The 5 Most Important KPIs for SaaS Businesses
If you are the CEO of a software-as-a-service (SaaS) business, then it is very important that you know what good looks like. Good SaaS businesses have fantastic valuation multiples. Less good businesses get substantially lower multiples.
You need to be laser focused on the 5 numbers that investors care the most about:
- Gross Margin
- MRR Growth Rate
- Addressable Market
- Net Retention Rate
- Payback period
The best analysis of the importance of these factors to SaaS valuations was done by Todd Gardner at SAAS Captial. His Tech Crunch article: Determining the worth of your SaaS company is a must read.
Gross margin is what makes SaaS businesses so valuable. If you want to get investment, you need to have a gross margin of at least 85%. If not, you need a clear path to get to this level using the investment.
To increase your gross margin, you need to reduce your cost of goods sold which includes all of the costs needed to service your existing clients. These costs typically include client support, servers, licenses, and any other maintenance costs.
For details on gross margin, read our previous article: Gross Margin – The SaaS Secret Sauce.
MRR Growth Rate
MRR is your monthly recurring revenue. Your MRR needs to growing at least 35%, preferably greater than 50%, on an annualised basis.
Investors like SaaS businesses because they can generally scale easily. To be investable, you need to be scaling at an acceptable rate.
If you could sell your product to everyone who could buy it, what would your annual revenue be? This number needs to be at least £1 Billion. If it is not, then you will run out of people to sell to very quickly and your MRR growth rate will eventually crash.
Net Retention Rate
Look at all of the customers that you had last year and calculate the MRR for this cohort. Now look at what the MRR is for that same group this year. You want this number to be greater than 80%. Very good SaaS companies have net retention rates over 100%. They achieve this through upselling existing customers.
If your net retention rate is too low, then you will constantly need to be replacing those customers. Acquiring new customers is expensive. It is generally far less expensive to encourage customers to stay then it is to get new ones.
Your payback period is the number of months that it takes to recover your customer acquisition costs. You really need this number to be less than 12 months. If it is larger than 12 months then you run the risk of severe cashflow issues as you accelerate your growth. It is then simply too expensive to acquire customers and again you risk slowing down your MRR growth rate.
Focus on these metrics and gather clear evidence that your SaaS business can do better than average on them and you will have a very sellable SaaS business.