How The Right B2B SaaS And Subscription Metrics Tools . - AcctTwo

Calculating CAC payback (months):CAC payback (number months) benchmarksGoodBetterBestSMB:126-12 6Mid-market:189-18 9Enterprise:2412-24 12Prior period sales and marketing expense/ [(quarterly net new CMRR) x gross margin]Source43. Customer Lifetime Value (CLTV)CLTV is the total amount of profit a SaaS or subscription business can earn from a customer throughout the lifetime of therelationship. This key SaaS and subscription metric is important to businesses and investors because it demonstrates howmuch a customer contributes towards the organization’s revenue or profitability, more accurately over their lifetime. CLTVcan also be explored by cohort—subsets of customers that share similar characteristics like tenure, demographics, industryvertical or product line. Exploring CLTV by cohort helps businesses determine which customer segments are most valuable.Calculating CLTV:Customer Lifetime 1/(1 – Customer Retention Rate)Customer Lifetime Value Customer Lifetime x average revenue per customer x profit marginSource44. CLTV-to-CAC ratioThe CLTV-to-CAC ratio reflects the relationship between CAC, the cost of acquiring a customer, and CLTV, the lifetime valueof that customer. If CAC is high, then CLTV will correspondingly need to be high to cover the cost of acquisition. A CLTV:CACratio of 1x implies that you are spending too much on acquisition and will be fortunate to break even. Less than 1x meansthat the revenue generated by customers in their lifetime will not cover the cost to acquire them—the business model isbroken. You should be aiming for a 3-5x, which represents the industry standard for a good-to-great ratio. While greater than5x is exceptional, it may also indicate that a business is underinvesting in sales and marketing spend and could be holdingback your potential for higher growth momentum.This key SaaS and subscription metric helps businesses and investors determine an appropriate CAC threshold—how muchit makes sense to spend on CAC to effectively calibrate profitability and growth.Calculating CLTV-to-CAC:CLTV / CAC benchmarks[Customer Lifetime Value / Customer Acquisition Cost]GoodBetterBest3x3-5x5x Source64@BakerTillyUSBaker Tilly USfaas.bakertilly.com

5. Churn: Logo Churn, Gross Revenue Churn and Net Revenue ChurnFor the purposes of this paper, we will look at a few different types of churn: Logo Churn, (often called CustomerChurn), Gross Revenue Churn, and Net Revenue Churn. Logo Churn is about customers: it is the percentage ofcustomers a business loses in a given period of time, either because they cancel their service or do not renew theircontract. Logo Churn is important to businesses and investors as an indicator of product-market fit and customersuccess and because it impacts cash flow.There is a fair amount of nuance around the timing of recording Logo Churn. Some customers cannot churn because ofthe terms of their contract but have indicated intent to churn, while others may appear to have churned when they aresimply late to renew. Still others may churn and return within a short period of time. Beyond that, customers churn fora variety of reasons, some which you control (ex: dissatisfaction with services) and others you may not (ex: customerbankruptcy). These reasons are a critical data point in identifying and remediating operational challenges resulting inchurn. All of these situations can lead to complexity in understanding how and when to track churn in order to mosteffectively address underlying issues spurring this behavior.Gross and Net Revenue Churn are about dollars. Gross Revenue Churn shows how much recurring revenue is loston existing customers in a given time period due to contraction resulting from customers dropping subscriptions,downgrading their service, price decreases (or increased discounts) on existing subscriptions and churn. Net RevenueChurn is gross churn (lost revenue) minus the recurring revenue gained via expansion on existing customers throughsubscription activities such as addons, upsells, cross-sells and price uplifts. Businesses and investors keep a keen eyeon Net Revenue Churn to determine if a company is effective in mitigating the effects of gross churn. Ideally, the rate ofexpansion should outpace the rate of contraction.Calculating Gross Revenue Churn:Calculating Gross Revenue Churn(- downsell CARR - churned CARR)/ starting CARRGross Churn percent benchmarksGoodBetterBestSMB:20-30%15-20% 15%Mid-market:20%10-20% 10%Enterprise:15%10-15% 10%Calculating Net Revenue Churn:Calculating Net Revenue Churn(upsell CARR - downsell CARR- churned CARR)/ starting CARRSource4Net Churn percent benchmarksGoodBetterBestSMB:10-20%0-10% 0%Mid-market:0-10%-10-0%-10% Enterprise:-10%-10-20%-20% Source46. Cash flowManaging cash flow is critical for SaaS and subscription businesses that are trying to pay for up-front investments andcapital expenditures, cover monthly operating costs and reinvest in the business. Rapid growth only makes this morechallenging—the dollars needed for growth can extend the length of time it takes to become profitable. Cash flow is a keymetric for SaaS and subscription businesses to determine how long it will be before the company is profitable and howlong their runway is (how many months before they run out of cash). The length of a cash runway plays an important role indetermining when to seek the next round of funding.5@BakerTillyUSBaker Tilly USfaas.bakertilly.com

