Cheat Sheet #3: Key Metrics to Track for B2B SaaS Platforms
May 26, 2021
Did someone say “Recurring revenue”? 🤔
For our final Cheat Sheet, we’re covering key metrics for B2B SaaS platforms. That’s right — FINALLY! In case you missed it we also have Cheat Sheet #1 for Marketplaces and Cheat Sheet #2 for Consumer platforms.
B2B SaaS models have been popular amongst start-up founders and investors for more than a while now and for very good reason — they’re capital efficient, highly scalable and are proven to work with pioneers like Salesforce, Dropbox and Slack leading the way. You may have heard that B2B SaaS businesses just need to show a robust sales engine, but we think user and engagement metrics, conversion and lifetime value are equally important and shouldn’t be underestimated, especially in earlier pre-Series A stages. After all, building a great product and achieving product market fit will lay the strongest foundation to your future sales engine. Once you’ve nailed product-market fit, tracking the sales funnel and corresponding metrics is relatively methodical and established. We’ve shared our top metrics for both usage and distribution (i.e. sales) below!
At Samaipata, we invest in digital platforms that generate network effects through many-to-many interactions between users. We believe B2B SaaS models are just as relevant to our thesis, especially hybrid SaaS businesses that incorporate a platform aspect, such as SaaS enabled marketplaces (e.g. OpenTable) or SaaS products that are becoming a platform themselves (e.g. Zoom apps). For these models, the SaaS is often core to building scale so tracking and improving these metrics below will be key before platformising!
1. Acquisition — How efficient and predictable is your sales funnel?
Number of qualified leads (#)
This represents the top of your funnel and indicates the depth of your market, with ‘qualified’ meaning within the parameters of your target segment. Although this metric is high level and also doesn’t reflect the quality of leads, it’s a good metric at early stages to show the size and starting point of your funnel. At later stages, you may tighten this by segmenting into Marketing Qualified Leads (MQLs) or Sales Qualified Leads (SQLs) which are leads showing greater awareness and intent than others.
Number of new accounts per month (#)
This metric is a high-level indicator of growth in your customer base and can be viewed in # or % rate. In early stages, you’d ideally want to see this metric increase steeply showing that you’re acquiring new customers. However, please note that this metric only considers new accounts and does not account for lost accounts or ‘churn’, which is something we will detail below.
% Conversion rate at each stage
This is the % of leads that ‘convert’ at each stage of your funnel, such as from qualified lead to demo, from demo to quote, from quote to purchase. Knowing this helps you understand where there is drop-off out of the funnel and thus, how to optimise it. The most accurate way to measure this would be by cohorts but in early stages, using an aggregate rate should be directionally correct.
Length of sales cycle (days/weeks)
Exactly as described, this is the number of days or weeks it takes on average to convert a qualified lead to paying customer. This is a rough indicator of how fast you can scale your business and is a function of (1) the efficiency of your sales team and (2) the complexity of your customers’ purchasing decisions. For the latter, it’s useful to identify (and then target!) the key decision maker since it directly impacts your sales cycle e.g. ‘Bottom up’ tools may not require any approvals while Enterprise-wide solutions may require multiple approvals from stakeholders. This helps to inform your go-to-market strategy!
Customer Acquisition Cost (CAC, €)
Calculated as the total sales and marketing cost divided by the number of new customers in a given month. Typically, the cost includes the fully loaded salaries of your sales team, marketing expenses and customer service. It is a key metric that is also used to calculate unit economics later on e.g. to calculate payback periods and compare against customer lifetime value (LTV) — more on this below!
2. Engagement and Retention — how much do customers love your platform?
Do these look familiar? Yes, they’re similar to metrics used for consumer platforms but are still incredibly useful for SaaS businesses to understand how end users interact with their platform… and are an early indicator of stickiness / churn!
Number of active users (#)
Number of active users is the size of your end user base and also indicates the level of engagement, when compared with total users. This can be tracked at different frequencies i.e. Daily, weekly or monthly (DAUs, WAUs and MAUs respectively). The right frequency to track depends on the type of interaction on your platform e.g. task management platforms may measure active users daily while hospital platforms may measure weekly because users work shifts. How you define ‘active’ will also depend on the type of engagement you want to measure e.g. sign ins vs messages.
DAU / MAU ratio (%)
While DAUs, WAUs and MAUs indicate the size of your active user base, they don’t show how active your user base is. DAU/MAU ratio addresses this by showing the % of your active user base who are intense users — i.e. it shows the stickiness of your user base. Depending on the nature of your platform, different standards for the DAU / MAU ratio could apply.
This is the % of users that activate and use their SaaS license in an organisation and shows how much the organisation, i.e. your customer, relies on your product and hence how sticky they are overall. After all, customers with higher penetration are less likely to churn.
Net Promoter Score (NPS)
NPS is a direct metric on customer satisfaction and can be helpful in early stages to understand and react to customer feedback. NPS is the % of promoters — % of detractors, which is measured from a survey to your customers asking ‘On a scale of 0–10, how likely would you recommend us to a friend or colleague?’ where promoters are those who vote 9–10 and detractors are those who vote 0–6.
