8 TMT Transforming Your Saas Business A Strategic Guide For Optimizing Business Performance

Transforming
your SaaS
business
A strategic guide for optimizing
business performance
kpmg.com/SaaS
Contents
2 Executive Summary
3 Background: Evolution of an Industry
9 Business Model Dynamics: A New Way of

Doing Business
15 Business Drivers: Optimizing Performance

for Success
38 Leading Practices: Critical Steps for Achieving

Success
43 Appendix: Strategic Drivers: Formulae

and Examples
Featured Industry Contributors

1 Mark Hawkins, CFO, Salesforce.com
2 Neil Williams, CFO, Intuit
2 Steve Cakebread, CFO, Yext
5 Mark Culhane, CFO, Lithium Technologies
5 Bob L. Corey, CFO, CallidusCloud
7 Ron Gill, CFO, NetSuite
8 Mark Garrett, CFO, Adobe
9 Kevin Bandy, Chief Digital Officer, Cisco
13 R. Scott Herren, CFO, Autodesk
15 Mike Kourey, CFO, Medallia
16 Matt Quinn, CTO and EVP Products & Technology, TIBCO
21 Clyde Hosein, CFO, RingCentral
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
“
Revolutionary changes in technologies have
come in waves -- it brought us the mainframe,
the client-server and the cloud. From our
experience, the cloud is exciting in that it
enables us to help our customers connect
with their customers in a whole new way. As
the pioneer in Cloud SaaS offerings, we have
witnessed disruption across industries and
the globe as people embrace this dramatically
improved technology.
As a CFO, the big opportunity is how best to SaaS software application
support our respective companies in these annual sales
times of innovation and disruption, pivoting to
new technology models and business models $33.4 billion
in order to meet the modern day expectations
and demands of customers and investors. in 2015
This publication, Transforming your SaaS
business, A strategic guide for optimizing
$67.2 billion
business performance, serves as a useful
guide to gain a deeper understanding of the
by 2019
Source: Market Trends Gartner, November 2015
drivers and metrics across the balancing acts
of growth, margin expansion and long-term
sustainability and competitiveness. Using this
knowledge, SaaS and software companies
have a greater opportunity to accelerate
their business transformations, improve their
competitiveness and amplify their future
”
financial success.
– Mark Hawkins, CFO of Salesforce.com
Transforming
Transforming
your SaaS
your SaaS
business
business
1 1
Executive summary
The Cloud Service Providers (CSPs) solutions, either as an additional offering “Transforming your SaaS
market, and more specifically or as a replacement of their on-premise business” is thorough and
portfolio. Companies that enjoy a large
the Software-as-a-Service (SaaS) comprehensive. It’s always good
maintenance revenue stream have
market, has evolved considerably adopted a hybrid strategy where the on- to step back and remember the
since its inception in the 1990s. premise and SaaS offerings coexist, while strategic rationale for some of
Whereas it began as a niche some are pursuing a complete business the choices we work with day
offering, primarily used by start- model transition to SaaS offering. Some by day. As the article describes,
providers have also started adopting a
ups that recognized the benefits of "freemium" licensing model, providing the I believe the SaaS model is a
computing in the cloud, it has since software code for free and charging for better way for customers to use
gained strong adoption among services and support. software and for companies to
enterprises around the globe. 3. Integrated Technology and Product build and deliver it, as it actually
With lower operational costs than on- companies: These include integrated enables faster development,
premise software, quick deployments, technology companies (IBM, HP and delivery and adoption.”
rapid product upgrades, flexible Cisco) and product companies (GE and
configurations, seamless integration, Siemens) that have integrated SaaS —Neil Williams, CFO of Intuit
scalability, high availability and inherent offerings into their core businesses.
security, there are tangible, competitive With their subscription-based model,
advantages for adopting a SaaS solution. the SaaS offering allows them to earn
recurring revenue streams.
As enterprise adoption has increased, the “Transforming your SaaS
number of SaaS solution providers has A new way of doing business business" is a complete tutorial
grown commensurately. With varying The SaaS business model differs
markedly from that of traditional software
and describes the proper metrics
operational models and capabilities,
businesses, with unique challenges and measures needed to have
these providers can be grouped into the
following categories: for product and pricing, research and successful SaaS business.
development, sales and marketing, service All the metrics described are
1. Pure-SaaS solution providers: and support and finance. As a result of
These companies were designed important to have a successful
these differences, SaaS companies must
from the outset with a cloud/SaaS- be managed differently than traditional on- SaaS company. The key
based product offering. This category premise software companies. metrics I focus on are Growth
includes pioneering, cloud companies in Customers, Growth in ACV,
(Salesforce, NetSuite), as well as a SaaS business drivers
As a result of this distinct management Growth in Deferred Revenue and
number of startups and emerging high
growth companies. approach, the SaaS business requires Growth in Cash Operating Cash
a different set of drivers and metrics Flow. These metrics help the
2. O
n-premise software providers: to measure business performance and
Responding to the increasing demand company focus on improving the
efficiency, for each type of SaaS company
for cloud-based solutions, and to provide — pure-SaaS, on-premise software value of the business.”
more predictability, some on-premise company, integrated technology/ product —Steve Cakebread, CFO of Yext
software vendors (Oracle, Adobe, Intuit) company—weighing the significance of
have transitioned to providing SaaS these metrics differently.
This paper highlights the transformational priorities

