Here’s an article by David Skok which explains the key metrics essential for understanding and optimization of SaaS business.
As SaaS business is more complicated than any traditional business, metrics for traditional business can’t capture the main factors that drive SaaS performance.
David Skok will help you to answer the questions:
You’ll get the revenue for the service in SaaS along with various recurring revenue businesses only over a long period of time (the customer lifetime). If users like the service, they will use it for a long time (and your profit will also increase), if users don’t like the service, they will leave it fast (your business will lose money spent on customer acquisition). So there are 2 things you should do:
The majority of SaaS business lose much money during the first years of existence. It happens because they have to invest aggressively to get users but they need to wait for a long time before they can get the profit. David Skok points out that “the faster the business decides to grow, the worse the losses become.”
It may be rather a difficult task to understand whether a SaaS business is financially viable due to the fact that there are many losses and expenditures in the beginning (in order to become successful, companies spend a lot on getting users).
You need to answer the question:
Can I make more profit from my customers than it costs me to acquire them?
You’ll need 2 metrics:
Here are 2 guidelines which will help you to understand whether your SaaS business is viable.
There are 3 contributing elements to how MRR changes relative to the previous month:
Net MRR or ACV Bookings is the sum of the three.
In the beginning, it doesn’t matter a lot. But when your business has grown significantly, the situation changes. 3% churn for a hundred customers and a million customers is 3 and 30,000 users correspondingly.
David Skok is sure that “the ultimate solution to the churn problem is to get to Negative Churn.”
You can get this expansion revenue by:
It’s a great idea if you don’t impact bookings. It can give you the cash flow that can cover money problems we mentioned in the beginning of the article. It’s always good to offer discounts as it encourages such behavior.
Getting paid in advance often helps to lower churn rate because users made a deep commitment to the service.
David Skok also explains how to:
The original article may seem a little bit complex but it will give you a deep understanding of the main key metrics in SaaS business.