Here’s a shout out to Dave Kellogg’s Key SaaS Metrics podcast, recently released on Aznaur Midov’s SaaShimi series. Dave does a terrific job explaining the current state of the art on important SaaS metrics. The podcast is an excellent SaaS Metrics 101 listen even for experienced SaaS finance experts.
Dave was most recently CEO of Host Analytics, previously CEO of MarkLogic, senior executive at SalesForce and before that at Business Objects. He’s currently an independent consultant and on the board of 3 SaaS companies. As he says in the podcast, he started writing about SaaS metrics because the best way to really understand things is to write about them – I second that! Dave writes regularly about SaaS metrics in Kellblog.
Dave defines and most importantly, explains the context of key metrics and why they are important in a way that anyone can understand. He defines the metrics that mean the same thing to most everyone – like ARR, and the ones that are “squishy” and vary from company to company, like LTV (Lifetime Value) and TCV (Total Contract Value).
He also distinguishes between the interests of investors and operators, the people running a company. He says that VCs love compound metrics because they are straightforward indicators of whether to invest or not. He says, and I agree, that operators look at the individual components because operators want/need to fix problems to improve and grow the business.
For diagnostics purposes, compound metrics, like LTV/CAC or CAC payback period, for example, don’t tell you what you need to fix – is your CAC too high, or your retention and/or SaaS gross margin too low? This is a really important distinction between what I would call the performance metrics, which typically are a compound of various individual metrics, and what I would call the drivers of performance.
Drivers are what produce the performance at the top of the value chain. Those are the ones that you need to analyze individually to fix areas of weakness in your company. And I’d point out that you need to benchmark both the performance metrics and the underlying individual metrics to diagnose exactly where to focus on improvement. Successful SaaS companies, in my experience, are very focused on the individual metrics driving the performance of their company and how they can improve those metrics which is helped by seeing the benchmarks of similar companies.
When asked what his primary SaaS metric is, Dave answered, “ARR – Annual Recurring Revenue.” ARR is exactly what it says it is – Annual Recurring Revenue and is straightforward to measure. MRR measures Monthly Recurring revenues if your contracts are month-to-month, but most enterprise SaaS companies sell annual or multi-year subscriptions, so ARR is a better enterprise SaaS metric. ARR and ARR growth rates are the primary metrics in SaaS valuations.
People sometimes use ARR and ACV or Annual Contract Value interchangeably, but Dave suggests sticking to ARR. ACV can be ARR plus services revenue, ie., one-time revenue with a different margin than ARR, so it matters if you include services or not. ACV might be ARR in one company and ARR + services revenue in another. Another metric that is confusing is TCV – Total Contract Value. TCV may or may not services, and could be a multi-year contract or not. According to Dave, investors value SaaS companies on ARR, which is relatively simple and consistent, and not on services. ARR is your lodestar in building company value.
Another metric that Dave likes is Net Dollar Expansion Rate – of all the customers that were customers one year ago, what’s the value of their ARR last year and what’s the value of their ARR this year, net of churn plus upsells. BTW, at OPEXEngine, this is how we define Net Dollar Retention Rate. Of course, it is also important to look at the individual metrics driving Net Dollar Retention Rates: gross retention as well as upsell values, because Net Dollar Expansion Rate or Retention Rate can obscure whether you have a problem retaining customers (gross churn) or you just aren’t upselling them.
Operators like looking at individual metrics but to understand them, you need good benchmarks to identify those metrics that are out of whack for your model. That’s what OPEXEngine does, by benchmarking detailed metrics for cohorts of SaaS companies with similar business models, ie., similar sales models, similar sizes and similar growth rates, among other factors.
Here’s a list of some of the metrics from the podcast:
- ARR: Annual Recurring Revenues
- ACV: Annual Contract Value
- TCV: Total Contract Value
- RPO: Remaining Performance Obligation
- ACD: Average Contract Duration
- LTV: Lifetime Value
- CAC: Customer Acquisition Cost
- ATR: Available to Renew (the actual contracts up for renewal)
- NPS: Net Promoter Score – measure of customer satisfaction with your product
- Billings: Recognized revenue + change in deferred revenue for the period
Plus, Dave discusses compound metrics like:
- LTV/CAC– tells you how much profit you make after the cost of acquiring a customer based on the estimated lifetime of the customer
- CAC pay-back period: tells you how long your money that you spent to get a customer is at risk before you’ve made it up in the value of the contract
- Rule of 40: Sum of revenue growth and EBITDA or free cash flow
This summary doesn’t do the podcast justice and Dave explains so much more – I highly encourage anyone interested in SaaS metrics to listen in. You can get the podcast and series on RedCircle, Apple podcasts, and Spotify.