What is a Saas Start-up and How to Measure a Saas Company's Success?
What is a Saas Start-up?
SaaS is an abbreviation of software as a service.
A SaaS Start-up is a company who owns an application and serves to customers online through the features of this application. In SaaS business model, customers do not own the software/ application itself but subscribe to use it.
Like almost in every business, SaaS companies may have different types of trade transactions. Common ones are as following; customers may be individuals, which is called Business to Customer (B2C) and customers may be other companies, which is called Business to Business (B2B) transactions. A SaaS company may have both kind of transactions according to service area, application or software. For example, when Spotify may be listed as B2C trade transaction, Zoom has individual subscribers as well as business subscriptions.
How to measure a SaaS company’s success?
For any company, in any business, it is vital to follow metrics and indicators. For SaaS companies, beside a strong financial statement and a well prepared budget; customer satisfaction and customer royalty is required as well as gaining new customer every month. Customer satisfaction on subscription is digitized by globally accepted SaaS KPIs.
The commonly used SaaS metrics may be listed as below.
ARPA & ARPU
CAC and Payback Period
MRR = Monthly Recurring Revenue
MRR has three dimensions; New MRR (new customers), expansion MRR (upgrade of existing customer) and churned MRR (cancellation or downgrade of customers). The sum of three of these MRR types indicates the net new MRR. Through net new MRR, one can find the company’s growth rate.
Churn means discontinuing of subscription or stop doing business with an entity.
Churn rate is a critically important metric for companies whose customers pay on a recurring basis -- like SaaS or other subscription-based companies. Since churn rate has a negative effect, for a successful company, growth rate needs to exceed companies churn rate.
Determine a time period.
Determine the number of customers acquired in this time period.
Determine the number of customers lost or churned in this time period.
Divide the number of lost customers by the number of acquired customers.
Calculation of Churn Rate is pretty easy but quite difficult to keep at exceptional ratios to attract investors.
ARPA & ARPU = Average Revenue per Account & Average Revenue per User
For companies, average revenue generated per account per year or month is another metric to be followed regularly.
When ARPA is calculated for paid customers, ARPU describes the average revenue for all users - paying or not. This is particularly relevant to companies with a freemium model. (SaaS companies may offer free trials and bundle subscriptions.)
LTV= Customer Lifetime Value
Customer Lifetime Value is one of the most important metrics to measure at any growing company. LTV tells companies how much revenue they can expect one customer to generate over the course of the business relationship. The longer a customer continues to purchase from a company, the greater their lifetime value becomes. Companies use LTV to calculate their payback periods on marketing spending as well as identifying their valuable segments too.
CAC and Payback Period = Customer Acquisition Cost
Customer acquisition cost indicates the spending on gaining customer. Marketing spending, sales development teams’ payroll and their software cost may be counted as customer acquisition cost.
In other words, CAC is costs associated with sales and marketing to attract a potential customer and to convince them to purchase.
Knowing CAC, and calculating it alongside other income metrics, allows you to assess which segments are most efficient and profitable.
This metric represents one of the most important KPIs for investors. It is used to understand the scalability of a business and evaluate the company’s profitability. It is also important to look at CAC in the context of the lifetime value of a customer (LTV). These metrics together are key indicators of return on investment.
When applied to Customer Lifetime Value (LTV), businesses ideally want LTV to CAC ratio (LTV: CAC) to be over 3 and CAC payback in under 12 months.