SaaS pricing models and revenue streams are changing. It’s no longer SaaS 1.0. Your KPIs and calculations must evolve with your business model if you have multiple revenue streams.
- Why you are misled by traditional KPIs
- How to adjust your KPIs based on your revenue streams
- The important CFO metrics to measure your GTM motion.
[Transcript] Are Your KPIs Misleading You?
Although transcriptions are generally very accurate, just a friendly reminder that they could sometimes be incomplete or contain errors due to unclear audio or transcription inaccuracies.
Thanks, Armando! Great to be here. Good morning, everyone.
We are excited to have you. I’ll leave it up to you.
All right, sounds good. Well, thanks, everyone, for joining today. Great to be here, live, calling in from Denver, Colorado. I’m going to talk a little about finance and go-to-market KPIs. First, a little bit about myself: I’m a SaaS CFO by trade, of course. Came up through the finance and accounting ranks.
I founded thesaascfo.com about 7 years ago to share as much knowledge as I can about SaaS metrics, SaaS Finance, and SaaS accounting. Interesting fact, I worked as a Mainframe programmer, if you can believe it. Programming in the Cobalt language before I went to grad school. So a little programming experience even though I’m a CFO.
So let me advance the slides here. Looks like everything is working. So, talking about KPIs, go-to-market motion, Sales, and Marketing efficiency, of course, is a Hot Topic in 2023. As we’re focusing on efficiency, it’s growth at all costs. That’s over. Now we’re looking at cash runways, sustainability, and the economics of our business model.
The SaaS 1.0 days were those basic subscriptions and basic pricing days, and we just offered subscription revenue. The traditional SaaS metrics were created from that where we were just offering $50 a month or $12,000 a year. We created some interesting metrics to manage our SaaS businesses back in those days.
Now, just to make a point here, with SaaS 5.0, modern SaaS companies are offering up to 5 different unique revenue streams.
I’ve had clients who have had subscriptions, who’ve had usage revenue, consumption revenue, processing revenue, and even hardware revenue because they are a point-of-sale system. So now that creates challenges to understand our go-to-market motion, those resulting sales and marketing efficiency metrics.
I talk about this all the time in my metrics course, with my Founders that our traditional SaaS go-to-market KPIs, our sales and marketing efficiency metrics, will mislead you if you do not adapt them to your revenue model.
We have to think about our revenue streams sitting on our P&L. Do we offer subscriptions? Do we offer usage consumption, transaction revenue, etc? How are those going to impact our go-to-market motion and our sales and marketing efficiency metrics?
As a CFO, the number one intuitive department that I spend time with is the sales and marketing teams. Of course, talking to all those departments within our SaaS companies, but so much going on in sales and marketing. A lot of investment there. We’re investing in that go-to-market motion, and then on the other side, hopefully, we’re producing recurring revenue in the form of subscriptions, usage consumption, etc.
So finance and go-to-market teams must collaborate to understand the economics of their inbound and outbound motion. We had the old outbound sales motion SLG; now we’ve got PLG, Product-Led-Growth. Are we a mix? Are we inbound or outbound? So that’s important for your Finance team to understand so they can coordinate those metrics around our go-to-market motion.
So there’s got to be a lot of collaboration with our finance, sales, and marketing teams. In 2023, it’s not just the CFO’s job anymore. We know that ‘cautious growth’ is the 2023 mantra or motto now. I even see it in my courses where I’m teaching SaaS metrics, and now I have product managers in there, I have chief revenue officers in there, and I have other sales and marketing roles.
Our product roles need to understand some of those high-level metrics that are used to manage their SaaS businesses and to value their SaaS businesses. So a couple of things that we have to look at if we’re on the sales and marketing team right now, or if we’re on the finance team right now is:
CAC to LTV. LTV has to be adjusted if we have multiple revenue streams. For example, if we’re offering subscription revenue, we know what we signed that customer out by, but what if we have some form of variable revenue?
We now have to estimate the variable revenue that we’re going to receive from that customer, and of course, it’s just an estimate, but that impacts CAC to LTV. It impacts the LTV calculation. In self-service SaaS businesses, CAC to LTV is so important.
Next is CAC Payback Period. One of my favorite metrics, and again, this is the number of months it takes to pay back that upfront customer acquisition cost. How are we paying back that CAC? We’re paying it back through the subscription revenue that we landed. What if we have variable revenue again?
We can’t just forget these other major revenue streams that are going towards that CAC payoff. So again, modify these metrics because if you just calculate these metrics based on your standard subscription revenue, they are going to be way off. They are going to look horrible. I’ve done that for SaaS companies. It’s like, “Whoa, we’ve got to take a step back and look at our revenue streams and how it impacts our metrics.”
If we have some early-stage founders in the audience, early-stage sales or marketing, maybe we’re just looking at our overall sales and marketing metrics. However, as we scale and get to 10 million ARR, 50 million, and 100 million, now we’ve got to take that a step further.
We’ve got to segment our metrics. Maybe we have to look at CAC payback by customer acquisition channel. Maybe we have to look at it by ICP or Ideal Customer Profile. Maybe, since we’re big enough, we have to look it up based on our North American geography, our European geography. So how are we managing our business? That ultimately dictates how Finance needs to set up the data structure and set up segmented metrics.
Ideal Customer Profile (ICP) Worksheet
Learn how to create an Ideal Customer Profile and build a successful sales strategy with this Ideal Customer Profile (ICP) Worksheet.
