Today, software entrepreneurs are very fortunate to have a wealth of information available on the indicators and metrics to focus on when running a SaaS business. There is so much out there that it can be a bit overwhelming to absorb. With that in mind, I’ve put together a one page summary of the core areas every SaaS founder should focus on when first starting and running a SaaS business.
This is not meant to be an exhaustive list of every KPI but rather an 80/20 “boil-it-down-to-what-matters-most” view of the qualitative and quantitative indicators of the overall health of a SaaS business. This also doubles as a checklist when going out to raise an institutional round of capital (most VCs will ask for these metrics as part of their diligence process.)
The way to think about it is in 4 categories.
- (1) Qualitative: Indicators in this category, while not as quantitative as the rest on this list, are likely to be the most important for early stage companies. They include a sharp focus on the team and the founder(s). The product/ service itself and early customer feedback are likewise very important.
- (2) Market Metrics: Venture investors care a lot about the market in which a business is focused on (and entrepreneurs should as well to ensure they are solving a worthy problem!) Key metrics here include the overall TAM and growth (or stagnation/decline) of the industry. In addition the competitive landscape, both the number of competitors and share of each competitor, is key.
- (3) Financial Metrics: Metrics in this category tend to be a bit more objective – but even here much is dependent on the idiosyncrasies of a particular business, what stage it is in and the market opportunity ahead of it. Here, most financial metrics boil down to 3 things:
- Top-line revenue and growth: CMRR/CARR is the most accurate predictor here
- Margin profile: some combination of gross and operating margin
- Cash position:both burn rate and runway
- (4) Operating Metrics: Operating metrics tend to be a bit more unique in SaaS than in other business models. A good way to think about operating metrics is through three sub-categories:
- Customer willingness to pay: a combination of ACV, NPS, expansion revenue, etc. combined with the pricing model employed can help determine overall WTP
- Sales efficiency: magic number (developed by Scale Venture Partners) is a great metric as are payback period and sales cycle length
- Churn: gross revenue churn is closely tied to growth but cohort analysis and the quick ratio (developed by Social Capital) are also good metrics to track
As mentioned earlier, there is a wealth of information on all of 4 of these areas as well as best-in-class metrics based on revenue, stage, etc. Some of the best material out there for further reading includes: Byron Deeter’s State of the Cloud report, David Skok’s For Entrepreneurs blog and Jason Lemkin’s content on SaaStr.