In 2011, Marc Andreessen famously wrote “Software is eating the world.” in his essays published on WSJ. Fast forward a decade, it still holds true. In fact, among the magic seven companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta), four of them are software companies.
The beauty of B2B SaaS
The beauty of B2B SaaS, for both builders and investors, lies in its simplicity. The business model is straightforward as well as the performance metrics. Software lives in the virtual world so it removes the real-world supply chain from the formula which is often complex and difficult to navigate for any business involving physical goods.
What this means is that B2B SaaS could scale up pretty quickly. Focus on the right metrics to fine tune and improve, you could be on your way to accelerated growth.
Key SaaS Metrics
I tend to divide the B2B SaaS Metrics in four categories: Growth Metrics, Retention Metrics, Efficiency Metrics and Profitability Metrics. Let’s dive in.
Growth Metrics
Growth metrics evaluate and track the growth and expansion of a B2B SaaS company. This is the Number One stats an investor will look at. Without decent growth metrics, there is no need to look any further. These metrics help businesses understand how well they are acquiring, retaining, and expanding their customer base, as well as how effectively they are increasing their revenue and market presence.
ARR/MRR
Revenue growth is the first and foremost growth metric to look at. In today’s constantly evolving business landscape, revenue growth is the ultimate measure of success. It not only reflects a company’s financial strength, but also its ability to continuously adapt and thrive in a competitive market. And when it comes to measuring revenue growth, two key metrics stand out: ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue). Both these metrics are essential in determining the overall health and growth potential of a business. ARR, as the name suggests, refers to the total revenue a company can expect to generate in a year from its existing customers. On the other hand, MRR provides a more granular view by measuring the monthly amount of recurring revenue. While ARR gives a long-term perspective, MRR allows businesses to track their revenue growth on a month-to-month basis, giving them a more accurate and timely picture of their performance. In the zero-interest-rate era, the ARR growth rate of top early-stage SaaS businesses can easily reach 200%. It has now normalized to around 100%.
Expansion Revenue
Expansion Revenue refers to the additional revenue a company earns from its existing customer base. Unlike traditional businesses, B2B SaaS companies have a unique advantage when it comes to expansion revenue. Digital products and services require minimal costs to scale and reach wider audience. Expansion revenue can be realised in mainly two ways: increased usage of existing product offerings (e.g. more user activities, more data usage) or selling new products/features to existing customers. It is not rare to hear stories of 1x – 2x revenue expansion for an existing customer in a relatively short amount of time.
Quality of Revenue
Sophisticated operators and investors will also consider quality of revenue. This refers to the stability and diversity of a company’s revenue sources. One aspect that plays a crucial role in determining the quality of revenue is customer concentration. This refers to the reliance of a company on a small number of customers for a large percentage of their overall revenue. While having a large, loyal customer base can be beneficial, relying too heavily on a few key customers can also be risky. Any changes in their purchasing habits or a loss of their business could significantly impact the company’s bottom line. Therefore, when evaluating a company’s financial stability, it is important to not only consider their overall revenue but also the diversity and stability of their customer base. A healthy balance between larger, reliable customers and a diverse mix of smaller customers is often a good sign of a solid and sustainable business model.
Retention Metrics
Retention metrics track the rate at which customers continue to use a service or product. This is particularly important in the highly competitive and ever-changing world of software as a service. But what exactly are the retention metrics for B2B SaaS? These can include customer churn rate, which measures the loss of customers over a certain period of time, customer retention rate, which calculates the percentage of customers that continue to use a service, and average revenue per customer, which showcases the average amount of money a customer spends over a certain period of time. These metrics not only provide insight into the success of a SaaS company, but also help identify areas for improvement and potential growth opportunities. Overall, understanding and consistently monitoring retention metrics is crucial for the long-term success of a B2B SaaS company.
User Churn
What is user churn metrics? Simply put, it is a measure of how many customers or clients stop using your product or service during a given period of time. By tracking this metric, companies can gain valuable insights into the effectiveness of their product, customer satisfaction levels, and overall growth potential. High user churn rates can be a red flag, indicating issues with the product, customer service, or even pricing. On the other hand, a low churn rate can be a sign of strong customer loyalty and satisfaction. By closely monitoring this metric and making strategic adjustments accordingly, companies can improve their retention rates and ultimately increase their revenue. In the competitive world of B2B SaaS, understanding and effectively managing user churn metrics makes all the difference.
Cohort Retention
Cohort retention takes into account the percentage of customers that continue to use the service after a specific period of time, usually measured in months or years. It provides valuable insights into the success of a company’s customer retention efforts and the overall customer satisfaction. A high cohort retention rate indicates that the company is delivering value to their customers, resulting in a loyal customer base, increased revenue, and ultimately, long-term success. On the other hand, a low cohort retention rate can signal potential issues that need to be addressed, such as unsatisfied customers or a lack of engagement with the product. Also more importantly, the trend line of cohort retention shows whether the company’s ability to retain its customers has improved or deteriorated over a specific time period.