Calculating cash flow:Calculating cash flow:[Earnings before interest and tax x (1 – taxrate)] depreciation and amortization- change in net working capital- capital expenditures non-cash chargesCash flow margin benchmarksGoodBetterBest-50-0%BreakevenCF Calculating cash flow margin:Cash flow / revenueSource47. Cash Conversion Score (CCS)CCS is a relatively new metric, one that Bessemer Venture Partners has identified as important, particularly in later fundingrounds. As SaaS and subscription businesses grow, investors want to know that a company has a solid track record ofyielding a return on previously invested capital—they want to know future invested dollars will be well spent. CCS is the ratioof CARR to total capital raised to date, including both equity and debt, minus the cash on the balance sheet. Investors look tothis metric to better determine potential ROI as well as readiness for investment—if a company is operationally sound enoughto put future capital to good use.Calculating CCS:CARR / (Capital raised to date – cash)Cash conversion score benchmarksGoodBetterBest0.25-0.5x0.5-1x1x Source48. Gross marginGross margin reflects how much revenue is left after the costs of generating that revenue have been deducted: SaaS andsubscription businesses are known for higher gross margins relative to other types of businesses. As businesses begin togrow, investors will be looking to understand current gross margins and what gross margins might be achievable in the future.Calculating gross margin:(Total revenue – cost of goods sold)/ total revenueGross margin percent benchmarksGoodBetterBest75%75%-85%85% Source76@BakerTillyUSBaker Tilly USfaas.bakertilly.com

9. Gross Dollar Retention and Net Dollar RetentionGross Dollar Retention is measured over a specific period of time. It reflects the percentage of recurring revenue that isretained from existing customers at the end of a given time period, as calculated by taking the starting recurring revenue forthe period minus any contraction or churn. Net Dollar Retention is similar, but it includes the benefit of expansion revenue tooffset losses. Both metrics are tracked on a percentage basis with Gross Dollar Retention having a maximum value of 100%,since only losses are incorporated in the metric.If you did not have any contraction or churn, you would have retained 100% of the dollars (revenue) from your existingcustomer base. Generally, Net Dollar Retention should be greater than 100%, indicating that your organization is able toexpand on existing customers at a rate that outpaces losses. Investors look for high Net Dollar Retention as a primaryindicator of product-market fit, customer stickiness and an effective monetization strategy.Calculating Gross Dollar Retention:(Starting CARR– downsell CARR– churned CARR/ starting CARR)x 100Gross Dollar Retention Calculating Net Dollar Retention:(Starting CARR– upsell CARR– downsell CARR– churned CARR/ starting CARR)x 100Net Dollar Retention benchmarksGoodBetterBest100-110%110%-120%120% Source5Attracting investors: Key financial metrics for early stageand series A fundingSaaS and subscription businesses in the early stage are often still trying to find their footing. They may still bedetermining product-market fit and may not have gained robust market traction. In addition, their financial trackingmay not be fully mature. At this stage, investors are asking broader questions: Is there a market for this product? Canthe company grow or is it beginning to grow? They may look to metrics like CARR and CMRR growth as an indicator ofmarket fit and to determine if that growth is steady and predictable (or at least has the potential to be). Cash flow is acritical metric at every stage, but early-stage companies face particular challenges as they seek to cover startup andoperating expenses at a time when they have very few customers. Investors may pay close attention to operationalissues that drain cash flow and whether the company can cost-effectively attract enough customers to help sustain it.7@BakerTillyUSBaker Tilly USfaas.bakertilly.com

