Managing a software as a service (SaaS) business so that it is successful has more in common with managing a service like Netflix than running a traditional IT business. In a SaaS business, things like churn rates and annual recurring revenue can mean a lot more than sales figures.
If you are growing a SaaS company think about the role of the CFO. In a SaaS business the CFO can make a big contribution to the success of the business by giving the leadership team guidance on the important SaaS metrics. These are not the normal metrics like orders, outstanding debtors or other conventional measures of performance. In a conventional business these are measures of what has already happened.
In a SaaS business the CFO needs to face forwards. Every SaaS company will start the year with an annual recurring revenue (ARR) figure that is what it can expect from existing clients. The clients have signed contracts to pay for the SaaS service for a set period and baring cancellation or the client going out of business, that is what the SaaS business will receive.
The company starts with an ARR which provides a starting point for what it needs to do. A big part of the company strategy will be to get clients to renew their contracts. The CFO will measure the churn rate so that the leadership team can make decisions on what to do to keep clients coming back. This is about delivering value to the customer. If the client was expecting some value from their SaaS solution and did not get that value they won’t renew. If they got the value, they were expecting then they may well renew. But if the client got not only the value, they were expecting but additional value as well they will definitely renew.
So, the savvy CFO monitoring churn (or renewal rates) can point the executive at upcoming problems before they start to hurt the bottom line. You can get some guidance on churn rates here.
Getting More Upsells
The next SaaS metric for the savvy CFO to keep an eye on is the upsell rate. This is the rate at which the company is getting existing client add more SaaS services. If the company is doing its job, then there are a group of happy clients who are getting value from their current subscription. The company needs to convince them to expand the services they consume from the SaaS business. This is a much easier sell than to a brand-new client and takes far less resources.
Focus on the New
The third area for the CFO to help the leadership team focus on, is new sales. This is a crucial area for growing a SaaS company. Without new sales the company cannot keep expanding. Getting new customers on board is expensive but vital. It takes a lot of resources to find and win new business. In the early days of a SaaS business the efforts of the founders leveraging their contacts and the contacts of any investors, can win new customers. But as the company grows, success depends on the company investing in a professional sales force and supporting that sales force appropriately. The CFO is a key player in ensuring that the SaaS business gets value from this investment.
Three Key SaaS Metrics
- To summarise the savvy CFO will measure three things that will help to drive the company investment and strategy:
- Renewal rates
- Upsell rates
- New sales rates,
By building a strategy that addresses these three key SaaS metrics, the founder will be well on their way to grow a SaaS company.