An alternative is to ask “how disappointed would you be if you could no longer use this product?” A greater proportion of customers who would be ‘very disappointed’ shows great product market fit!
3. Revenue and Growth — how much are your customers willing to pay?
MRR or ARR (€)
For businesses who primarily charge annually, ARR is the total annual subscription revenue. For those who charge monthly, MRR is the total monthly subscription revenue you receive. ARR should be used for annual contracts only, it would be misleading to calculate ARR as 12 x MRR if you charge monthly since it’s not guaranteed your customers stay subscribed for the whole year.
MRR or ARR growth rate (%)
% growth in MRR or ARR between periods, this is the top-line metric for revenue growth. While seemingly straightforward, it’s important to note this growth rate aggregates both new revenue gained and lost revenue from churn and downgrades. To isolate sales performance specifically, you can use Gross MRR growth which is just the sum of new and upgraded MRR.
Average Revenue per Account (ARPA, €)
ARPA is similar to ARPU for consumer platforms. It is calculated as total revenue per month or year (depending on your standard subscription length) divided by number of accounts, this metric reflects the average revenue each account generates and includes subscription but also other non-recurring revenues you may earn. It can be calculated across all accounts or different segments to understand how valuable they are. Also very important to calculate LTV below!
Annual contract value (ACV, €)
ACV is the annualised subscription revenue per contract, which is usually averaged across all your customers. It is helpful to understand how valuable each contract is to your business, and ideally you’d like to see ACV grow in time. ACV is often confused with ARR but the main difference is that ACV is the average annualised revenue of all customers while ARR is the total annualised revenue of all customers. E.g. if you have 10 customers paying £1m annual subscription, your ACV is £1m and your ARR is £10m.
Churn rate (%)
For SaaS businesses, churn is your greatest enemy. Churn can refer to either logo churn (number of customers lost in a given period) or revenue churn (the amount of revenue lost in a given period). In early stages, revenue churn may be more useful to track since you have limited customers. Later on, both are important and you should track closely to ensure you maintain any new growth gained from new customers by not losing existing ones. Most critically, you should clearly define what you consider churn (since every business has its own nuances) and measure accurately on a cohort basis. Without cohorts, an aggregate churn rate could be misleading!
Quick ratio (#)
Quick ratio measures the efficiency of your revenue growth vs any customers lost through churn. It is calculated as the ratio between New MRR / Churned MRR, where New MRR includes both new business and upsell MRR and Churned MRR includes lost business and downgraded MRR. Ideally, you want this ratio to show that you can grow revenue sustainably even with churn — a healthy ratio should be at least 2 and of course, the higher the better. A lower ratio may indicate that your churn rate is too high — in such a case, you should focus on addressing this first before growing more!
Distribution of accounts by size
You can break down the distribution by dividing your customer accounts by size ‘buckets’ of different ARPAs. E.g. €100 ARPA, €10k ARPA and €1m ARPA buckets. Why is this useful? The distribution can help you understand the volume or efficiency of acquisitions you need to hit your target, which can help guide you sales strategy. E.g. If you’re targeting €1m ARR, it will be very challenging to hit it with just €100 ARPA accounts so you should target upstream and win some larger accounts.
4. Unit Economics — how healthy is your platform as a business?
Just like marketplaces and consumer platforms, SaaS businesses should also consider and track unit economics. We know unit economics are hard to grasp because it is a function of all the metrics above. However, they are critical to understand and useful as a way to ‘temperature check’ your business.
Lifetime Value (LTV)
LTV measures how much value each account represents over their lifetime, it is calculated as the total contribution margin I per account divided by the churn rate — (ARPA per month x contribution margin 1 %) / Revenue churn rate. This is more suitable for slightly more mature SaaS businesses that have stable cash flows and churn.
CAC payback period (# months)
CAC payback period is the time required for a user to ‘pay back’ the cost to acquire them, calculated as CAC divided by (ARPA per month x contribution margin 1). This is a quick way to gauge the dynamics of your platform and set limits on your CAC — how does the payback period compare to your average lifetime? If you’ve assumed 12 months, has CAC been paid back yet?
LTV/CAC measures the Return on Investment (ROI) per account on your platform and is critical to assess the health of your business — LTV should be greater than CAC by 3x as a rule of thumb. It takes time to achieve this, but we think it’s important for Founders to think about their platform in such terms so they can strive to improve it every day.
That wraps up Cheat Sheet #3! With these metrics, we hope you’re ready to take your SaaS business to the next level. Feel free to reach out to us — we’re always happy to answer any questions, no matter how big or small :)
At Samaipata, we are always looking for ways to improve. Do not hesitate to send us your thoughts. We strive to partner with early-stage founders and to support them in taking their business to the next level. Check out more ways in which we can help here or for all our other content here
And as always, if you’re a European digital business founder looking for Seed funding, please send us your deck here or subscribe to our Quarterly updates here.
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