While these early metrics remain important as SaaS and subscription businesses move into Series A, investorsbegin to dig deeper in a broader set of metrics. They may look at CAC to better understand the cost of acquiring newcustomers, what types of activities are driving that spend, and how high-touch those activities are (as high-touchactivities like personal interaction can be more costly or challenging at scale). They may look closely at churn todetermine how long customers are staying, if the customer lifetime is long enough to cover CAC payback, whether theyare renewing, and what the potential impact of their behavior is on cash flow. They may also begin to look at grossmargin to understand whether the business model has potential for levels of profitably that meet their expectations.Attracting investors: Key financial metrics for series BfundingWhen SaaS and subscription businesses begin to grow and are well into Series B, they have validated product-marketfit, and investor dollars are now focused on growing revenue engines. At this stage, investors begin to ask additional,more detailed questions that tell them more about the viability of those revenue engines. They are looking for earlyindicators for when they will become profitable, and just how profitable they might be. Is the company growing, and ifso, how quickly? Can it scale in a rapid and predictable way?And also, why is the company growing? What are the primary drivers and can those levers be adjusted to accelerategrowth? At this stage, some of the more telling metrics include gross margin; CLTV-to-CAC ratio; customer, gross andnet revenue churn; and gross and net dollar retention.Gross margins are increasingly important at this stage, and investors may want to know what gross margins areachievable. For more mature businesses, they may also look to whether gross margins have improved over time.Improving margins may indicate increasing operational efficiencies and economies of scale that translate to increasedrevenue per customer. Digging deeper, they may want to understand the drivers behind gross margins to determine itsoverall health. For instance, subscriptions should be driving greater gross margins than related professional services.The CLTV-to-CAC ratio is another important metric at this stage, as the business has matured enough to startproducing consistent trends that can be used to predict future behavior. Investors will want to understand not justhow much it costs to acquire a customer, but also whether a business is spending too much relative to the CLTV, andwhether those costs can be brought into alignment in the short or long term. If the business has an extremely highCLTV-to-CAC, they may want to explore further investing in sales and marketing to accelerate growth and leverage firstmover or fast-mover advantages.Additionally, churn becomes ever more important at this stage. Investors will want to dig deeper into the financialimpact of churn, possibly expecting to explore logo, net, and gross churn by customer or product cohort. Investors atthis stage will also have a keen eye on net churn as an indicator of the organization’s ability to plug the leaky bucket.At this stage, investors are increasingly looking at gross and net dollar retention as key metrics to indicate revenueretention, monetization and potential profitability. Since it is generally costlier to acquire new customers versus retainexisting ones, high dollar retention can help keep gross margins up. High Net Dollar Retention (100% ) has the addedbenefit of reducing the burden on the sales organization to hit recurring revenue growth goals by generating excessrevenue from the existing customer base. This means that new customer acquisition sales are additive to the CARRbucket, as opposed to recuperative. Recent analyses have shown a strong correlation between a company’s Net DollarRetention and their Enterprise Value to CARR multiple garnered at time of investment.In addition to these metrics, this is the point at which CCS may become relevant to some investors. They may beinterested in understanding the ROI of previous influxes of capital as an indicator that a company is prepared to makesound use of a future one.8@BakerTillyUSBaker Tilly USfaas.bakertilly.com