and critical challenges for the SaaS business, with an
underlying goal of providing a framework for achieving
long-term success.
For more information about this publication, or to learn
how KPMG can help your Cloud (SaaS) business, please Prasadh Cadambi Satya Easwaran
contact us: Partner, Technology Industry Partner, Advisory
+1 650-793-4129 +1 650-391-5365
scadambi@kpmg.com seaswaran@kpmg.com
2 Transforming your SaaS business
Metrics Blueprint for SaaS Businesses: A Strategic Framework
This publication provides a strategic Because of their inherent complexity, methodology for each metric in the
framework for increasing growth, these drivers and metrics must be appendix.
profitability and sustainability for the SaaS measured and interpreted correctly
business. We present strategic drivers The road to success
in order to be applied effectively —
along with key metrics used to assess Successful implementation of the metrics
whether internally, externally or both.
performance at each stage in the business blueprint is a top-down challenge for
Throughout this publication, we describe
lifecycle — launch, scale/optimization and SaaS companies, which must review
these metrics in detail and explain how
stabilization (see illustration immediately and transform their existing enterprise
to incorporate them into a successful
below; highlighted metrics are “must performance management frameworks
business strategy, providing calculation
haves” for success). and operating models.
Key stages of growth Launch > Scale and Optimize > Stabilize >
Strategic Drivers Customer Growth Customer Growth Customer Growth
– Customer Lifetime Value – Customer Lifetime Value –C ustomer Lifetime Value
– Number of customers – Subscriptions/customer – Billings/customers
– Billings Customers
Revenue Growth Revenue Growth
– Total Contract Value Revenue Growth –A CV
– Backlog – Total Contract Value – Bookings
– Annual Contract Value (ACV) and Average – Backlog – C alculated Billings
ACV – ACV and Average ACV –R ecurring revenue
– Bookings – Bookings
Growth – ACV to Billings ratio – Calculated Billings
– Recurring Revenue (ARR/MRR/QRR) – ACV to Billings ratio
– Average Revenue per User or per Account – Recurring revenue
– Deferred Revenue – Average Revenue per user or per account
– Time to recognize deferred revenue – Deferred revenue
– Time to recognize deferred revenue
Costs Costs Costs
– Customer Acquisition Costs – Cost to Serve – C ost to Serve
– Research & Development Costs/Sales – Research & Development Costs/Sales
Margins
– Sales costs/Sales – Sales costs/Sales
–R ecurring Margins
– Marketing costs/Sales
Margins –G ross Margins
Margins – Recurring Margins
Cash flow
– Recurring Margins – Gross Margins
– Gross Margins – Service Margins Mix –C ash flow from operations
– Service Margins Mix –O perating cash flow margins
Cash flow
–N et cash per share
Profitability Cash flow – Cash flow from operations
– F ree Cash Flow
– Cash flow from operations – Operating cash flow margins
– Operating cash flow margins – Net cash per share
– Net cash per share – Free Cash Flow
– Free Cash Flow
– Months up-front
Sales Effectiveness Sales Effectiveness Retention
– Growth Efficiency Index – Growth Efficiency Index –G
ross revenue churn
– Sales and marketing efficiency – FTE's drivers (i.e. ARR/Sales FTEs) –N
et revenue churn
– Lead Velocity Rate – Sales and marketing efficiency –D
ollar-based Net Expansion Rate
– Sales cycle length – Lead Velocity Rate
User adoption
– Average Contract Length – Sales cycle length
– V olume and type of Support Tickets Raised
– Renewal Rate – Average Contract Length
–N et Promoter Score
– Customer Acquistion by Channel – Renewal Rate
– Typical acquisiton path – Leads-to-trial conversion rate
– Leads-to-trial conversion rate – Trial-to-paying-account conversion rate
– Trial-to-paying-account conversion rate
Retention
Retention
Sustainability – Customer churn
– Customer churn
– Gross revenue churn
– Gross revenue churn – Dollar-based Net Expansion Rate
– Quick Ratio
User adoption
User adoption – Products per customer
– Products per customer – Number of features accessed per customers
– Number of features accessed per customer – Volume and type of SupportTickets Raised
– Net Promoter Score – Net Promoter Score
– Altitude metric – Altitude metric
Transforming your SaaS business 3
Background
Evolution
of an industry
SaaS represents
50% of the total cloud

