SaaS Metrics Reporting Challenges
Steve Keifer
“SaaS companies are obsessed with metrics. SaaS CEOs or founders far more likely to know what their ere are or their net retention is than their kid’s grade point average or their bank account balance. And the obsession is for good reason because venture capital firms, private equity firms, institutional investors all pore over these metrics to understand how fast the SaaS company is growing and how efficiently they’re running their operations.
These metrics dictate whether or not you can raise capital and the valuation that you’re going to be able to raise it at. But if you’re a finance leader at a SaaS company, these metrics can be quite a headache because there’s a variety of different flavors of each one, and each investor and SaaS company calculates them slightly differently.
Customer Count
The number of customers that a SaaS company has. Well, it depends on when we’re taking the measurement. Are we taking it at the beginning of the quarter? Are we talking at the end of the quarter or are we talking an average across the quarter? And what if you have contracts with large multinational enterprises like Procter and Gamble? Maybe you have 12 different contracts with 12 different divisions. Is that one customer or is that 12 customers, Different SaaS companies look at it different ways?
Annual Recurring Revenue
ARR can also be confusing. ARR stands for annual recurring revenue. But what exactly is recurring revenue? Now, if you have a vanilla SaaS contract where you’re charging a customer $1,000 per month and it’s a fixed fee, that doesn’t change throughout the contract, that’s pretty clearly recurring revenue. But what if it’s usage-based pricing? What if it’s tied to the number of API calls that a company makes and it goes up and down every month? What if the SaaS company has a large contingent of customers on monthly plans that can terminate for convenience at any time? Is that really annual recurring revenue? Well, some SaaS companies think it is and others don’t.
Net Revenue Retention
Net revenue retention can get confusing as well. So the idea behind net retention is you’re measuring how a cohort of customers grows over time. But what period of time are we comparing? Are we comparing this December to last December? Are we comparing this Q4, last Q4 or all of this year to all last year?
Valuation
SaaS finance teams, though, need to get these numbers right because they send these spreadsheets over to investors who have a team of quants educated at the world’s top business schools. They’re going to look at them with a magnifying glass and identify any inconsistencies or discrepancies. If you get it wrong, that can delay your capital raise or even take a zero off the entire valuation.”
Learn more about Ordway’s SaaS Metrics Reporting software.