Net Dollar Retention
Net Dollar Retention, also known as Net Revenue Retention, is a crucial metric in the B2B SaaS industry. It measures the amount of revenue a company retains from its existing customers over a specific period of time. In simpler terms, it looks at the revenue generated from a cohort of customers at the beginning of a period and compares it to the revenue generated from the same cohort at the end of the period, taking into account upgrades, downgrades, and churn. This metric is essential for B2B SaaS companies because it not only reflects their ability to retain customers, but also their ability to grow revenue from those customers. A high net dollar retention rate is an indicator of customer satisfaction, as well as customer loyalty, which are crucial for the long-term success of a SaaS company. In contrast, a low net dollar retention rate can signal potential problems such as dissatisfaction, competition, or poor product-market fit. Generally speaking, a good net dollar retention should be north of 100%. Top quantile companies can achieve 120% – 140% net dollar retention.
Efficiency Metrics
In a competitive space such as B2B SaaS, it is crucial for companies to not only stay on top of market trends and customer needs, but also to constantly evaluate their own performance. This is where efficiency metrics come into play. These metrics provide a valuable glimpse into the inner workings of a company, helping businesses understand how effectively they are utilizing resources and meeting objectives.
Revenue/FTE
Revenue per full-time equivalent (FTE) is a commonly used metric in B2B SaaS as it helps determine the efficiency and productivity of their workforce. A higher revenue per FTE ratio indicates that a company is generating more revenue with fewer employees, which can be a sign of a well-optimized and profitable business model. On the other hand, a lower ratio may signal potential inefficiencies and opportunities for improvement. When used in combination with other financial metrics, such as customer acquisition cost and lifetime value, revenue per FTE provides valuable insights into the overall health and growth potential of a B2B SaaS company.
Customer Acquisition Cost (CAC)
CAC measures the cost of acquiring a new customer. It includes all expenses related to marketing, sales, and onboarding. Both staff and non-staff costs. A lower CAC indicates more efficient customer acquisition. However, low and high are all relative to average contract size/customer life time value and cannot be evaluated in isolation.
Customer Lifetime Value (CLV)
CLV measures the total value a customer brings to your company over their entire relationship with your business. It takes into account the total value of the customer’s subscription, including any upgrades, renewals, and additional services purchased. This metric enables B2B SaaS companies to understand the true return on investment (ROI) of each customer and make informed decisions about customer acquisition and retention strategies. A higher CLV suggests that you are effectively monetizing your customer base. CLV and CAC are often used together to produce the mighty CLV/CAC ratio. As a rule of thumb, 3:1 is a good ratio.
Profitability Metrics
Profitability metrics measure a SaaS company’s financial health and success. You may hear a lot about the attractive margin profiles of B2B SaaS companies. But you might be surprised to find out few of the publicly traded SaaS businesses were profitable before their IPO days. This is because the SaaS space is furiously competitive and you do whatever you can to claim the crown — reach $100mm ARR. Regardless, it is important to keep your profitability metrics in check even in the early days so you can make sure that you survive and live to see the better days!
Burn Rate
Gross Burn equals to the total ongoing expenses of a company and Net Burn is Gross Burn net of revenue. In the early days when burn rate >> revenue, it directly determines the runway of a SaaS business. In order to maintain a healthy burn rate, companies must constantly evaluate their expenses and allocate resources in an efficient manner. Especially as capital is becoming scarce again, a slow and steady burn means extended runway and increased odds to achieve sustainable growth.
Burn Multiple
Burn Multiple is calculated by dividing the company’s cash burn (the amount of money it spends each month) by its monthly recurring revenue (the amount of revenue it generates each month). This metric is often used to evaluate the financial health and sustainability of a company, as a high burn multiple can indicate that a company is spending too much money in comparison to the revenue it is bringing in. Generally speaking, it is good to keep the burn multiple below 2x. However, it’s important to note that a high burn multiple is not always a cause for concern, as in some cases it may be a strategic decision to invest heavily in growth and market expansion.
Gross Margin
The most beautiful part of a B2B SaaS business is its high gross margin. Gross Margin represents the percentage of revenue that a company retains after accounting for the costs of goods and services sold. In simpler terms, it is the profit generated from each unit of sale. This is particularly important in the world of B2B SaaS, where high operating costs and ongoing investments in research and development are common. A high gross margin signifies a strong financial foundation for a company, as it allows them to cover their expenses and continue to invest in growth. On the other hand, a low gross margin can be indicative of potential issues such as poor pricing strategies or high costs in acquiring and maintaining customers. On average, a B2B SaaS shall have a gross margin above 70%, with many achieving a gross margin higher than 80%.
And that is a wrap! – an overview of the essential B2B SaaS metrics. From monthly recurring revenue (MRR) to customer lifetime value (CLTV), each metric is a vital piece of the puzzle that makes up the success of a SaaS company. By monitoring these metrics, businesses can identify their strengths and weaknesses, accurately forecast their growth, and ultimately make data-driven decisions that will propel them to success.