3 Essential SaaS Metrics to Exceed Investor Expectations
Oct 2023
The Software as a Service (SaaS) industry has experienced tremendous growth, capturing the attention of entrepreneurs and investors alike. For SaaS startups, impressing investors is about more than showcasing a great product; it’s about illustrating a company's long-term viability, strategic vision, and growth potential. Below are three fundamental SaaS metrics that every founder should understand and highlight to investors.
Why Metrics Matter for Investors
Metrics serve as a mirror, reflecting a company's operational health, scalability, and potential profitability. Beyond numbers, they provide investors with insights into a company's performance, positioning in the market, and the robustness of its business model. These metrics, in particular, give investors a holistic view of the startup, ensuring that their investment will yield favorable returns.
1. Customer Lifetime Value (CLV)
Definition: CLV represents the average revenue a company expects to earn from a customer over the duration of their relationship.
Why It Matters to Investors: CLV offers a window into the potential revenue stream of the company. A high CLV indicates that customers find value in the product, leading to prolonged engagement. Investors seek companies with growing CLVs, as this typically translates to increased profitability and a more secure return on investment. It also signals a company's ability to nurture and retain its customer base, reducing dependency on continually acquiring new customers.
Practical Approach to Calculation:
- Determine the average revenue per account over a specific period and divide by the number of customers during that timeframe.
- Multiply by the gross margin.
- Divide the result by the churn rate.
2. Customer Acquisition Cost (CAC)
Definition: CAC indicates the average expense incurred to acquire a new customer.
Why It Matters to Investors: CAC speaks volumes about a company's efficiency in its marketing and sales efforts. A low CAC means that the company can onboard new customers without excessively burning through capital. When juxtaposed with CLV, the CLV:CAC ratio provides insights into the return on investment. A higher ratio signifies that the company stands to earn considerably more from a customer than what it spent on acquiring them, ensuring better capital efficiency and promising better returns for investors.
Practical Approach to Calculation:
- Sum up all associated customer acquisition costs over a set period.
- Divide by the number of new customers acquired during that period.
3. Churn Rate (Customer and Revenue)
Definition: Churn rate measures the percentage of customers who discontinue using the service within a specific timeframe.
Why It Matters to Investors: A low churn rate is an investor's dream, as it signifies stable recurring revenue and high customer satisfaction. Elevated churn rates can be a red flag, suggesting potential issues with the product, service, or market fit. Investors perceive a high churn rate as a risk, anticipating potential revenue drops and questioning the company's long-term viability. By contrast, a low churn rate assures investors of consistent revenue streams, reinforcing the company's stability and growth potential.
Practical Approach to Calculation:
- For customer churn, tally the number of customers who discontinued their subscriptions over a period and divide by the total starting customers.
- For revenue churn, measure the total revenue lost from churned customers and compare it to the total starting revenue.
Wrapping Up:
In the dynamic world of SaaS startups, these metrics are pillars that support investor decisions. By understanding and effectively communicating these metrics, founders can assure investors of their company's growth trajectory, financial health, and long-term potential.
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