Rob Reid, Chief Executive Officer, Intacct
Every modern business uses software management systems, but the best use systems bring strategic, operational, and financial data together to support and optimize a performance-driven organization. For software companies, this requires new attributes, focus changes in metrics, and a comprehensive view of growth.
“With the right measurements in place, software companies are on the verge of being able to dramatically increase their business by having the insights necessary for explosive growth and high customer satisfaction”
Elevation of SaaS metrics
More and more software companies are focusing on a few common SaaS metrics to measure growth, success and value. The operational measures, like CMRR (Change in Monthly Recurring Revenue), churn, Customer Acquisition Cost (CAC), and Customer Lifetime Value (CLTV) are being presented to executives, investors, and board members with equal billing alongside traditional GAAP-based financial reports like an income statement, balance sheet, and statement of cash flows.
The elevation of these SaaS metrics to board-level and Wall Street reporting legitimizes the value of SaaS metrics as a primary indicator of the health and value of a software company. This represents a new trend in financial reporting and performance measurement.
Challenge in SaaS metrics
The challenge with SaaS metrics, however, is ensuring that they are calculated with the consistency and accuracy of traditional GAAP financial measures, which are subject to well-established accounting guidelines and financial controls.
Software companies want to make reporting SaaS metrics as straightforward as creating an income statement at the end of the month; yet the source data for SaaS metrics is generally not completely contained within an ERP system. Therefore, software finance leaders are challenged to report SaaS metrics in a timely, accurate manner outside of their normal financial reporting process.
Measuring successful execution of strategy
The ability for CFOs to have automatic, accurate SaaS metrics that can also be viewed by dimensions and attributes that define successful execution of company strategy is revolutionizing the way software companies make decisions and measure the results of those decisions.
Fortunately, modern best-in-class cloud ERP systems are able to meet the reporting and insight needs of software companies. By seamlessly integrating with other business systems, a cloud ERP system can centrally and automatically calculate SaaS metrics using business data from multiple systems. This process delivers SaaS metrics that a CFO can trust, calculated with the same level of accuracy and control as GAAP reports within the financial system of record.
Not only are the SaaS metrics complete, accurate and timely, but the metrics can be viewed through the unique lens applied by an individual software company by industry, segment, package, product,
New perspective sees growth as not just an outcome
Respondents in Sand Hill Group’s “Software CEO / CFO Outlook 2015” report revealed the number-one metric their companies use to track their business is revenue growth. This is not a surprise, as revenue growth drives a significant portion of a software company’s future prospects. A software company’s valuation, funding and IPO timing tend to be driven by revenue growth, with many software business leaders believing that the majority of their company’s value at IPO will be driven by its revenue growth rate.
The study found that 48 percent of surveyed companies in 2015 track their business using the revenue-per-customer metric—a significant increase over the 33 percent of companies that reported using this metric in Sand Hill’s 2014 study. The increasing use of the revenue-per-customer metric in 2015 shows that software companies are not looking at growth as an outcome that must come at all costs but, rather, a result of being strategic about customer targeting and segmentation in order to drive growth from revenue- and profit-generating customers.
The 2015 study found the fourth most commonly used metric is MRR (Monthly Recurring Revenue). The surprise is that CMRR (Change in Monthly Recurring Revenue) is not used by even more software companies as the industry shifts towards SaaS - and subscription-based products.
While MRR is a valuable metric for illustrating a software company’s current run rate, showing how much revenue is coming in for the month, CMRR focuses on the comprehensive metrics of new billings, churn, upgrades, and downgrades. These metrics are used by subscription businesses to plan for future investment in sales, marketing, product, etc. and to forecast spending needs associated with sustaining, growing, servicing, or managing particular levels of recurring revenue.
Using churn to measure customer success
While CAC and churn are used less frequently than other software company metrics, the study found increased usage in 2015, which continues a trend of widespread adoption of SaaS metrics as valuation tools by management, boards, investors and analysts. These stakeholders want to know about a software company’s dollar churn and company churn, which can be used to determine the health of the company, the solution and the relationship a software company has with its customers. They also want to know how much it costs to acquire customers so that the software company can be evaluated on how effectively it acquires profitable customers for the long-term, rather than acquiring customers who will pay little to nothing for software and services over time, and then not make a return on their CAC investments.
Churn continues to be a popular and valuable measure of a customer success program because churn is a natural consequence for software companies with customers who are not satisfied or successful. Yet churn should be used in conjunction with other success measures when evaluating the ROI of a customer success program.
Customer engagement is perhaps the hardest to measure but greatest indicator of the value of a customer success program. Measuring customer engagement based on customer activity both with and on behalf of their software vendor is an important way to predict and determine satisfaction and success.
In performance-driven companies, acting on insights from the metrics described above will help them understand strengths, weaknesses, and areas for improvement in achieving their goals. With the right measurements in place, software companies are on the verge of being able to dramatically increase their business by having the insights necessary for explosive growth and high customer satisfaction.