Learn the definition of SaaS deferred revenue, why it’s important to your accounting practices, and how to properly calculate it.
September 30, 2020
If you’re like most SaaS startup founders, you’re likely already tracking some basic metrics—but are you tracking the right metrics for your business? Many of the SaaS business founders we speak with are overlooking some of the key performance indicators (KPIs) they need to get a complete picture of their financial position, make smart data-driven decisions, and measure progress toward their business goals.
The full range of KPIs you need to monitor depends on your specific business model and needs, but there are five types of startup KPIs that all SaaS companies should be tracking:
Regularly tracking these important KPIs gives you visibility into areas of your business that may be holding you back from growth and need urgent attention. You’ll also get insights into the profitability of your startup to use in financial projections, or share with board members and potential investors.
Let’s take a look at the KPIs these four categories include and how to calculate them.
Top of funnel KPIs show the number of potential customers moving through your sales pipeline. With these figures, you can identify the stages in your sales funnel where you’re losing the most prospects, and target these ‘leaky’ areas to convert more leads into customers. Top of funnel KPIs also indicate how many customers you’ll generate from the leads you’re working with, so you can predict how many sales you’ll make over the coming months.
Below are four essential top of funnel KPIs for startups:
For businesses that rely on subscriptions, there are two vital revenue KPIs: monthly recurring revenue (MRR) and annual recurring revenue (ARR). These metrics give an accurate picture of your startup’s net revenue for the month or year by including both new and existing subscriptions, as well as any subscription revenue that was lost. Because MRR and ARR show recurring revenue, they are reliable indicators of the amount of revenue you’ll generate for the next three or six months, and the scale at which your business is growing.
There are several types of MRR to take into account when calculating your total MRR and ARR:
Total MRR each month =
New MRR + Upgrade MRR + Reactivation MRR - Downgrade MRR - Churn MRR + Existing MRR
ARR = Total MRR x 12
Customer churn rate = Number of customers lost in a given period / Total number of customers at the start of the given period
Retention rate = Number of customers retained in a given period / Total number of customers in the previous period
“What are your unit economics?” It’s a question many investors ask, but most founders don’t have these figures at their fingertips. Unit economics KPIs look at the average revenue and costs per customer, and show whether you’re spending more money acquiring customers than they’re likely to generate for your business. In short, they determine whether your marketing and sales channels are operating in a healthy way. For potential investors, your unit economics indicate if the money they put in is likely to grow, or if your startup is a leaky bucket.
There are four key metrics for SaaS startup unit economics:
ARPC = Total monthly revenue / Total number of customers
LTV = Average number of months a customer stays with you x ARPC
CAC = Cost of acquiring customers over a given period / Number of new customers acquired in the given period
LTV:CAC ratio = LTV / CAC
It can be difficult to calculate the LTV:CAC ratio for very early stage startups with low churn rate: Until you start to see churn, you won’t know how long customers are likely to stay. In this case, you may need to predict your LTV based on the customer data you have and the metrics of similar businesses in your vertical.
Product/market fit shows whether your product is solving a customer need. It’s a key indicator of whether your business is ready to scale, or if your product still needs more development in order to attract and keep customers. If you’re delivering great results for your product/market fit KPIs, it’s a good time to invest and grow; if you’re underperforming in these metrics, it’s going to be difficult to grow your user base unless you make changes to your product.
Regularly tracking these metrics allows you to see how your product development work is impacting customer satisfaction, and to identify the point where you have sufficient product/market fit to focus on growing your sales.
The Superhuman Product/Market Fit Engine
Rahul Vohra, founder of email app Superhuman, somewhat famously reverse-engineered product/market fit for early-stage startups, to take what was once a ‘gut feel’ and make it measurable. In four succinct questions, he was able to (a) measure product/market fit based on product availability, (b) gain important intel regarding customer persona, (c) understand the most important features of the product from the customer’s POV, and (d) advise on prioritization of the product roadmap. The questionnaire read as follows:
In this model, product/market fit has been achieved when 40% of your customers answer ‘A) Very disappointed’ in response to the question, “How would you feel if you could no longer use Superhuman?”
Below are three more important product/market fit KPIs. I also recommend tracking the Customer Churn Rate and CLTV metrics discussed above to get insight into whether customers are satisfied with your product.
Average Sales Cycle Length—The average number of days between a lead first entering your sales funnel and closing the deal. A short sales cycle suggests that your product fits with what customers are looking for, so they’re able to make faster buying decisions.
Net Promoter Score (NPS)—An indicator of your customer experience based on how customers rate your service on a scale of 1 to 10. Scores of 9 or 10 indicate promoters of your company; scores of 7-8 indicate people that feel passively about your company; and scores of 1-6 indicate people that feel negatively about your company.
NPS = Percentage of promoters - Percentage of demoters
Product Engagement—The number of users who are using your product on a regular basis. The ratio between the number of people using the product daily and the number of people using the product monthly shows the proportion of customers that are frequent users, and indicates how much value customers are getting from your product.
Product engagement = Daily active users / Monthly active users
There are dozens of financial KPIs for startups that you could be tracking, but these six KPIs should be top of your list. Together, they give you an insight into your cash flow, total costs, and profitability, helping you budget your expenses to be in line with your revenue and giving early indication of potentially critical cash flow problems. These financial metrics are vital for startups that are considering fundraising: You can use them to calculate the amount of investment your business needs as well as when you need it.
Net burn rate = Total monthly revenue - Total monthly COS - Total monthly OPEX
Number of months of runway = Cash balance in the current month / Average monthly burn rate
Cash zero date = Current date + Number of months runway
As a SaaS startup founder myself, I’ve seen the benefits founders and CEOs get from tracking these SaaS KPIs daily. You can confidently predict where your revenue will be at the end of the month, and identify and address any concerning trends before they become serious issues. If you only review these metrics monthly, you won’t get visibility into what’s coming down the line, and this makes it much harder to scale your startup. However, I know that for a lot of founders, the idea of adding yet another task to your daily workload can be daunting.
The good news is that with Zeni’s finance dashboard, checking on your financial KPIs daily only takes a few seconds. Zeni is a modern finance firm that combines AI and ML technology with human expertise to provide bookkeeping, accounting, tax, and CFO services for startups. With our dashboard, you get instant access to key financial metrics that are automatically updated with real-time data, including:
The Zeni Dashboard makes it easy to see exactly how your company is performing at a glance. No need to waste time searching for the right data or checking your calculations for errors: With the dashboard, you have the numbers you need right at your fingertips. Plus, you get full access to a finance concierge who can answer questions and help you interpret the figures.