What are SaaS companies?
SaaS companies (Software as a Service) are companies that sell Software as a service over the Internet and receive payments according to the time the customer uses the Software. This model makes it much easier to use, as the customer does not need to install, maintain and update software and hardware.
In addition to this difference in use by the user, Startups SaaS have some peculiarities in relation to traditional companies when it comes to revenue generation. Traditional metrics are insufficient to understand the financial health of SaaS companies.
In this post, we'll talk about each of the steps in the sales funnel and relate them to each of the most important result metrics for SaaS companies. Let's answer the following points:
Why SaaS companies are different from traditional companies in revenue generation?
SaaS startups are different from traditional companies in that the revenue generated by the customer is directly related to how long the customer stays. If one customer only stays for 1 month and the other stays for 12 months, the second brought in much higher revenue than the first. This time is extremely relevant because to acquire a customer investments are made in marketing and sales (Customer Acquisition Cost), so if the customer does not stay long enough to pay this cost, the company actually had a loss with it.
In the image above, we have an example of the cash flow of a SaaS company that spends an average of BRL 6,000 to acquire a customer and that receives a monthly amount of BRL 500. Note that the company started to make a profit with this customer only from the 14th month onwards, if the company had not stayed with this client for 14 months, it would have had a loss. Therefore, there are three major challenges in generating revenue for SaaS companies:
Customer generation: The greater the volume of customers, the greater the revenue;
Customer maintenance: The longer the customer's lifetime (lifetime), the greater the revenue;
Customer monetization: The higher the average ticket per customer, the higher the revenue.
What are the stages of the sales funnel and its objectives?
In order to be successful in the results in the three challenges mentioned, it is essential to have clear each of the stages of the sales funnel. It is by improving each of the conversions between the stages that we can achieve greater results:
Attraction: It aims to attract people to the site so that they become visitors.
Conversion: It seeks to convert the visitor into a lead by offering some free material such as Ebooks, Audios, Courses and Tools. Landing Pages are used for the user to enter their email address in exchange for the material.
Relationship: After obtaining the email, a relationship with the lead is developed by sending marketing emails and email automations. The goal here is to help the lead understand if he has a problem and if your solution is best for him. The moment the Lead indicates that it is interested in the product or service offered by the company, it becomes an opportunity. Generally, the lead signals this by asking to speak to sales for more information.
Sales: After becoming an opportunity, the main objective is to close the sale.
Retention: As we mentioned before, retaining the customer is essential in order to bring the greatest possible value to the company, or at least pay the investment used to acquire it.
What metrics are related to each step in the sales funnel and how to calculate them?
Now that we know what the funnel steps and their goals are, we can relate the key funnel and SaaS metrics to each of the steps:
This volume of metrics might be a little scary at first, but we'll see that they're simpler than they seem and that they're of great value for evaluating results. We've separated the main metrics into 5 groups:
1) Revenue Metrics
MRR (Monthly Recurring Revenue): Monthly revenue received based on the volume of current customers and average customer ticket.
MRR = Total clients x Average monthly price
Expanded MRR: Monthly revenue obtained through the sale of other products (cross sell), sale of superior plans (upsell), accessories (add-ons) or greater availability of use (volume) for current customers.
Expanded MRR = Total clients that expanded x Average monthly average ticket increase amount
Cancelled MRR: Monthly revenue lost due to customer cancellations.
Cancelled MRR = Total customers who canceled the plan x Average ticket of cancellations
NMRR (New Monthly Recurring Revenue): New monthly revenue obtained through sales in the period.
NMRR = Total new customers x Average price for new sales
Net NMRR: It is the effective new revenue, considering the revenue from new, expanded and canceled customers.
Net NMRR = NMRR + Expanded NMRR - Cancelled NMRR
ARR (Annual Recurring Revenue): Annual revenue received based on the volume of current customers and average customer ticket.
ARR = MRR x 12
ARPA (Average Revenue per Account): Average monthly revenue per account.
ARPA = MRR / Accounts
ARPU (Average Revenue per User): Average monthly revenue per user.
ARPU = MRR / Users
2) Churn Metrics
Logo Churn: Proportion of customers who canceled (in volume).
Logo Churn = Volume of lost customers in the period / Total customers at the end of the previous period
MRR Churn: Proportion of customers who canceled (in value).
MRR Churn = Recurring monthly revenue from lost customers / Recurring monthly revenue from all customers at the end of the previous period
Client Lifecycle: Customer lifecycle, average time that people remain as customers.
Client Lifecycle = 1 / Logo Churn
OU
Client Lifecycle = 1 / MRR Churn
LTV: It means Lifetime Value, it is the total value that a person brings to the company during the entire period as a customer.
LTV = ARPA X Gross Margin X Client Lifecycle
CAC: It stands for Customer Acquisition Cost, that is, the average cost to acquire a customer in a given period.
CAC = Marketing and Sales Expenses / New Accounts
4) Satisfaction Metric
NPS (Net Promoter Score): Measures customer loyalty. Customers answer the probability of recommending a product or service to a friend or colleague, giving a score from 0 (unlikely) to 10 (very likely). From 0 to 6 are considered detractors, 7 or 8 neutral and 9 or 10 promoters.
NPS = % Promoters - % Detractors
5) Conversion Metrics
CTR (Click through rate): Click through rate of publications, advertisements or links viewed in search engines. It can be used for any step of the funnel that expects some click from the user.
CTR = Total Clicks / Total Views
Visit conversion rate: Conversion rate in the stage where people send their email in exchange for access to some course, tool and ebook, for example.
Visit conversion rate = Volume of Leads / Volume of Visits
Leads conversion rate: Conversion rate at the stage where the customer signals that they are interested in the product or service and becomes an opportunity. One action that can signal this is the request to speak with the sales team.
Leads conversion rate = Volume of Opportunities / Volume of Leads
Opportunities conversion rate: Converting opportunities to sales.
Opportunities conversion rate = Volume of Sales / Volume of Opportunities
How to know if the SaaS company is financially healthy?
In order to have greater clarity on the financial health of SaaS companies, we can use the following parameters: LTV must be 3x greater than CAC and CAC must be recovered within 12 months:
For well-established SaaS companies, The Rule of 40% can also go a long way in balancing growth and profitability. The rule establishes that the sum of the company's growth in revenue and profitability must be greater than 40%:
For early stage companies a good growth parameter that can be used is the T2D3 model. Term that became popular after the publication of the article The SaaS Adventure, written by Neeraj Agrawal.
Sources: Salesforce, Forentrepreneurs