Most executive dashboards are ineffective in performing their function by failing to provide an integrated view of the metrics collected about their organization. Instead of providing context for the data, these systems focus on the individual data points and are, therefore, missing a critical piece of the puzzle.
The true challenge for organizations is not how to measure the business but how to ensure the integrity of the data collected and have a clear understanding of the timing for fixing faulty data.
Why Data Order Matters
This analysis separates the sequential dependency of saas metrics, the relevant segment benchmarks, and the infrastructure required to develop a sustainable revenue-generating engine.
The Order to Fix Your Numbers
Most teams pursue both improvements to NRR (net revenue retention) and revenue growth efficiency. This is a fundamental mistake in how the company approaches these two areas of focus.
In order to effectively improve the NRR and grow, the company must follow a defined order of operations to correct causes of both. If the company attempts to improve growth without addressing the churn rate, it will waste cash and cover critical flaws in the product.
Fixing Churn First
Churn is the first metric that every business must stabilize before they can realize the value of their business.
Churn will break the math associated with LTV (lifetime value) and result in an inability to retain customers. Therefore, the act of acquiring new customers will only increase the company's expenses without contributing to growth.
Establishing Customer Value
After churn stabilizes, it will be time to focus on establishing the company's LTV. The major error in calculating a company's LTV is based on using total revenue number.
Ultimately, LTV should be calculated using the gross margin-adjusted LTV formula. Using revenue-only as the basis for calculating LTV will result in overstating the true value of a customer by up to 30 percent, leading to excessive expenditures in marketing expenses.
Optimizing Customer Acquisition Costs
With a true LTV established, you can safely measure your customer acquisition cost (CAC). The most critical efficiency signal here is the CAC payback period. The median payback period sits between 15 and 18 months.
Top performing businesses look to achieve full return on their investment in under 1 year when utilizing capital.
Balancing the LTV to CAC Ratio
If your company is exceeding those targets, then you will get into an unhealthy ratio with too much spend on customer acquisition (CAC) compared to your long-term customer value (LTV).
If you have a 1:1 ratio for customer acquisition, then you'll begin to destroy the value of your company with every customer acquisition as they're going to leave.
Expanding Accounts with NRR
Measuring NRR is an important KPI for software businesses, as it tells you the potential growth of each existing customer (through upsells and cross sells), and to offset any churn from customers that churn out.
You should only focus on NRR after you have acquired the customer. NRR is the biggest growth driver of your software business.
The NRR score shows how much existing customers are growing, what you make off them, and what they spend with you.
Scaling Profitably with the Rule of 40
Finally, we have the Rule of 40 as the last part of the dependency chain. The Rule of 40 simply takes your projected growth and adds your projected profits to arrive at a combined value of 40.
If you have a score of above 40, you balance your scale and efficiency as a good business. Top quartile companies are trying to achieve a combined score of 60 or higher.
Core Benchmarks for SaaS Metrics
The benchmark will vary based on both ACV and sales growth model.
The median NRR is around 101% for software companies. However, the best performing companies will have an NRR greater than 111%.
For enterprise models, the best-in-class companies are achieving NRRs at a range of 120%-130%, depending on the size of their company.
Retention and Churn Benchmarks
The gross revenue retention (GRR) metric for software companies should be above 90% for enterprise models. Elite teams achieve gross revenue retention (GRR) rates of 95%+.
Customer churn based on annual contract values varies by industry. Enterprise customers should target annual churn rates of <5% to be considered successful.
For mid-market customers, annual churn rates of <7-10% are acceptable. The SMB segment typically experiences <10-15% annual churn.
On a monthly basis, enterprise customers should expect churn rates of <1%. SMB customers typically experience churn rates of 3-5% each month.
Margin and Growth Targets
To support the ongoing growth of software development, software companies need high-margin products. A 75-80% gross margin is considered "good" today.
Top software companies achieve gross margins of 85%+.
Private companies are at a median of 26% annual recurring revenue (ARR) growth. The top 25% of private companies are at 50%+ annual growth rates.
Data Integrity and Dashboard Rules
The data that is captured in dashboards must be trustworthy and it must also be easy for teams to trace the metrics back to the data sources. Without the ability to trace data back to the source, the dashboard becomes worthless.
Effective analytics requires strict governance and a clear process for validating data in the analytics pipeline before it is published in dashboards.
The Four Phases of Analytics
The analytics development process will be completed over four distinct phases. Do not attempt to create all the views of the dashboards at one time.
Start with the primary phase of the dashboard, which will contain only the high-level MRR, cash, and churn data. Then conduct a department phase for marketing, sales, and customer success.
