead, you’ll be collecting monthly subscriptions at much smaller amounts. This is a win-lose situation for a lot of SaaS startups, because in the long run, you’ll have a steady cash flow, but will need to survive long enough to make it that far.That’s why we recommend tracking Monthly Recurring Revenue (MRR). The general concept is that MRR is a measure of the predictable and recurring revenue components of your subscription business.
You’ll need to dive deep into your finances to pull this number, but it’s the most important number you should be tracking and will be paid attention to by potential investors.
SaaS churn is the percentage rate at which SaaS customers cancel their recurring revenue subscriptions.
Churn is a key metric of historical SaaS business performance and an important parameter in revenue forecasting. When used in forecasting, churn can be interpreted as the probability rate at which customers will cancel their subscriptions.
Churn is in direct opposition to growth; the primary objective of most SaaS businesses. As the limiting factor to growth, the churn rate has a very negative impact on both SaaS profitability and SaaS company valuation.
Moreover, churn increases with the size of the customer base, so it is essentially negative virality, and as such is difficult to overcome and difficult to avoid in an investment meeting.
3. Customer Lifetime Value
Customer Lifetime Value (CLV) is a prediction of the value a business will derive from a customer. Since it’s impossible to know how long each relationship will be, most companies will make an estimate and state CLV as a periodic value, like “this customer’s 24-month CLV is $x.”
Showcasing your CLV will tell investors that you have a deep knowledge of your customer base and prove to them that you understand not all customers are equal. This is also a great opportunity for you to indicate your retention strategy for high-value customers.
4. Cost Per Acquisition
Any good investor will want to know your cost per acquisition — a metric that shows how much money you’re spending on acquiring customers.
The most common question SaaS companies ask regarding CPA is what makes a good CPA? How much should be spent on getting a new client? The answer, of course, is that it varies — it comes down to what your average revenue is per customer.
There’s plenty of ways to determine your CPA, but a good starting place is by adding up the amount of money spent on marketing and sales, then divide that figure by the number of customers acquired over a certain period.
5. Leadership Team
Even though it’s not a metric, a company’s leadership team is its sine qua non. Whether or not you're in the SaaS market or raising a Seed or Series A round, every investor will want the pulse of a company’s leadership team.
Many investors consider this an integral part of making an investment.
It’s a known fact that PR agencies get media by creating bold and compelling press release headlines. In order to get investors for your SaaS business, you’ll need to do the same.
Knowing your SaaS metrics and having the ability to show how these are trending over time, will allow you to craft some big data-based headlines for your business and get noticed amongst a sea of startups.