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As with any company, it's critical to start with a strong SaaS business plan which includes key SaaS metrics. One of the major challenges of the SaaS business model is that a lot of the costs are front-loaded while the customer revenue comes in over time. Your business plan and financial model will show how healthy your business is over the mid- to long-term and you can catch issues early.
For example, the health of a traditional software business is measured in bookings: how many new customers (or upgrades) do you bring in each quarter? However, bookings alone can be misleading in a SaaS business. How valuable is a quarter of heavy bookings (new subscriptions) if those same customers cancel the next quarter? And what good is a $50/year contract if it cost you $200 in marketing to generate and close that lead?
The best SaaS metrics are not bookings, but instead these five measurables (as originally defined by Bessemer Venture Partners - see this blog article):
This is a key financial metric for measuring growth. CMRR is the amount of ongoing revenue (monthly or quarterly, depending on your subscription period) from current or projected new customers.
Churn is the percent of customers who cancel each year. Ideally, a SaaS company should target a churn rate of less than 12% of CMRR.
Cash flow is of course important for any company, software or SaaS or anything else. But because so many of the costs are front-loaded in the SaaS model, it is a critically important metric to track and manage.
The CAC is simply the gross margin from a single customer, divided by sales & marketing costs per customer.
SaaS companies should target average payback of 1 year on sales and marketing costs. Bessemer surveyed a number of SaaS companies in 2008 and found an average CAC ratio of 0.6.
Obviously, the goal for a SaaS company is an average CLTV>0. If churn is too high and CAC ratio too low (high customer acquisition cost) then the CLTV could very well be negative, even if the company is signing up many customers.
To learn more about SaaS business planning, check out our software business planning advice and resources here. There is also a template SaaS business plan package available here, including these five key metrics, which you can use to get started on your business and marketing plan.
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