Throughout every industry, it is essential to track the health and growth of your business. For most, this means using a standard set of Generally Accepted Accounting Principles (GAAP) to assess your numbers year over year and compare businesses across the board. For the SaaS Industry, though, tracking growth rates is not so simple.
Because Software-as-a-Service is still a relatively new industry, a standard set of principles to measure growth has not yet been adopted across the board. Therefore, it is up to each b2b SaaS company to decide what metrics are the most appropriate and fitting to the business to track for analysis. For instance, growth rates and benchmarks for a $3 million business and a $20 million business vary greatly.
At RevTek Capital, we desire our SaaS startup partnerships to get a strong start in the early stages of measuring growth to thrive. Below is a basic guide to the most commonly measured SaaS benchmarks in metrics.
Before beginning to track any numbers, every SaaS business needs to narrow down the number of Key Performance Indicators used as benchmark metrics. Of course, many metrics will be tracked for each department of your company. Still, the number of metrics used to track your company’s official overall growth and health should be less than 10.
Depending on your business area, these metrics may vary. Still, overall each benchmark should be selected based on Clarity, Comprehension, and Comparability. Your SaaS business should identify exactly which metrics are to be used as benchmarks for growth and define them specifically. These benchmarks should be easily comprehended by those doing the analysis and those who will assess your risk in investment for VC. Each benchmark should also work as a metric that can be used to track your comparability to other public companies or private SaaS companies.
Keeping these 3 in mind, below are the most commonly used areas of SaaS Metrics Benchmarks.
This is the number one metric tracked to assess the growth of any SaaS company. Your area of business will determine the specific method for how to track revenue growth. For instance, Annual Recurring Revenue (ARR) is typically used for companies that implement yearly billed contracts. Monthly Recurring Revenue (MRR) is commonly used for companies that have varying amounts and billing schedules. The GAAP Reportable Revenue is less widely used but remains an option for assessing exact numbers. This metric reveals specifically how much monetary value your company has gained or lost.
Efficiency metrics are used when tracking numbers of dollars spent versus received. These metrics are tracked explicitly through understanding how much value is created per dollar spent. This includes tracking how much is spent in sales and marketing dollars per customer or per month. Tracking customer analytics to assess where customers are coming from or numbers such as the Customer Lifetime Value (CLV) gives insight into where sales dollars are well spent vs. where dollars may be wasted. To increase your gross margin, it is efficiency metrics that show the investment areas that bring the most return of revenue to your company.
Churn refers to the number of customers lost in a certain period. Therefore, tracking customer churn gives insight into the value of your product. For instance, every SaaS business expects to see churn around 5-7%. Therefore if your numbers are higher than this, something in your sales strategies or products offered needs to be reviewed to boost your retention rate and customer success. Using a cohort analysis to follow a customer’s actions will give insights into how to tweak up-sell options in your business to reduce churn. This metric allows you to assess the value of what you offer and develop strategies to keep customers coming back.
Creating benchmarks and tracking metrics of how much capital your company receives and where those dollars are used is a vital piece to creating a thriving SaaS business. Keeping track of where cash comes from, what projects it funds, and how that influx creates growth allows you to assess your company’s overall health and helps secure more capital later.
At RevTek Capital, we make an effort to build on partnerships by extending capital to current partnerships with proven records of growth and smart strategies for capital budgeting. In this way, we succeed when you succeed, and the cycle continues.
If you need advice in designing your SaaS metrics benchmarks or are ready to increase your cash flow to grow your business, please contact our team at (480) 332-0399 to see how RevTek Capital can partner with you.