INSIGHT’S PERIODIC TABLE
OF SAAS FINANCIAL AND OPERATING METRICS
INTRODUCTION
The following table provides a framework for the ‘dashboard’ of Financial and Operating metrics that can
be used to monitor the overall health and operating efficiency of a SaaS business, along with some
additional statistics that speak to tactical trends that Insight Venture Partners has observed across the
industry (e.g., widely-used contract and billing structures).
The data in this table has been compiled from public SaaS companies and companies in Insight Venture
Partners’ portfolio to construct a series of benchmarks for each measure. We intend to provide a useful
quantitative reference point for operating performance within the SaaS landscape; however – since no
two businesses are truly identical – these numbers do not constitute appropriate benchmarks for every
SaaS company and should be evaluated on an individual basis.
Several key metrics vary significantly as a function of company size and maturity, so we have broken out
the data between two segments: Hyper Growth companies and Scale Model companies.
We define these segments as follows*:
Hyper Growth
•
Companies generating < $50M in annual
revenue and/or growing > 50% p.a.
Scale Model
•
Companies generating > $50M in annual
revenue and/or growing < 50% p.a.
*In certain cases where these definitional criteria were contradictory (e.g., a company with $50M annual revenue,
growing at 100% p.a.), qualitative assessments were used to classify firms as belonging to one segment or another.
INSIGHT’S PERIODIC TABLE
OF SAAS FINANCIAL AND OPERATING METRICS
INSIGHT’S PERIODIC TABLE
OF SAAS FINANCIAL AND OPERATING METRICS
Acronyms & Definitions
ACV / ARR
(Bookings)
CAC
Annual Contract Value: Dollar value of bookings that would be generated in 1 year under a given contract’s
run rate (also known as ARR – Annual Recurring Revenue)
Customer Acquisition Cost (CAC): Total annual Sales & Marketing expenditure divided by total number of
new customers acquired (normally segmented by time period and by sales/marketing channel; some
companies estimate % of S&M dedicated to new vs. existing logos to refine calculation)
The number of months required to have ACV equal S&M costs.
Calculation: CAC divided by first year. New customer ACV, multiplied by 12.
CAC Payback
Period/
Customer
Breakeven
FTE
Can also be expressed as a CAC Ratio.
Calculation: CAC divided by first year. New ACV (over a given time period, normally 12 months).
In SaaS businesses, a CAC ratio of less than 1, i.e., less than 1 year or 12 months to return the investment to
acquire the customer is considered optimal. Customer breakeven should be measured on both a revenue
breakeven basis and a gross margin breakeven basis.
Full Time Equivalent employee
‘Customer Lifetime Value’ (abbreviated as LTV or CLV) is the net present value of expected net cash flows
over the average customer’s lifetime, less the cost to acquire that customer. The key drivers of LTV are
customer retention rate, average net income per customer/user (ANIPU), total CAC (see above), and the
discount rate (r in the formula below).
LTV/CLV
In mathematical terms, this can be calculated as:
Note: Instead of ANIPU, avg. gross margin per user can be used to get LTV based on contribution margin
INSIGHT’S PERIODIC TABLE
OF SAAS FINANCIAL AND OPERATING METRICS
Acronyms & Definitions
MRR
NPS
Monthly Recurring Revenue: ACV divided by 12, or the monthly recurring revenue recognized by Finance.
Annualized MRR is the company’s current annual run rate
Net Promoter Score: Customers are asked on a scale from 0 to 10 how likely they would be to recommend a
given company, product, or service to a close friend, colleague (for B2B), or family member (B2C) , with 10
meaning ‘extremely likely to recommend’ and 0 meaning ‘not at all likely to recommend’. (Neither strong
proponents of the product nor strong detractors)
NPS is calculated as the % of respondents who are Promoters (9 and 10) subtracted by the % of respondents
who are Detractors (0-6). Respondents answering 7 and 8 are counted as Neutral.
NPS scores for B2B software businesses range from 25-50%. Consumer businesses are typically 60% or higher.
PS
Professional Services (non-SaaS revenue) : fees charged for implementing software (e.g., software
configuration, data migration, or other set-up fees related to software application installation and set up by a
new customer)
S&M
Sales & Marketing: typically referring to the total cost of acquiring customers and retaining them including
employees, commissions, channel management and marketing program
SMB
Small & Medium-sized Businesses
INSIGHT’S PERIODIC TABLE
OF SAAS FINANCIAL AND OPERATING METRICS
Footnotes
1
2
The incremental cost of acquiring a new customer tends to be greater than what the average cost was to acquire the
customers in a company’s current installed base. This problem tends to increase in severity as companies reach a higher
level of scale and market maturity.