workload and
20% of the global

application market
Source: Market Trends: Future Look at SaaS in the Application Markets’. Gartner, November 2015
SaaS installed workloads

growing at a compound
annual growth rate
of 34% (2014-2019)
Source: Cisco Global Cloud Index: Forecast and Methodology, 2014-2019
IDC predicts the share of SaaS

globally will grow from
20% in 2015 to
30% by 2018
Source: IDC Worldwide SaaS Enterprises Application 2014-18 Forecast
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Background: Evolution of an industry
The Software-as-a-Service (SaaS) While the SaaS market keeps growing, “Transforming your SaaS business’
market has grown considerably a number of new considerations are provides a fantastic framework
shaping the industry, given the key
while undergoing significant for management teams and
role scalability, high availability, security
change since the late 1990s, when and data residency play in the decision investors on how to measure and
it began as an alternative way of criteria for adopting SaaS in an enterprise evaluate a SaaS business through
delivering software. environment. Data residency, for instance, the key stages of growth. SaaS
can have a significant impact on global businesses are fundamentally
While the earliest SaaS offerings SaaS operations, as illustrated by the
included a handful of major recent decision by the European Court
different than traditional software
players such as Salesforce and of Justice (October 2015) to overturn the companies given customers
NetSuite, the market is now very Safe Harbor agreement between the EU don’t own or have the burden
and US, requiring additional measures of operating the software. As a
competitive, with a wide variety to transfer EU cloud data to the United
of business models. result, how you build and operate
States. As SaaS providers become more
mature, enterprise SaaS implementation the software, support it, sell it,
The adoption of SaaS is in large part
attributable to the number of competitive projects are also becoming larger and bill for it requires alignment
advantages that it offers compared to a in terms of scale and scope. Some across the entire organization.
traditional software licensing model, such providers have begun integrating social This guide concisely lays out the
as more flexible configurations, reduced media components into their offerings,
key considerations and metrics to
costs that are more predictable, and faster a differentiating element in what is
deployments. increasingly a highly competitive SaaS measure each step of the way.”
market.
As the corporate adoption rate of SaaS
With global corporate demand for SaaS —M
ark Culhane, CFO of
grew, the industry moved from edge
applications to core, with a proliferation of solutions growing steadily, a growing Lithium Technologies
providers which developed SaaS offerings number of solution providers (on-premise
for an expanded field of domains, software providers and integrated
including HR, talent management, technology and products companies),
finance and accounting. Today, Customer have entered the SaaS marketplace, each
with a goal of delivering greater value, The evolution to the digital
Relationship Management (CRM),
Enterprise Content Management (ECM), increased revenue and the ability to marketplace has set the stage
Customer Experience Management monetize intellectual property. for a Buyer-led economy.
(CEM) and Enterprise Resource Planning Transforming your business to
(ERP) are the most profitable SaaS the Cloud is essential to compete
offerings, while Business Intelligence
(BI), digitization (including enterprise
in this new digital marketplace.
mobility, predictive analytics and robotic The Cloud completely disrupts
process automation), and CRM comprise the old market methods for
high-growth areas (year-on-year growth competing and communicating.”
between 25 and 40 percent in 2015, as
per Gartner’s estimates).
—B
ob L. Corey, CFO of
CallidusCloud
Background: Evolution of an industry (continued)
The primary categories of SaaS as well as the fact that their solutions were – Vendor solvency is a vulnerability that
providers include the following: built with a cloud native delivery model. impacts both the customer and provider.
As a result, they have enjoyed higher SaaS providers must therefore track cash
1. Pure-SaaS solution valuations, a reflection of their primary flow metrics closely, particularly during
providers business model attributes: the launch phase. This becomes less
A. E
xponential growth, particularly in of an issue as they scale and become
Pure-SaaS providers are “born in the established market players.
cloud”, which means that their product the early years, partly due to the
offering was designed to be cloud/ SaaS– compounding impact of renewals – Contract and Service Level Agreements
based from the outset. and add-on sales requirements are likely to require a
B. Predictable revenue streams, robust contract management cadence
Most pure SaaS providers began as for both customer and provider. For SaaS
technology start-ups, and many of them including annuities
providers, this may also include requests
went public after recording rapid growth C. Long-term profitability (margins for periodic data backup.
and maturity. The 2015 estimated in the short terms are invested in
median sales growth for U.S-based public growth), supported by economies With the above in mind, below are the
emerging software companies was 47 of scale within the SaaS business key transformational priorities and “must
percent, according to Goldman Sachs. model have” metrics that pure SaaS solution
providers should consider:
Pure SaaS solution providers are often Pure SaaS providers may face critical
rewarded for their first-mover advantage operational challenges, including:
Types of offerings Key transformational priorities

