August 1, 2019
As a Founder or operator of a SaaS business you have a number of questions on your mind. One of the biggest questions is most likely, “how does my business stack up to other businesses like mine?”. In other words, “am I out-performing, performing or under-performing compared to my peers and competition?”
These questions can be tough to really understand given how busy you are operating your own business. The good news is, you don’t need to boil the ocean when it comes to finding the key SaaS metrics to measure the performance of your business. Based on our experience at ASG, we’ve identified five standard SaaS metrics that can be used to evaluate the health of any SaaS business.
Put simply, net revenue retention and customer retention answer the question: are your customers — and their money — coming back month over month or year over year?
Net Revenue Retention (NRR) answers the question of what happens to your revenue if your company doesn’t gain another customer. This retention metric is one of the most important aspects of a healthy SaaS business.
Customer retention tells you how well you’re able to retain your customers from one period to the next.
At ASG, rates greater than or equal to 100% for revenue retention and 90% for customer retention are indicative of a healthy SaaS business.
Spoiler: it’s both. The Rule of 40 metric asks you to think about the tradeoff between revenue growth and profit margin (EBITDA) in your business. Conventional wisdom says if those two numbers add up to at least a score of 40, you have a healthy SaaS business. Let’s look at how to calculate the Rule of 40.
Revenue growth rate is the percentage at which revenue was added this year over last year.
When we talk about profit at ASG we typically refer to EBITDA. EBITDA is earnings before interest, tax, depreciation and amortization. It’s a way to measure profit without having to consider other factors such as financing costs, accounting practices, and taxes. Profit margin in this case is equivalent to EBITDA margin.
Employee Net Promoter Score (eNPS) is a metric used by employers to assess employee loyalty and satisfaction. At ASG, our philosophy is that culture leads strategy. Each quarter we send out an engagement survey that includes an eNPS question. We believe that if your employees are engaged and working well together, that energy will positively impact every part of your business.
What eNPS is NOT is a popularity contest. Sometimes as a leader you have to make tough choices that people don’t always like. eNPS may temporarily suffer. But the key is, as a leader, do people trust you even when they don’t fully understand why you are doing something? If the answer is “yes” then your eNPS will bounce back over time.
At ASG we consider 50 a strong eNPS score.
Keep in mind, eNPS is based on a single question and is not the whole picture when truly seeking to understand how engaged your employees are. Think about creating regular touch points throughout the year (both in person and through an employee engagement survey) to gather more specific and actionable feedback for how you can improve as an organization.
Customer NPS tells you how likely your customers are to recommend your product or service to a friend. Research indicates there is a high correlation between a company’s growth and its customer NPS. Happy customers usually mean strong customer retention as well as referrals for new business.
At ASG, we consider 50 a strong customer NPS score.
Research indicates that organizations with high eNPS and high customer NPS typically tend to perform at an above average level financially as well.
LTV to CAC helps you determine if you’re getting your money’s worth out of your sales and marketing investments. A lot of early stage businesses track average revenue per customer or account. With just a little more effort, you can can learn how to calculate LTV to CAC, a more useful metric that helps you answer questions like, “Should I hire more salespeople or put more money into digital marketing?”
In SaaS businesses, an LTV/CAC ratio of three or greater is generally considered attractive, and companies with an LTV/CAC ratio greater than five are considered to have particularly sticky, high-value customers.
Said simply, this “SaaS magic number” helps you determine how many dollars of ARR (annual recurring revenue) you create for every dollar spent on sales and marketing. This metric gives SaaS operators and investors a tangible metric on which to base plowback decisions, particularly in the go-to-market side of the business.
A ratio of 1.0 indicates that your sales and marketing investments will pay back in one year. It’s generally accepted that any ratio greater than 0.75 is a “green light” for further sales and marketing investment.
Now that you are aware of these five SaaS metrics that matter for your business, the next step is collecting the data to measure them. Many Founders we meet are running lean teams with very few resources dedicated to measuring the financial performance of their SaaS business. Spending the time and resources to get your hands around the data needed to calculate these metrics is worth it.
Once you start calculating these metrics, you’ll soon see real value from them. Armed with the data that matters most, you’ll feel more confident in making day-to-day decisions, correct quickly when you get off course, and make smarter choices about where to invest additional resources for future growth. In addition, you will know how you stack up against your peers and competition.