If you prefer a slower, more leisurely approach to business, the software market really isn’t for you. To survive and thrive, research shows, SaaS brands must grow at a constant annual rate of at least 20%, or face the risk of collapse within a matter of years.
The indefatigable pursuit of expansion both creates and relies on huge volumes of financial data — data that must be gathered, measured, and acted upon at lightning speed.
The days of rudimentary monthly cash flow and profit / loss calculations are long gone, with recurring revenue, customer acquisition costs, churn rates, and other SaaS-specific financial metrics now the basis of make-or-break strategic decisions.
Keeping track of these diverse KPIs isn’t easy at the best of times, but right now, it’s especially difficult. The SaaS industry is changing rapidly in response to the economic downturn, with conventional funding channels and pricing models falling in popularity as new, tech-enabled alternatives come to the fore.
Now more than ever, software leaders must be vigilant against the danger of drowning in data — and take concrete action to maintain total visibility across all their financials, all of the time.
Core financial metrics
Before going further, let’s first break down the core financial metrics that all SaaS businesses should be monitoring.
At the top is Recurring Revenue, either monthly (MRR) or annually (ARR). One-off sales are always welcome, but without a continuous stream of subscription renewals, a vendor won’t be around for long.
Next up is Customer Lifetime Value (CLV), which indicates the typical net profit you’ll make over the duration of an individual subscriber’s lifecycle. Average Revenue Per Customer (ARPU) is equally important, representing the money made from each of your users.
Customer Acquisition Cost (CAC), is also a key measurement for finance teams, revealing how much on average a SaaS company is spending to attract a new client.
Finally, churn rate — how many customers you lose a month — is another vital indicator of financial health, as is a brand’s burn rate.
A market on the move
Keeping on top of these KPIs has become more complex in recent months, thanks to some significant shifts in the SaaS market.
The availability of venture capital funding has declined throughout 2022, forcing start-up valuations down as investors demand more control for less money. Unwilling to sacrifice large stakes — or unable to entice any VC interest at all — technology founders have been turning to venture debt to keep cash flow in the green. As a short term solution, this is fine — but with interest rates on the up, borrowing isn’t sustainable in the long run.
At the same time, facing their own cash flow constraints, an increasing number of software customers simply can’t cover the costs attached to conventional SaaS pricing, presenting vendors with another set of problems.
Happily, with advances in financial technology, there are new ways for SaaS firms to secure funding and cater to their customers’ need for payment customization.
Innovative AI-powered tools, for instance, give software providers the power to calculate the reliability of their recurring revenue streams, gleaning insights that can unlock non-dilutive finance intelligently tied to the strength of their customer contracts.
Next-level analytics are also changing the way SaaS start-ups think about pricing. Rather than relying on traditional tiered or consumption-based models, brands are starting to apply machine learning to customer data in order to offer bespoke, buy-now-pay-later style packages.
This new tech-enabled approach to capital and payments could, if implemented poorly, swamp vendors with data, making it harder to monitor core financial metrics. It’s common for SaaS businesses to use financial systems that aren’t designed for their evolving business models and payment options, so this has the potential to become a serious problem.
The solution? Adopting an integrated payment and funding tool that embeds directly into your sales and finance stack, and is able to draw on data at every level of the sales journey. This allows for full visibility over every facet of your financial data, ensuring you have maximum control when tracking recurring revenue, churn, and the other KPIs.
At Ratio, we’re helping SaaS businesses keep track of their key financial indicators while drawing on new capital channels and offering customers the pricing flexibility they desire. Visit our website to learn more.