For you, what are the metrics for a SaaS company that work the most? Some people think of basic concepts such as recurring monthly income, abandonment rate or conversion.
Today we will discuss five fundamentals that can be applied to any SaaS business, let’s start by focusing only on the growth of a SaaS company instead of efficiency. In doing this, there are really only two fundamental values that we need to know.
The first is the amount of accounts; the second is recurring income. Together, these figures tell us how many customers we have and how much they pay us recurrently.
These two pieces of information are the fundamental components we need to understand how a growth-oriented company is performing.
This type of metrics for a SaaS company are fundamental.
The number of accounts is simple: It is the number of customers you have: the sum of the existing accounts and the accounts earned, minus the cancellations.
Recurring revenue is money generated regularly by customers who receive the service. Usually, it is reported as recurring monthly income (MRR) or annual recurring income (ARR). The SaaS or the startup community uses the term MRR while the financial world leans toward ARR, which may be easier to associate with annual revenue figures.
There are only four things that can happen to your recurring income: you get a new recurring monthly income from completely new accounts; Existing accounts are improved and pay you a higher recurring monthly income; they hire a lower plan and pay you less; or cancel them completely.
Both basic components, accounts and recurring income, can be observed over time (for example, we opened 10 new accounts today, but we lost 2, therefore we have a total increase of eight), or in its entirety, for example, ” We have a total of 5,000 accounts as of today. ”
Now that these two basic values are being monitored, we can begin to understand how the business is growing.
Learn about the importance of the visibility of financial metrics.
Three metrics for a SaaS company
We have identified three metrics for a SaaS company that are crucial to understanding what is happening with recurring accounts and revenues:
Recurring income growth rate. Dropout rate for the number of accounts and recurring income. Net retention of recurring resources.
Recurring income growth rate
Measure the speed, taking the net increase in the amount of money we receive from the subscriptions each month / year (New – Improvements – Lower category – Cancellations) and dividing it by your total recurring income at the beginning of the month or year.
This tells us how fast we are growing and what kind of growth curve we are on.
The bigger you get, the harder it is to grow (doubling $ 50K in recurring monthly income is very different from doubling $ 500K).
It is estimated that the growth rate of a company’s recurring revenue should be as follows during its first five years of operation.
Example: Monthly recurring revenue growth of 6.5% or annual recurring revenue growth of 110%
Why are the clients leaving? The abandonment rate is the speed at which you lose customers. A subscription service can lose customers very easily, and it can be bad news if you lose a small number of clients on a regular basis. With a monthly rate of account abandonment of 4%, you have lost half of your business in one year.
This is one of those metrics for a SaaS company that will reach you as your base grows and, in the worst case scenario, may mean that you are losing more customers than you are able to acquire.
The abandonment rate must be calculated for both accounts and recurring income. By the way, the dropout rate can also be called the withholding rate, which is simply how many customers you withheld versus how many you lost.
Example: Abandonment of monthly accounts of 2.4% or abandonment of annual accounts of 14.7%
Example: Monthly withdrawal of 1.9% recurring revenue or annual abandonment of recurring revenues of 9.2%
Net withholding of recurring income
Another metric for a SaaS company is the net retention of recurring income (generally called net income withholding or withholding of income in dollars). It’s a bit more complex, but basically it’s a way to measure if your base income is growing.
Again, we measure it over a period of time, a month or a year, and it is the total change in the recurring income of your current customers with the improvements, declines and cancellations contemplated.
The best companies have a model where existing customer improvements exceed category declines and cancellations. Do that, and growth will be much easier.
Example: monthly net income withholding of 100.5% or net annual income withholding of 130%.
The SaaS model is relatively new, so it is understandable that many people do not easily understand how it works.
A SaaS business is not a clothing store that sells you a blouse and will probably never see you again; It’s more like a magazine that sells you a subscription that you can renew. The important thing in this type of companies is to retain customers and make the user base. And the metrics for a SaaS company help monitor performance.
Also published on Medium.