SaaS Entrepreneur

EXCERPT FROM CHAPTER FIVE

SaaS Entrepreneur: The Definitive Guide
to Succeeding in Your Cloud Application Business

SaaS Business Metrics

A variety of different metrics have been developed to assist SaaS companies in tracking and measuring their financial progress and performance. Some of these numbers, such as optimal churn rates, trial and freemium conversion rates, sales close rates and others are covered in different chapters of SaaS Entrepreneur. To assist you even further in this area of your business, a spreadsheet created by SCIO Development as part of our ongoing Softletter SaaS Survey project is provided on the SaaS Entrepreneur Virtual DVD that you will download after purchasing this book. The spreadsheet will enable you to plug in your own numbers and model your metrics in a large variety of ways. The spreadsheet comes in both a populated and blank version and can be edited to fit your needs.

Common SaaS Operational Metrics

Average Revenue per User (ARPU). This metric is valuable in business models where customers subscribe to different application levels, modules or service levels. When multiple income streams are generated, it can be useful to track these income sources separately and use that data to determine what types of subscribers contribute the most revenue.

Cost of Service (CoS) or Cost to Maintain (CtM). The cost of services and operations to maintain the application and client instances. This can include hosting charges, hardware and software renewals (though we think these should be broken out of this metric and tracked in their own ‘bucket’), support, staff operations, and outside services—all of which are operations costs. The running change calculated in the spreadsheet is a key indicator because it can offer insight into trends you might not see otherwise.

In the 10-K section of this chapter note the general and administrative percentages (G&A) and research and development (R&D) percentages for SaaS companies; these provide more insights into cost of services numbers. Also note the information on what percentage of revenues SaaS firms dedicate to running and maintaining their infrastructure provided later in this chapter.

Average Customer Acquisition Cost (ACAC) or Average Cost to Acquire (AtC). This is a ‘front-loaded’ cost because you normally must spend money on sales and marketing programs before you generate revenue. In SaaS sales, it is hard to know the ‘lead-time’ from the first moment a prospect comes in contact with your company through to closing the sale (metrics on this topic are provided in the Sales chapter of the book). Only in the case of metered marketing campaigns that include promotional tracking can you begin to analyze your sales. In the spreadsheet example, we have taken the simplistic approach of counting the previous period sales and marketing costs as the contributing factor for the sales in the following period. You can modify this to set a period that better reflects your sales model, but until you actually know the cycle, this is a good starting point on which to model your assumptions.

This metric also points out another factor: most business-to-business sales models for SaaS include different subscription periods so you cannot assume a uniform renewal rate. Subscribers may be renewing on a monthly, quarterly, yearly or multi-year basis. In those cases, a separate report that tracks renewal period choices made by different market segments will be very valuable. These reports can answer questions such as, ‘Are larger enterprises actually subscribing at the longer subscription lengths?’ ‘Is this an SMB market with subscribers picking monthly and quarterly subscription lengths?’


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