With over 26,000 followers on LinkedIn, Paul Barnhurst (AKA The FP&A Guy) is an FP&A thought leader who brings his years of hands-on experience to help finance professionals add value to their organizations.
In this exclusive post for the Subscript blog, Paul shares how B2B SaaS businesses can develop a process for aligning and standardizing SaaS metrics and SaaS metric reporting.
…Over to you, Paul!
Every SaaS business has metrics they should track regularly, but unfortunately, this is easier said than done.
Studies have shown that many companies struggle with tracking and reporting standard SaaS metrics in a timely manner, let alone conducting analysis and finding value-added data insights.
A 2022 SaaS Performance Reporting benchmarking study conducted by RevOps2 and The SaaS CFO found the following:
- 75% of companies calculate SaaS metrics using Excel
- 54% of companies take six or more days to provide SaaS metrics after receiving a request
- 69% of companies find calculating SaaS metrics manually to be a top challenge
- Only 15% of companies do cohort analysis on customer retention rates
- In general, many companies do a poor job of tracking and reporting SaaS metrics regularly
- Multiple data sources are often required to track and report metrics
Many companies are struggling to track and calculate standard SaaS metrics consistently. Often companies have different people using different source data and calculations for the same metric.
I once worked for a company where after nearly a year and several meetings with senior leadership, we still had not aligned on a company-wide method for calculating churn. I share this story because it highlights how difficult it can be to align on one method for calculating metrics.
Each company has different reasons for why they struggle to align metric reporting, but some common causes include:
- Multiple data sources
- Calculating SaaS metrics is a manual process
- No clear definition for how metrics should be calculated company-wide
For companies to gain better actionable insights from SaaS metrics, they need to develop a process for aligning and standardizing SaaS metrics and SaaS metric reporting.
The below list of tips can serve as a starting place to help companies align and standardize the process:
- Align upon company-wide SaaS metrics to track and report
- Keep key SaaS Metrics to no more than ten
- Standardize calculation method for SaaS metrics company-wide
- Involve key stakeholders in the alignment process
- Agree on source data for calculating SaaS metrics
- Automate tracking and reporting of SaaS metrics
- Conduct periodic reviews on key SaaS Metrics
Align upon company-wide SaaS metrics to track and report
The first step in creating a robust company-wide process to track and report SaaS metrics is alignment by leadership.
Senior leadership must align on what SaaS metrics the company will track. With several dozen options to choose from, companies need to decide what metrics are most vital for them to track and report regularly.
Every company will have some standard metrics they will track regularly and report company-wide such as ARR and churn rate, and other metrics that may only be reported on an as-needed basis or at a department level, such as qualified marketing traffic.
What metrics are tracked company-wide should align with the company's strategic objectives, size, and stage.
A SaaS company in a pre-seed or seed stage will often focus more on customer and product metrics than sales metrics. However, a sales-led company that is in the process of rapidly scaling revenue will be much more focused on customer and sales metrics.
A clear vision of which metrics are most important and how each employee can influence these metrics is essential in creating a culture built upon measuring, reporting, and improving those metrics that matter most.
Limit key SaaS metrics to no more than ten
When deciding on what metrics to report company-wide, it is easy to determine that dashboards and reports should include every metric available.
However, studies have shown that most adults can keep 5 to 9 items in short-term memory, leading to the rule of 7 that says one should keep key metrics to 7 +/- 2. This does not preclude companies from having the ability to look at or track all metrics, but it does require leadership to narrow down the key metrics a company should focus on.
Regarding metric overload, I like the words of Scott M Graffius in his book Agile Scrum: Your Quick Start Guide with Step-by-Step Instructions, who said:
“If you don’t collect any metrics, you’re flying blind. If you collect and focus on too many, they may be obstructing your field of view.”
Narrowing down key metrics is not only essential to prevent overload, but it is vital to focus the company’s attention on what matters.
Much like companies must decide on a few key strategic objectives for the company to focus on, the same is true regarding what to measure. When employees clearly understand the key SaaS metrics critical to the company’s success and how they are responsible for measuring and improving these numbers, performance will improve.
Standardize calculation method for SaaS metrics company-wide
One of the biggest challenges companies face is ensuring that the same method is used for calculating SaaS metrics.
