What is a SaaS company?
A SaaS (Software as a Service) company refers to any company whose software is licensed on a subscription basis. The payment model is generally on a monthly and/or annual basis. Think Netflix, Salesforce, Square.
Why should you care about SaaS companies?
SaaS is BIG and it's getting much BIGGER. The revenues of large SaaS companies are in the billions. Companies such as SAP, Oracle, Salesforce are some of the big names while many others are popping up each week and growing rapidly.
How do we analyze SaaS companies?
Most SaaS companies aren't analyzed like traditional businesses where the focus is on the bottom line. When it comes to startup and mid-size SaaS companies, the profits take a backseat to a few other SaaS specific Metrics.
Here are some of the most important ones -
1. MRR (Monthly Recurring Revenue)
MRR is the monthly payments the company can expect to receive from its customers. This metric normalizes the big one-off sales and provides a baseline to measure business performance. MRR is helpful to predict cash flow, support strategic planning and enable a quick comparison with competitors.
2. CAC (Customer Acquisition Cost)
3. Churn
4. GDR & NDR (Gross & Net Dollar Retention)
Gross Dollar Retention refers to the extent of the MRR of the customers from a year ago that is retained and excludes any expansion of revenue for those customers. Net Dollar Retention includes Expansions.
GDR cannot exceed 100%, unlike NDR which can.
To learn more, here are a couple of great resources:
1. https://www.forentrepreneurs.com/saas-metrics-2/
2. https://blog.hubspot.com/service/saas-metrics
A SaaS (Software as a Service) company refers to any company whose software is licensed on a subscription basis. The payment model is generally on a monthly and/or annual basis. Think Netflix, Salesforce, Square.
Why should you care about SaaS companies?
SaaS is BIG and it's getting much BIGGER. The revenues of large SaaS companies are in the billions. Companies such as SAP, Oracle, Salesforce are some of the big names while many others are popping up each week and growing rapidly.
How do we analyze SaaS companies?
Most SaaS companies aren't analyzed like traditional businesses where the focus is on the bottom line. When it comes to startup and mid-size SaaS companies, the profits take a backseat to a few other SaaS specific Metrics.
Here are some of the most important ones -
1. MRR (Monthly Recurring Revenue)
MRR is the monthly payments the company can expect to receive from its customers. This metric normalizes the big one-off sales and provides a baseline to measure business performance. MRR is helpful to predict cash flow, support strategic planning and enable a quick comparison with competitors.
2. CAC (Customer Acquisition Cost)
Customer Acquisition Cost is the money spent on Marketing and Sales to acquire a new customer. This metric directly influences the profit made from each customer which is critical for the growth and sustainability of a SaaS company. A low CAC allows for freeing up cash flow that can be reinvested into the business which can fuel rapid growth.
Knowing the rate of Churn both on a customer and on a revenue basis is critical. A higher churn means losing the upfront Marketing and Sales effort to acquire that customer. This metric is critical to help understand whether the business is sustainable
Gross Dollar Retention refers to the extent of the MRR of the customers from a year ago that is retained and excludes any expansion of revenue for those customers. Net Dollar Retention includes Expansions.
GDR cannot exceed 100%, unlike NDR which can.
To learn more, here are a couple of great resources:
1. https://www.forentrepreneurs.com/saas-metrics-2/
2. https://blog.hubspot.com/service/saas-metrics
