I have been following the SaaS (Software as a Service) industry for a number of years and in spite of the fact that most of them lose huge amounts of money every year, the industry is growing rapidly.
They survive on repeated rounds of funding from investors and VCs who seem to think that the only metrics that really count are the following, at least when you are looking at scaling the business:
MRR – monthly recurring revenue. It is the base measure of scale. It is a simple multiple of the number of subscribers times their subscriptions. You increase it by growing the numbers of customers. Or up-selling existing customers to higher value packages. MRR is the lead indicator which shows the growth of your SaaS business.
Churn – this is a measure of how many customers are coming in, but more importantly, going out. The reasons for churn are not always obvious. Your SaaS may work like a dream. But does it add enough value? Is it worth paying for? More important, do your customers find it is worth the time and effort to have your SaaS as part of their lives?
Customer Acquisition Cost (CAC) – In SaaS, CAC is a measure of the efficiency of your sales, marketing and distribution model. It is governed by two things: Conversion and Sales Model.
Cornerstone on Demand (CSOD) finally gets it!
Notice nowhere is there a mention of profitability. Top line revenue trumps net income every time in this industry. The only exception I’ve found in the last 2 years is Cornerstone on Demand (https://www.cornerstoneondemand.com/). They have now, after 19 years of existence, begun to think that profitability is a metric that they need to be looking at. Congratulations, Adam Miller, CEO!
I’ll be doing more posts on the SaaS industry as time goes on.