Six years ago, I was unprepared for a board meeting when one of the directors asked me about booking rates. It turned out that my assumption that revenue would grow automatically over time didn’t account for churn. This is because at the time, there were not many resources to turn to and it wasn’t well understood how recurring revenues work.
With time, we learned more about the financial aspects of success in SaaS. With this knowledge came new metrics that are used to measure how well a company is doing financially and which lead to a better understanding of what makes customers happy. The future for these companies looks bright.
SaaS is a new and different business model from the one we were used to with enterprise software. Customer success metrics can be more valuable because of this difference, as they connect Sause customer success management to its financial performance.
The SaaS Recurring Revenue Metrics Mandate
The reason that metrics are so important in SaaS is because of the subscription model. It’s different from a traditional business, where transactions happen one time and don’t continue for years to come. Metrics help companies understand what customers want, how they’re using their product or service, etc.
SaaS Business Stability
Recurring revenue is not just a key to growth, but also stability. As you build up your customer base over time and acquire more recurring customers, the fluctuations in your business start to even out because it’s based on an understanding of long-term patterns rather than short-term deals. It gives companies the confidence they need for investment into their existing customers as well as new ones.
SaaS Business Measurability
When it comes to SaaS businesses, the product they offer is uniquely measurable. The always-on communication channel between customers and companies gives them access to operational metrics that are not available for other types of companies. Product usage data provides a goldmine of information about how customers interact with your business when properly collected and analyzed by employees in order to increase success rates, reduce churns, etc.
The SaaS Recurring Revenue Machine
One of the best things about SaaS is that it can be turned into a saas recurring revenue machine, constantly generating money for years to come. This happens when you create customer success metrics and measure their performance.
SaaS Business Predictability
The amount of data available for mature Metrics-driven SaaS Businesses enables predictive analytics which gives a more scientific approach than traditional methods.
The SaaS Recurring Revenue Metrics Universe
In the SaaS business model, an ongoing customer relationship is a continuous source of revenue and cost. In contrast to traditional software where sales transactions have always taken center stage, this contrasts sharply with licensed software which makes copies rather than renting subscriptions. This fundamental shift in value from copies to customers turns the economics upside down.
Customers Form the Center of the SaaS Universe
Traditional software is often sold as a product, where the value of that piece of intellectual property (code) equates to the number of copies sold. Value for service-based products like SaaS companies is different because revenue comes from subscriptions and not individual sales.
The company’s profits from a software product are calculated by taking the price per copy minus costs for each transaction, multiplying that number times copies sold, and then subtracting research and development.
SaaS profit = (avg recurring revenue – avg recurring cost ) x current customers – avg acquisition cost x new customers
Transactions are what make up revenue in licensed software; they don’t do anything for the bottom line with subscription-based business models.
Connecting SaaS Customer Success to SaaS Business Success
Financial metrics for SaaS companies are not enough. They only show the end result and nothing about how to improve on those results in the future.
The Metrics-driven SaaS Business is a framework that measures both the financial and customer success of your company. A few examples are: Customers who use our product churn less than those who don’t, so it’s important to measure how often they’re using our products or services; if we want to prevent customers from leaving, then measuring their usage helps us find patterns before they do.