Next, develop operational views, which set forth red, yellow, and green indicator thresholds to provide teams with direction on when to take action based on daily updates. Finally, the advanced phase takes predictive modeling and deep cohort analysis to new heights.
Enforcing Source Truth
By enforcing source truth for metrics through documentation, and assigning a clear owner to metrics, we can ensure 100% accuracy of metrics.
To facilitate accuracy in revenue numbers, companies should allow for SQL and standard flow logic to be built into revenue calculations so that finance personnel can validate the calculations easily.
Reconciliation should occur quarterly and provide accountability when comparing the dashboard numbers to the core financial system for revenue, and therefore to eliminate drift.
Choosing the Right Tool for Growth
Choosing the correct saas metrics tool for your company is dependent on your billing scheme and the sales process. There is no "best in class" tool.
Only the tool that fits best with your current revenue model is best.
1. ProfitWell for Early Stages
Early stage teams need timely, predictable revenue numbers without spending a lot of money. ProfitWell is the easiest way for early stage companies to have core revenue metrics in place (MRR, Churn, LTV).
It integrates seamlessly with the majority of the leading billing platforms making it a great product for seed stage companies.
2. Baremetrics and ChartMogul for Multiple Sources
As companies grow and become larger, they tend to utilize multiple sources of revenue and billing. Baremetrics and ChartMogul are two tools that excel in this type of environment.
Both tools offer in-depth cohort analysis for revenue, and also have easy integration with multiple payment platforms such as Stripe and Recurly.
3. Maxio and RevenueCat for Complex Billing
Enterprise companies require strict revenue recognition under complicated billing rules. Maxio serves that purpose by providing the bridge between billing and finance.
RevenueCat is the go-to solution for managing native in-app subscriptions and integrations with Apple or Google billing platforms, specifically for mobile and consumer software.
4. Mixpanel, Amplitude, and PostHog for Product Data
Financial answers look at past events, while product analytics attempt to determine what will happen in the future. The Mixpanel, Amplitude, and PostHog platforms provide this crucial tracking of how customers use features and their rate of activation for new features.
These platforms will allow you to establish a product qualified lead (PQL) before entering your sales pipeline.
Immediate Revenue Retention Tactics
Some of the fastest ways to recover revenue are through some very specific tactical actions. The quickest way to recover involuntary churn revenue is through immediate intervention.
Dunning and Payment Recovery
It is evident that B2B software companies experience a considerable amount of involuntary churn due to the number of accounts lost to expired credit card information and failed payment processing.
These accounts require dunning processes that automate the collection of expired accounts and credit cards.
By improving your company's dunning procedures, you can recover between 1% and 3% of your net revenue retention over the next three to four weeks.
In one case study, a company was able to bring down its involuntary churn from almost 10% to approximately 2% in just 30 days with improved dunning procedures.
Red Flag Product Triggers
Waiting for an account to be canceled is an absolute fail on the part of the customer success team. All teams should create red flag metrics in their product analytics.
An example would be, when the user's first session is less than two minutes, the system should flag that user for immediate customer support.
Acting quickly on usage data has allowed companies to reduce their overall churn by 78%.
The Strategic Command of SaaS Metrics
Growth is not random; it is the result of planning and measuring through disciplined action. By linking metrics together in a timely and logical operational cadence, companies will stop wasting money at the top of their leaky funnels.
Having a strong data governance process will provide leadership with a high degree of trust in the metrics they are using to make strategic decisions. Ultimately, establishing the correct saas metrics will lead to predictably profitable scaling of the company.
Eliminating Critical Data Bottlenecks
How often should management review the performance of core metrics dashboards?
Board members look at financial data quarterly. However, management needs to look at this information much more frequently. Operating metrics such as MRR and simple churn should be reviewed by the management team weekly.
If you wait until you get your numbers every month, you could lose a significant amount of revenue due to small revenue leaks in the month prior.
What causes the differences between our CRM data and billing system data?
The CRM manages intent, while the billing system tracks established first payments. If the two applications do not match, then you will have an accounting problem.
Strictly defined source ownership, along with performing quarterly data checks, will resolve these issues. If your financial dashboard does not match your actual financial system, you will need to resolve the issue before your financial numbers can be relied upon by your leadership.
What is the most common mistake in calculating customer lifetime value?
Ignoring the cost of goods sold is the most frequent mistake in LTV calculations. If you calculate LTV using only top-line revenue, you will overstate a customer's true value.
You must include gross-margin-adjusted LTV in establishing safe limits on marketing and acquisition costs.
