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By Kevin Dobbs
Montclair Advisors, LLC
The best-in-class SaaS companies are obsessed with operational efficiency, and they are constantly testing and monitoring all different types of business processes to improve speed and reduce costs.
A good example of this focus on efficiency is the use of the Customer Acquisition Cost (CAC) metric to measure the overall effectiveness of marketing and sales efforts. Since it is not possible for a SaaS firm to spend as much to sell new customers like a traditional software company, this becomes a very important efficiency metric to track because it has a direct impact on both the top and bottom line of the company.
SaaS Metrics
Just like CAC, there are a number of other process-specific SaaS business metrics that are commonplace for firms to use to monitor all areas of their company. Leading firms will usually track some subset of these types of these SaaS metrics on a quarterly, monthly or even in some cases daily basis. Here is a list of sample SaaS metrics that I have shared with my clients that can be used to kick start the discussion with operational groups inside of a firm that is considering a move to SaaS:
The most obvious areas to track are revenues, COGS, cash flows, bookings, CAC, profits, customer satisfaction, customer lifetime value, revenue per unit, customer satisfaction and churn. Beyond that there are a myriad of process specific metrics and dashboards that can be tracked and monitored, but start with the most important ones first.
Other Resources
Here are some great sources of information on SaaS metrics including:
David Skok of Matrix Partners, forEntrepreneurs blog and his SaaS Metrics post, which is really comprehensive and easy to read.
ReadWrite Cloud’s, 6 SaaS Metrics You Should Track
Michael Dunham of Scio Consulting, Haut SaaS Blog did a great post on SaaS Metrics – SaaSoNomics 101
Joel York’s Chaotic Flow Blog is always really useful and he did a fantastic post on SaaS Metrics and Economics. Joel provides a very scientific approach and a lot of details for those who are really interested in getting into what comprises SaaS metrics theory.
Some firms like j2Communications tracks hundreds of metrics related to their subscription software services but it took them ten years to get to that point. My advice to clients is always, start with something simple, make sure that works and then you can always add complexity as you go along.
On a recent client engagement I was asked to provide a simple set of definitions for basic terms and concepts around Software-as-a-Service and Cloud Computing (which I often use inter-changeably). What was interesting is that there is a lot of buzz out there but I can see why people get confused because there isn’t a standard set of definitions.
So my Friday contribution to the SaaS industry I am publishing the Montclair Advisors’ SaaS Glossary of Terms. I would be interested in your feedback on the definitions and if I miss any key ones.
| Term | Definition |
| ACV | Annual Contract Value of a subscription software agreement. |
| API | Application Programming Interface. |
| ARR | Annual Recurring Revenue. |
| ASP | Application Service Provider. Typically associated with a hosted single tenant software solution. |
| CAC | Customer Acquisition Costs. A key -SaaS metric that measures sales effectiveness based on how long it takes to pay back Sales and Marketing investments. |
| Churn | A SaaS measure of customers who do not renew their annual or monthly subscription agreement. |
| Cloud Computing | A utility computing method that shares many types of computer resources through virtualization and delivers an elastic computing environment over the Internet. |
| CLTV | Customer Lifetime Value. A key SaaS metric that is used to measure customer value, usually over 3 to 5 years. |
| CMRR | Contracted Monthly Recurring Revenue. A key SaaS metric that is calculated for new customers, up-sells, cross-sells and removing churning customers. |
| CoLo | Co-Location facility. A term for leasing a third party’s physical data center infrastructure, which usually includes the building, power, Internet connectivity and security. |
| Cross-Sell | A key SaaS metric measuring new software functionality or modules added to an existing software subscription agreement. |
| Down-Sell | A key SaaS metric that measures when customers remove of functionality, users or capability that lowers the CMRR. |
| Freemium | A business model in which the SaaS or Cloud Computing provider offers basic features to users at no cost and charges a premium for supplemental or advanced features. |
| Hosted Software | Single tenant software that is delivered over the Internet from either the Software vendors own data center or through a third party hosting company. |
| IaaS | Infrastructure-as-a-Service refers to a combination of hosting, hardware, provisioning and basic services needed to run a SaaS or Cloud application that is delivered on a pay-as-you-go basis. |
| Mashup | It is a web application that combines data or functionality from two or more external sources to create a new service. The term implies easy, fast integration, frequently using open APIs and data sources to produce results that were not the original reason for producing the raw source data. |
| MRE | Monthly Recurring Expenses. |
| MRR | Monthly Recurring Revenues. |
| MSP | Managed Services Provider. Usually a hosting or CoLo provider who provides a higher level of application management services (App management, monitoring, reporting, billing and call center support). |
| Multi-tenancy | Refers to a software architecture where a single instance of the software runs on a server, serving multiple client organizations (tenants). Multi-tenancy is contrasted with a multi-instance architecture where separate software instances (or hardware systems) are set up for different client organizations. |
| On-Demand | Is often used as an interchangeable term along with SaaS. |
| On-Premise | Traditional method of installing and customizing software on the customer’s own computers that reside inside of their own data center. |
| Platform-as-a-Service (PaaS) | Platform-as-a-Service solutions are development platforms for which the development tool itself is hosted in the Cloud and accessed through a browser. With PaaS, developers can build web applications without installing any tools and then they can deploy their applications and services (reporting, integration, security) without any specialized systems administration skills. |
| Private Cloud | Employs Cloud Computing principles within a customer’s own internal networks. The term implies that the same virtualization and highly flexible and scalable methods used in huge Internet-based enterprise datacenters. |
| Public Cloud | Cloud Computing conducted using the public Internet outside of any enterprise firewall. |
| Renewal | Agreeing to extend an existing software subscription agreement beyond the initial term. |
| SLA | Service Level Agreement. The contractual terms of service associated with SaaS provider’s offerings. |
| SOA | Service Oriented Architecture. |
| SaaS | Software-as-a-Service refers to multi-tenant software delivered over the Internet and customers consume the product as a subscription service that is delivered on a pay-as-you-go basis. |
| Subscription | SaaS licensing method where customers rent their software from the provider usually over a 1-3 year period. |
| TCV | Total Contract Value. Total value of a transaction as measured over the term of the agreement. |
| Up-Sell | A key SaaS metric measuring additional software functionality, users, or capacity that is sold onto an existing software subscription agreement. |
| Virtualization | The creation of a virtual (rather than actual) version of an operating system, a server, a storage device or other network resources. |
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