Horizontal offering: specific product aimed at a broad number of 1. D
eveloping a modular service-oriented architecture to
customers in multiple industries support new technologies and features and allow scalability
Vertical offering: complete solutions tailored for customers in a 2. A
dopting cloud-based subscription platforms and billing
specific industry & pricing systems
3. E
laborating cloud specific sales compensation plans,
Competitive edge
carefully set goals and index on relevant SaaS metrics
Cloud experience, no on-prem legacy issues, cost benefits, 4. B
uilding and nurturing a robust partner ecosystem
flexibility and scalability
5. A
dopting an integrated approach in operating the
product, sales and marketing functions throughout the
Providers Examples product release cycle, to iterate faster
– Salesforce – Medallia
– Adobe – Yext “Must Have” Metrics
– Netsuite – Lithium Technologies – ACV/ ARR on a disaggregated basis
– RingCentral – Recurring gross margins
– ARR/Sales FTEs
– Growth Efficiency Index
– Customer Lifetime Value
– Gross churn
– Customer Acquisition Cost
– Cash Flow from operations
Note: highlighted metrics are the new SaaS specific metrics to be

considered
“The thing that surprises many 2. On-Premise Software As a result of their original business
investors and boards of directors model dynamics, on-premise software
providers companies have a challenging, strategic
about the SaaS model is that,
A key consideration for on-premise course-correction to execute. However,
even with perfect execution, an software providers is to respond to the companies that have successfully
acceleration of growth will often increasing customer demand for cloud- navigated this transition have prospered,
be accompanied by a squeeze on based software solutions. creating enormous shareholder value.
profitability and cash flow. Companies that enjoy healthy
maintenance revenue streams have begun Following a transition to
Inherent in the amortized revenue
adopting a hybrid strategy where the on-
model in SaaS is a longer delay the cloud and an annuity
premise and SaaS offerings coexist.
between investments in capacity business model, Adobe
Some companies that are primarily
and the uptick in recognized software license-driven are transitioning
experienced a 3.5-fold
revenue driven by that capacity. to a business model that includes cloud/ increase in shareholder
To oversimplify a bit, a new SaaS SaaS. Others are still evaluating their value. Meanwhile, blue chip
sales rep will simply cash more options to determine the most favorable software giants including
business model moving forward.
paychecks before he/she delivers Microsoft, Oracle and SAP
Some providers have started adopting have all begun a similar
revenue than the same rep in a
a "freemium" licensing for open source
perpetual model. Investors need transition to the cloud with a
intellectual property model, as a variant of
to be prepared to see some P&L the on-premise model. They in essence SaaS-based model for their
and cash flow metrics turn down provide the software code for free but core product offerings.
when things are going really well. charge for services and support, in what
can best be described as a services model.
The counterintuitive corollary,
of course, is that when growth
levels off or slows, margins and
cash flows tend to improve.”
Types of offerings
— Ron Gill, CFO of NetSuite Offerings can combine on-premise and SaaS delivery.
Cloud-based versions of flagship on-premise software suites,
mostly horizontal offerings
Competitive edge
Software market experience, installed base, know-how and
brand equity, flexibility in offerings depending on the customer’s
needs
Providers Examples
– Microsoft – Intuit
– Oracle – Autodesk
– SAP – TIBCO
– Adobe – CallidusCloud
Over the past five years, we have With the above in mind, below are the key transformational
successfully transformed our priorities and “must have” metrics that on-premise software
providers should consider:
Creative product business from
a shrink-wrapped CD software
offering to a cloud-based Key transformational priorities
subscription model. During the 1. A
dopting a cloud first strategy in developing and
business model transition, our deploying products which look and feel like a web-
profit and loss statement was not browser customer experience and that can be used
the best measure of the health across multiple devices
