For the last decade, SaaS companies have been the stars of the stock market. 2020 and 2021 saw particularly impressive growth, even as many other sectors of the economy suffered.
However, in recent months, SaaS growth has taken a bit of a nosedive - a phenomenon that some in the industry have dubbed the “SaaSacre”. This is one of the biggest market downturns since the 2008 recession, leaving many teams wondering how to proceed.
As you can see from The BVP Nasdaq Emerging Cloud Index, the forward-revenue multiples of public, cloud-software businesses have dropped by nearly 60% since November.
In the middle of a SaaSacre, how should businesses change their thinking about operating and metrics?
In recent years, explosive SaaS growth led to an implicit assumption in the industry of infinite, nearly-free capital. Frank says that the days of this assumption are over - as the market declines, SaaS finance leaders need to prepare for free capital to dry up.
“There used to be a ‘growth at any cost’ mindset in SaaS,” Frank explains. “Now, the question becomes: can your business model attain profitability, or will you always have to raise money?”
In response to the SaaSacre, what practices should businesses adopt?
The drying up of capital calls for a few reminders of SaaS best practices. While these may seem straightforward, the aforementioned “growth at any cost” mindset that’s dominated SaaS for the last few years means that some of these have fallen by the wayside.
If that’s the case for you and your business, Frank says it’s time to bring these back:
1) Prioritize efficiency with cash
Of course, less access to cash means you’ll need to use what you have more wisely. Cost-effectiveness has always been necessary for a successful business, but this need will continue to increase moving forward.
2) Pay close attention to your metrics
If you’ve been sloppy with metrics in the past, now is the time to clean up your approach. A detailed understanding of your metrics is crucial for detecting problems early and course-correcting. Core metrics like Magic Number, CAC Payback Period, and Burn Multiples are especially important.
⭐️ Subscript can make this easier by calculating your metrics and keeping them in one easily accessible interface. If you’re not using Subscript, spreadsheet software can do the trick - but only if your sheets are meticulously maintained and monitored.
3) Thoroughly understand your CAC, customer acquisition processes, and retention
Efficient customer acquisition and high retention rates are more important now than ever. Even if meteoric growth in recent years has made up for some higher-than-ideal churn and acquisition spending, it’s unlikely that this trend will continue moving forward.
4) Use customer success strategically to drive expansion
As businesses shift gears toward expansion over acquisition, customer success will play an increasingly important role.
The metrics that matter most
We’ve briefly discussed the need to pay close attention to your metrics. That’s true across the board, but three stand out as the most crucial during a SaaSacre:
1) Magic Number
Your Magic Number is the number of dollars you collect in revenue from every dollar spent on sales and marketing. Subscript can calculate this for you, but you can also use this formula:
The higher the resulting number, the more efficient your S&M spending. Your Magic Number can be interpreted as follows:
- Below 0.75: A Magic Number below 0.75 usually means you should re-evaluate your S&M spend.
- 0.75 - 1: A Magic Number in this range typically indicates efficient S&M spending.
- Above 1: A Magic Number greater than 1 signifies highly efficient S&M spending.
For more information, explore this article by The SaaS CFO.
2) CAC Payback Period
Customer acquisition cost, or CAC, is the total sales and marketing cost necessary to acquire a single customer. It’s calculated by dividing your total sales and marketing expense in a given period by the total customers acquired in that period.
CAC Payback Period is the amount of time it takes for an acquired customer to “pay back” their acquisition costs. To calculate it, you’ll need to know your CAC, as well as your Average Revenue Per Account (ARPA) and Gross Margin percent. Here’s the formula:
In almost all cases, the faster your CAC payback period, the better. 12 months is commonly cited as universally strong, but according to OpenView, your peers’ payback periods may be a better benchmark. You can find more information here.
3) Burn Multiples
Burn Multiples are perfect for giving you a big-picture understanding of how efficient your business is. While Magic Number and CAC only factor in your Sales and Marketing spend, Burn Multiple factors in all of the cash you’ve spent.
To calculate your Burn Multiple, take the cash you’ve burned in a given period and divide it by the net ARR added in that period.
- Under 1x: Amazing
- 1 - 1.5x: Great
- 1.5 - 2x: Good
- 2 - 3x: Suspect
- Over 3x: Bad
The downturn experienced by SaaS businesses in recent months calls for a shift in priorities. Central to this shift is the understanding that free cash will be increasingly limited, leading to a slowing of growth and the increasing importance of account expansion through stellar customer success. Businesses can prepare by returning to some tried-and-true SaaS strategies.
Subscript keeps all your data in one easily accessible, user-friendly interface, helping you run a tight ship with metrics without the hassle of spreadsheets.
Want a demo? Let us show you around.