The generally accepted accounting principles (GAAP) used for many businesses don’t work well for SaaS. In fact, if you try to use them to calculate net income for SaaS businesses, the averages come out negative. This negative net income doesn’t change regardless of how old the company is (below).
Does this mean all SaaS businesses are slowly dying? Not at all. It just means that because of how the SaaS business model is built, often revenue and expenditures are misaligned. Companies have to spend money to acquire customers, but over time these customers will bring profit to the company and keep it growing. To understand how SaaS business metrics work, they need to be viewed using a slightly different lens.
Because of the subscription-based nature of SaaS, customers must choose to continue using the service after a pre-determined period of time. This means SaaS company leaders are focused not just on building software and selling it, but serving and supporting their customers over time.
As a result, SaaS businesses must:
- Invest incredibly heavily in customer success
- Invest in post-sales customer service
This greater focus on renewal and customer attention in SaaS means that SaaS businesses need a special set of KPIs to understand important questions like:
- How our business is doing?
- Is our business healthy?
- Are we growing too fast and are we retaining customers well?
What do we want out of these KPIs
SaaS companies run like a car: it’s easy to step on the gas and increase your growth, or step on the brakes and slow down, you just need to know when to do which.
That’s the importance of SaaS KPIs. They can give SaaS leaders an accurate look at how the company is doing. If capital is readily available, leaders know they have the resources to finance growth and can turn up the dial. But if the markets change or your company is not able to make up for losses, then it’s time to dial back on growth.
In this article we’ll answer the two most important questions of any SaaS business:
- How much money are you making? To answer this, we’ll look at how SaaS business measure revenue.
- How happy are your customers? Your customers are your source of revenue, so we need to look at ways to measure customer retention to determine happiness.