of our business. The faster we 2. M
anaging and reporting both product offerings (on
transitioned our customers to a premise and pure SaaS), taking necessary steps to
mitigate offer cannibalization
subscription model, the faster our
revenue fell in the short-term. 3. O
perating the product, sales and marketing functions
closely throughout the product release cycle: integrated
We shared new metrics to approach rather than a functional/ decoupled approach
help analysts better measure 4. T
ransforming the finance organization, attracting better
the health of the business as FP&A talent, acquiring the right technology (i.e. subscription
we went through this transition. based billing engine), communicating the right metrics
internally and externally
We shifted their focus toward
the building blocks of our new 5. B
uilding the right sales team to sell annuity based
product offering and retooling the existing sales
Creative Cloud business—
compensation plans accordingly
number of subscriptions, average
revenue per user (ARPU), “Must Have” Metrics
annualized recurring revenues – Number of subscriptions
(ARR), and revenue that was
– Average revenue per account
contracted and either deferred or
– Revenue (License vs Maintenance)
in backlog (off-balance sheet).
– Maintenance renewal base and changes in maintenance
We were transparent and renewal base
over-communicated with Wall – ARR
Street. We provided both
– Deferred revenue
short- and long-term metrics,
– Backlog
including three-year compound
annual growth rates for revenue – Net Dollar Based Churn
and earnings per share to give Metrics that need to be considered and that are perhaps not being tracked, are in bold font
investors a way to measure our
progress and to have a view of
what the business would look
like after the transition.
— Mark Garrett, CFO of Adobe
3. Integrated Technology and Products companies “Cisco and our partners have
Integrated technology and product deep expertise and intellectual property
been working with industries
companies are also including SaaS with in turn delivering stable recurring revenue from retail to manufacturing
their core business offerings. Historically, streams that include a high margin and to government to help them
these companies would embed or build higher market valuations. The digitize, disrupt and unlock
perpetually license their software as part strategy has strengthened their customer business value. At Cisco, we
of a solution bundle. They are now offering relationships by shifting the narrative from
software as a separate service that spend/cost to business outcomes. are transitioning our business
includes multiple licensing options. SaaS model from a hardware focused
offerings allow them to monetize their model to one focused more
on software, services and new
Types of offerings consumption models to meet
Software (including VoIP, operating systems, and analytics), the needs of our customers.
hardware (laptops, chipsets, switches, routers, etc.),licensing of This transition involves a delicate
intellectual property balancing act to ensure our
existing revenue streams co-
Competitive edge
exist with and support SaaS
Integrated Highly technical specialization in their field, size and reputation and new business model
Technology of offerings
companies revenue growth. A successful
Providers Examples transformation would need
– IBM
to span the spectrum from
offerings, to routes to market,
– HP
to business and support
– Cisco Systems
functions - all these need to align
– Qualcomm to execute on our digitization
strategy and better support
client organizations. We have
Types of offerings focused on increasing internal
Highly niche software offerings, typically IP-based solutions collaboration across functions to
ensure sales, product, services
Competitive edge and support organizations are
working in concert to ensure we
Product High degree of specialization and domain knowledge.
companies Investment in technology aligned to core business create a unified portfolio that our
partners can digest and drive
Providers Examples digitization opportunities across
– GE companies, industries, cities and
– Siemens
countries”
—K
evin Bandy, Chief Digital
Officer of Cisco
With the above in mind, below are the key transformational

priorities and “must have” metrics that integrated high
technology companies and product companies should consider:
Key transformational priorities