So, the key takeaway: You can’t improve what you don’t measure. Your CFO is probably telling you this, but this is really from Peter Drucker. We’ve got to put these metrics in place. So if we think about some of the common metrics for our go-to-market motion:
- CAC to LTV
- CAC Payback Period
- Segmented Metrics
- Cost of ARR
- The SaaS to CAC ratio.
Sometimes CFOs try to make the data perfect. We try to make perfect calculations, but the point is just to get started. Start calculating these metrics if you’re not already, and then iterate on those just like we iterate on our lead process, our close one process.
We’re constantly iterating on metrics, and maybe they’re not perfect, but we’ve just got to start somewhere so we can understand our cash runways. How much are we investing in sales and marketing? If we invest a dollar in sales and marketing, are we getting a dollar out in recurring revenue, for example?
So again, you can improve what you don’t measure. So start putting these metrics in place and think about your different revenue streams. Work with your Finance team and see how you need to collaborate on your metrics in order to make these accurate and not misleading If you have many revenue streams and you are just calculating your SaaS metrics off of subscription revenue, they are going to be way off. You cannot use those and they will just show really bad numbers.
I’ve got a Finance 101 for SaaS course. If you want to learn more about SaaS metrics and SaaS Finance, file that URL. Use that promo code ‘HOTTAKES’ for 100% off. Absolutely free. I’ve got tons of Founders in there. So, a free SaaS Finance 101 course for you.
Hot Takes Live
Catch the replay of Hot Takes Live, where 30 of the top SaaS leaders across Marketing, Sales, and RevOps revealed some of their most unpopular opinions about their niche.
These leaders shared what lessons they learned and how they disrupted their industry by going against the grain (and achieved better results in the process).
First of all, thank you so much. I love this. What I particularly love about your session is that the audience for this event is essentially go-to-market operators at mid to early-stage companies.
For this audience, this is exactly the type of conversation that’s going on at the C-level. It’s kind of like peaking a little bit into that type of conversation. It’s really true, I think, particularly this year, but moving forward, there is a renewed attention toward not only growth but also efficient growth.
The fact is that, yes, we need to grow. This growth needs to come from somewhere, and we need to be able to measure that and execute that, but also there is a cost to this growth.
Not only is there a relationship between how much we are spending and how much we are making, but also there is a relationship between how much time is elapsed between the two. That will potentially create a cash flow issue or potentially a cash flow flywheel.
Exactly, and that’s getting into advanced SaaS topics. If we’re investing a lot in our sales and marketing motion and we have long payback periods, that capital is tied up. We can’t reinvest that elsewhere and we need even more cash to continue to grow at those current growth rates.
Yeah, exactly! One thing I was curious to double-click on is the idea that you were introducing about pricing models, business models, 1.0, 2.0, 3.0. When it comes to SaaS, can you unpack this?
In the meantime, if there are questions that the audience is excited to hear more about, feel free to write them in the messaging system, and we’ll share them.
Yeah, happy to take any questions. Some of my more popular posts are the ones explaining the SaaS revenue streams. I mean, it’s really rare now to see a SaaS company that just has subscription revenue. Very common if you’re early stage. One product, one go-to-market motion, and that’s it, but then you’re expanding your product line.
Now, setting that up and valuing your SaaS company is based on those revenue streams. So we can’t just have one category that lumps up all revenue together because there’s so much information those revenue streams tell us. We have to understand margins by revenue stream. Are they contributing to our business? It just impacts how we manage our business.
If you’re spending more money than you’re making for a certain cohort of customers, geographies, or products, you know that’s something that you should talk about.
Yeah, especially for 2023. It’s really getting back to those basics of fundamental financial management and what are our gross margins. What revenue streams are contributing or not contributing to our profitability? Do we have a cost structure issue? Do we have a pricing issue? Then we can zero in on those things that may be working or not working.
So when you say 1.0, 2.0, 3.0, essentially, you’re talking about pricing structures that become more complicated and have multiple dimensions?
Yes! Pricing structures that are evolving that, if we look at our P&L, look all right. Then we’ve got a subscription, now we offer a usage component on top of this. So those pricing models and how they evolve then result in those revenue streams on our P&L.
Right, it could be, essentially, back to what you were saying, if you have a valuable component based on usage, based on seeds, based on another component as an example, or an e-commerce marketplace component, all those things need to be treated in a different way.
Oh, absolutely! I’ve got one SaaS company that I work with that has traditional subscription revenue, some processing revenue, and also some marketplace revenue. Three distinct revenue streams, how we manage those, how we forecast those, and a lot of those variable revenue streams are 100% gross margin. So we just have to set that up correctly.
Another example that comes to mind is if you have a pro-serve layer. So if you have professional services onboarding, revenue type of things, those behave differently and should be accounted for differently compared to pure subscription revenue.
I came from companies that had PS components, and I treat those almost like their own business unit. So we have Professional Services revenue, we have that Services expense, we have a backlog, we have utilization, we have margins on our services revenue, and it’s almost like its own little machine within that SaaS company. So Services component is also really important within our structure.
Yeah, absolutely hear you on that. Well, there you have it! A little sneak peek inside the mind of the CFO. Thanks for watching, everyone. Ben, this was awesome.
I appreciate that. Thanks a lot, Armando; I really appreciate it. Thanks, guys!