‘Uncontrollable’ churn refers to customers going out of business, losing budget for non-mission-critical services, or losing
need for a given product due to shifting focus or market dynamics. SaaS businesses that sell primarily to SMBs experience
a higher amount of ‘uncontrollable’ churn due to the less stable nature of their customer base. Controllable churn
describes customers lost to competitors who leave citing poor product experience or customer service.
Note: as a result of “uncontrollable” churn, retention rates in companies selling primarily to SMBs will be higher and should
be benchmarked against similar businesses.
3
4
5
Gross logo retention refers to the percentage of customers that remains active and paying out of all customers
scheduled to renew a contract in a given period (monthly, quarterly or annually).
Gross dollar retention refers to last year’s total ACV less churned ACV and downgrades (this does not include upsells or
new logos). This is a measure of the actual ACV that renewed as a percentage of the ACV that was up for renewal in
that period.
Note: In businesses that have a combination of Monthly, Quarterly or Annual billing, Gross Dollar Retention is calculated
from the Contract Value that was eligible to be renewed in that Month, Quarter or Year. Creating an aggregated Gross
Dollar Retention number will distort true renewal rates in companies that have different contract lengths.
Net dollar retention refers to last year’s total ACV less churned ACV and downgrades, PLUS upsells (this does not include
new ACV from new customers/logos).
INSIGHT’S PERIODIC TABLE
OF SAAS FINANCIAL AND OPERATING METRICS
Footnotes
6
A sample model for calculating LTV (also known as CLV) could be structured as follows:
INSIGHT’S PERIODIC TABLE
OF SAAS FINANCIAL AND OPERATING METRICS
Footnotes
7
SaaS businesses tend to reach an inflection point between efficiency and productivity at a range of $30M-$60M ARR,
where economies of scale and sales momentum push the trajectory of revenue growth above the rate of
headcount/cost expansion. This is especially true in high-retention businesses (> 95% gross dollar revenue retention) that
benefit from recurring (and even increasing) revenue streams from existing customers, whose average cost to serve is
lower than the spend required to acquire a new customer.
8
For Hyper Growth companies, the current year’s operating loss can be viewed as an investment in future revenue and
earnings – which will be generated from new bookings (upsells and new logos) sold in future years. New ACV / Operating
Cash EBITDA (loss) measures ROI on burned cash: How much future value was created in proportion to the amount paid
today?
9
Capital Expenditures (CAPEX) can account for a meaningful percent of revenue and include investments in data
centers, hosting infrastructure, and operating software applications like ERP, CRM, or financial systems.
10
Successful early-stage/ hyper growth companies growing in excess of 75% p.a. often spend 50%-100% of ARR on Sales &
Marketing. This is an investment in growth that may be necessary to build traction for an emerging business; however,
metrics around the long-term economics of this initial cost of customer acquisition must be carefully monitored.
Companies should ensure that customer retention – and the ability to ‘land and expand’ / upsell within accounts – is
sufficient to justify the near-term shortfall in revenue generated by new customers (relative to the cost of acquiring
them). Understanding the CAC Ratio and CAC Payback period is essential. Reaching profitability depends heavily on
achieving a high LTV:CAC ratio, so it is critical that sales efficiency is monitored and each area of conversion across the
sales pipeline is improved incrementally and repeatedly.
11
The annual cash outlay for infrastructure hosting CAPEX and capitalized R&D costs is not reflected in a company’s
Income Statement. In such cases, EBITDA is not an accurate measure of profitability – operating cash margin (EBITDA less
change in working capital less CAPEX less capitalized R&D expense) should be used to understand cash profitability.
Many SaaS businesses capitalize their investments in R&D / software development, hosting, and technology/datacenter
infrastructure. These expenses exert a meaningful downward pressure on free cash flow, especially for early-stage
companies working with high volumes of data and/or queries , where CAPEX could be 15-20% of revenue (these firms
must purchase a large amount of fixed assets – servers, datacenters, etc. – to build out a scalable infrastructure before
they are able to acquire large numbers of customers and higher annual recurring revenue / ARR).