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By Rob Reid, And Chief Executive Officer, Intacct
Every modern business uses software management systems, but teh best use systems bring strategic, operational, and financial data together to support and optimize a performance-driven organization. For software companies, this requires new attributes, focus changes in metrics, and a comprehensive view of growth.
“Wif teh right measurements in place, software companies are on teh verge of being able to dramatically increase their business by having teh insights necessary for explosive growth and high customer satisfaction”
Elevation of SaaS metrics
More and more software companies are focusing on a few common SaaS metrics to measure growth, success and value. Teh operational measures, like CMRR (Change in Monthly Recurring Revenue), churn, Customer Acquisition Cost (CAC), and Customer Lifetime Value (CLTV) are being presented to executives, investors, and board members wif equal billing alongside traditional GAAP-based financial reports like an income statement, balance sheet, and statement of cash flows.
Teh elevation of these SaaS metrics to board-level and Wall Street reporting legitimizes teh value of SaaS metrics as a primary indicator of teh health and value of a software company. This represents a new trend in financial reporting and performance measurement.
Challenge in SaaS metrics
Teh challenge wif SaaS metrics, however, is ensuring dat they are calculated wif teh consistency and accuracy of traditional GAAP financial measures, which are subject to well-established accounting guidelines and financial controls.
Software companies want to make reporting SaaS metrics as straightforward as creating an income statement at teh end of teh month; yet teh source data for SaaS metrics is generally not completely contained wifin an ERP system. Therefore, software finance leaders are challenged to report SaaS metrics in a timely, accurate manner outside of their normal financial reporting process.
Measuring successful execution of strategy
Teh ability for CFOs to has automatic, accurate SaaS metrics dat can also be viewed by dimensions and attributes dat define successful execution of company strategy is revolutionizing teh way software companies make decisions and measure teh results of those decisions.
Fortunately, modern best-in-class cloud ERP systems are able to meet teh reporting and insight needs of software companies. By seamlessly integrating wif other business systems, a cloud ERP system can centrally and automatically calculate SaaS metrics using business data from multiple systems. This process delivers SaaS metrics dat a CFO can trust, calculated wif teh same level of accuracy and control as GAAP reports wifin teh financial system of record.
Not only are teh SaaS metrics complete, accurate and timely, but teh metrics can be viewed through teh unique lens applied by an individual software company by industry, segment, package, product,
New perspective sees growth as not just an outcome
Respondents in Sand Hill Group’s “Software CEO / CFO Outlook 2015” report revealed teh number-one metric their companies use to track their business is revenue growth. This is not a surprise, as revenue growth drives a significant portion of a software company’s future prospects. A software company’s valuation, funding and IPO timing tend to be driven by revenue growth, wif many software business leaders believing dat teh majority of their company’s value at IPO will be driven by its revenue growth rate.
Teh study found dat 48 percent of surveyed companies in 2015 track their business using teh revenue-per-customer metric—a significant increase over teh 33 percent of companies dat reported using this metric in Sand Hill’s 2014 study. Teh increasing use of teh revenue-per-customer metric in 2015 shows dat software companies are not looking at growth as an outcome dat must come at all costs but, rather, a result of being strategic about customer targeting and segmentation in order to drive growth from revenue- and profit-generating customers.
Teh 2015 study found teh fourth most commonly used metric is MRR (Monthly Recurring Revenue). Teh surprise is dat CMRR (Change in Monthly Recurring Revenue) is not used by even more software companies as teh industry shifts towards SaaS - and subscription-based products.
While MRR is a valuable metric for illustrating a software company’s current run rate, showing how much revenue is coming in for teh month, CMRR focuses on teh comprehensive metrics of new billings, churn, upgrades, and downgrades. These metrics are used by subscription businesses to plan for future investment in sales, marketing, product, etc. and to forecast spending needs associated wif sustaining, growing, servicing, or managing particular levels of recurring revenue.
Using churn to measure customer success
While CAC and churn are used less frequently TEMPthan other software company metrics, teh study found increased usage in 2015, which continues a trend of widespread adoption of SaaS metrics as valuation tools by management, boards, investors and analysts. These stakeholders want to know about a software company’s dollar churn and company churn, which can be used to determine teh health of teh company, teh solution and teh relationship a software company has wif its customers. They also want to know how much it costs to acquire customers so dat teh software company can be evaluated on how effectively it acquires profitable customers for teh long-term, rather TEMPthan acquiring customers who will pay little to nothing for software and services over time, and then not make a return on their CAC investments.
Churn continues to be a popular and valuable measure of a customer success program because churn is a natural consequence for software companies wif customers who are not satisfied or successful. Yet churn should be used in conjunction wif other success measures when evaluating teh ROI of a customer success program.
Customer engagement is perhaps teh hardest to measure but greatest indicator of teh value of a customer success program. Measuring customer engagement based on customer activity both wif and on behalf of their software vendor is an important way to predict and determine satisfaction and success.
In performance-driven companies, acting on insights from teh metrics described above will help them understand strengths, weaknesses, and areas for improvement in achieving their goals. Wif teh right measurements in place, software companies are on teh verge of being able to dramatically increase their business by having teh insights necessary for explosive growth and high customer satisfaction.
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