Many SaaS metrics can be calculated in more than one way. A few common SaaS metrics that can be calculated multiple ways include:
- Customer Acquisition Cost (CAC) Payback
- Churn Rate
- Conversion Rate
- Average Revenue Per Account
- Rule of 40
Each company may settle on a different way to calculate many SaaS metrics, which is fine if everyone agrees to use the same method for calculating the SaaS metric. This should include a company-wide SaaS metrics dictionary that consists of the formula used to calculate each SaaS metric.
This will prevent meetings from deteriorating into a discussion regarding what methods were used to calculate a metric. Once a meeting reaches this point, little of value will be accomplished in this meeting.
Involve key stakeholders in the alignment process
All key stakeholders need to be involved to ensure metrics are tracked and reported company-wide similarly.
I have seen one department create reports and use one set of metrics calculated one way and another using the same set of metrics calculated differently. Preventing this from happening requires a company to involve the key stakeholders in the process.
One way to do this is to have one department responsible for defining and owning the method for all SaaS metrics. This department would be responsible for reviewing this method with the key stakeholders from each department and getting their sign-off on the approach.
Agree on source data for calculating SaaS metrics
Another challenge many companies face is what source data to use for calculating SaaS metrics. The data used to calculate SaaS metrics can come from many different sources, including:
- Accounting platform
- Company website
- Billing platform
- CRM platform
- HIRS system
I have seen three different systems used to calculate the revenue numbers as input to a key SaaS metric.
For example, the CRM, accounting, and billing systems could all be used to determine the revenue number for Average Revenue Per Account (ARPA), and each system could come up with a different answer.
For this reason, companies need to align on which source system will be used for calculating each metric. Aligning to the source system is also necessary when it comes time to automate the reporting and tracking of SaaS metrics.
Automate tracking and reporting of SaaS metrics
Using Excel as the primary tool for calculating and reporting SaaS metrics is not sustainable.
Excel is excellent for ad hoc requests and conducting a deep-dive analysis on certain trends in the data. Still, it is not a long-term sustainable solution for tracking and reporting SaaS metrics.
Doing all the calculations in a spreadsheet:
- Increases the chance for error
- Increases the time it takes to receive the reports
- Limits management’s ability to act quickly on real-time insights
- Increases the chances of different teams calculating metrics differently
Once a company has gone through the process of agreeing upon key metrics, aligning upon the method for calculating them and what source data they will use for SaaS metrics, they should then look to automate the tracking and reporting of SaaS metrics.
Studies have shown that companies with a robust process for measuring key metrics and then taking action upon them are more successful than companies that manage it manually.
Conduct periodic reviews on Key SaaS Metrics
Over time as companies grow and scale what SaaS metrics are most important will change. For example, an early-stage company might be very focused on managing the CAC payback period while a more mature company might be more focused on metrics around existing customer expansion.
This change in what metrics are most important is why company leadership needs to have a process in place for reviewing which are the key SaaS metrics that are most important to achieving the company’s strategic objectives.
Failure to do so will often result in people focusing their efforts on the wrong area. If a company is focused on a metric that was very important during an earlier stage of the company’s life but is no longer key to the current strategy this will result in a lot of inefficiencies.
An easy way to ensure key SaaS metrics get updated periodically is to review them when conducting strategic planning sessions with the senior management team.
In summary, companies must take ownership of tracking and reporting SaaS metrics. This requires companies to:
- Agree upon Key SaaS metrics
- Standardize a method for calculating SaaS metrics
- Automate the collection and SaaS metrics reporting process
Given the uncertain and rapidly changing environment that companies operate in today, it is more important than ever to ensure that the process for tracking and reporting SaaS metrics is efficient.
Companies can no longer afford to wait several days to receive SaaS metric reporting as the finance team downloads the data from several sources and manually does the calculations in Excel.
A tool that automates the tracking and reporting of SaaS metrics is more important than ever.
Imagine if a simple dashboard existed that allowed everyone in the company to easily see the key SaaS metrics critical to the company’s success in one place and then have the ability to drill down and see the details behind each of these metrics.
One such tool that manages this process is Subscript. To learn more about Subscript, please request a demo at https://info.subscript.com/demo.