Section Two:How the right tools for SaaS and subscription businessreporting and metrics propel growth and attract investorsFor SaaS and subscription companies, capturing, categorizing, calculating and analyzing objective financial andoperational metrics is an essential methodology for determining the health of the business, establishing efficiencies,identifying issues and opportunities, and driving predictable growth. These objective metrics are used as quantitativeKPIs, enabling unbiased analysis, informed decision-making, and organizational alignment around specific key results.These essential KPIs are critical to attracting new investors and providing reporting to existing ones.However, accessing even the most basic, industry-standard metrics can be challenging due to both bandwidth andlogistical constraints, especially for the many businesses still relying on spreadsheets. In this section, we will explorethe challenges SaaS and subscription businesses face in trying to use spreadsheets to capture and analyze data. Thenwe will introduce the alternative—a modern, purpose-built SaaS and subscription reporting and metrics tool—and explorewhat to look for when selecting one.Why spreadsheets are a formula for failureMany SaaS and subscription businesses begin their customer subscription management and metric tracking withMicrosoft Excel or another spreadsheet tool, either relying on readily available templates or building their own. WhileExcel and other spreadsheets are unquestionably valuable tools for specific financial and accounting tasks, as SaaSand subscription businesses scale, they rapidly outgrow them. For all but the earliest startups, manually capturing,calculating and analyzing data in spreadsheets is simply too time- consuming, laborious, error-prone and complex.SaaS and subscription businesses face many common challenges when using spreadsheets for reporting on keymetrics. Spreadsheets are:– Time-consuming and delayed: Pulling data from disparate systems, manually entering it into spreadsheets, running––the appropriate calculations and analyzing the resultant raw data is time consuming. Because this process islaborious, many businesses cannot prioritize it to the degree they should, and they miss out on valuable insightsthat hinder their growth. Those that do invest the necessary time may find the information that the insights arederived from is weeks or months old—perhaps even too outdated to be useful.Error-prone and unreliable: Spreadsheets present a host of opportunities for error, starting with manual data entryand multiple formulas in hundreds of cells that do not carry over or break with the slightest change. Further, whenmultiple people need to work in a single spreadsheet at the same time, they often create duplicates, which inevitablyleads to version control issues. Strategic blunders arise from erroneous data, placing crucial business objectives,investments opportunities, and even professional careers at risk.Static and lacking scalability: As SaaS and subscription businesses scale, their needs evolve—the key metricsessential to an early start up may be different from what a growth-stage company is seeking. Spreadsheets arestatic and built with specific formulas to perform a defined set of functions—they do not evolve the way yourbusiness needs do. There is also a functional barrier to scaling spreadsheets. As data sets grow, the spreadsheetsused to track them become increasingly cumbersome and unstable —they simply were not intended for data sets atscale.9@BakerTillyUSBaker Tilly USfaas.bakertilly.com

– Broad and lacking detail: For SaaS and subscription businesses, data can unlock critical information about thehealth of the organization, identify opportunities, and support data-driven decision-making, but only if they canefficiently access and analyze that data. Spreadsheets are limiting—because of their complexity, it’s hard to identifypatterns that might elucidate meaningful trends, either positive or negative. Sure, there is a lot of information, butinformation is not the same thing as insight. Spreadsheets lack the necessary details to deeply analyze subscriptionactivity and uncover the underlying drivers of recurring revenue growth. Templatized spreadsheets barely scratchthe surface of tracking subscription activity by providing only the broadest of categories like expansion orcontraction, making it difficult to interpret or expose the real drivers of those outcomes.The solution: A modern, purpose-built SaaS andsubscription reporting and metrics toolIf Excel and other spreadsheet applications are not the answer, then what is? SaaS and subscription businesses wouldbe well-served by investing early in a modern, purpose-built reporting and metrics tool that is fully integrated with theiraccounting software stack and other

Nine key SaaS and subscription metrics to understand business health 3 Attracting investors: Key financial metrics for early stage and series A funding 7 Attracting investors: Key financial metrics for series B funding 8 SECTION TWO How the right tools for SaaS and subscription business reporting and metrics propel growth .