1. Adopting cloud-based subscription platforms and billing
& pricing systems
2. Leveraging the partner ecosystem to enable cross-sell/
up-sell to the existing install base
3. Retooling sales compensation plans to include a cloud/
SaaS component
4. Managing and reporting product lines and offerings,
including SaaS
5. Investing in enhanced customer on-boarding and
servicing
“Must Have” Metrics

– Gross Margin/ Net Margins
– Revenue Growth
– Research & Development as a % of revenue
– Sales & Marketing expenses as a % of revenue
– Deferred Revenue growth
– ARR and ARR Growth
– Backlog
– Subscription per customer
Metrics that need to be considered and that are perhaps not being tracked, are in bold font
Business
Model
Dynamics
A new way of
doing business
Business Model Dynamics: A new way of doing business
Solution providers offer distinct The offering differentiation impacts a finance function operations. As a result,
business models that reflect their number of factors, including product and SaaS companies need to be managed
pricing, sales and marketing, the way differently than traditional on-premise
offering (SaaS vs. traditional on- service and support is provided and the companies.
premise software delivery)
Product and pricing
Traditional On-premise Offering Saas offering

– Single-tenant
– Multi-tenant
Architecture – Software installed directly on customer’s IT
– Direct access to cloud-based application
infrastructure
Release Cycle Generally up to twice a year Typically 6 to 8 weeks
Pricing Upfront license fee as well as ongoing support fees Recurring subscription fees
Speed of Weeks or days - can be longer depending on

Several months
deployment complexity of integration with other systems
Scheduled, large-scale, typically once a year, time Ongoing, more frequent upgrades throughout the
Upgrades
consuming and can cause significant disruption year
Customer Traditional software user interface and experience, Browser-based user interface and experience,
Experience desktop based, single location access accessibility across multiple devices
Security and Baseline cost for product security, access control Higher cyber security and compliance costs to ensure
Compliance and compliance with applicable regulations data privacy and residency
Prior to a product release, SaaS solution customer demand for accessibility across them more agile to accommodate pricing
providers seek to enhance key capabilities, multiple devices and platforms. models changes (such as per seat vs.
such as hosting and system management, Additionally, SaaS solution providers are usage based billing) while also providing
commerce platforms and business support transforming their design to a modular, real-time reporting that creates visibility
systems. They also look to enhance the service-oriented architecture, one that into usage patterns. Some SaaS providers
customer experience, investing in the supports new technologies and features are actively looking for billing engines
product architecture, design and user and is readily scalable. They are also designed to support the subscriptions
interface. Mobile first design has become transforming their billing systems, making model.
the norm, a response to the increasing
“I believe all enterprise software Key Success Factors for pure SaaS offerings
will move to (or be born in) the
cloud for a few reasons. First,
– Modular architecture and scalability as a design principle at the outset, to manage
the cloud provides limitless Cost to Serve (CTS) and achieve benchmark gross margins at maturity
compute and storage elasticity,
– Invest in user interface and user experience, mobility (access across multiple
which is not only a superior cost devices)
model, it also enables work
– Spend continuously on innovation and security
that was previously prohibitive
– Invest to ensure uptime and availability and plan sufficiently for business continuity
to complete. Second, the
and performance
explosion of mobile devices
– Invest in proper billing systems customized for metered usage
over the last 10 years has
fundamentally and permanently – Invest in application performance monitoring
changed the way companies – Adjust for variability between product pricing and volume
get work done at all levels. And
third, the cloud is an inherently
collaborative platform, which
is increasingly important for all
businesses. These are business
driven imperatives, which is why
I believe all enterprise software
moves to cloud/mobile. It is
important to recognize that
the business metrics that
companies (and investors) need
to focus on are dramatically
different for cloud/mobile
businesses”
—R
. Scott Herren, CFO of
Autodesk
Business Model Dynamics (continued)
Sales and marketing
Traditional On-premise Offering Saas offering

Marketing Significant events and tradeshows, website, Webinars,
Tradeshows, conferences, print, outdoor,
and lead social marketing, content marketing, referrals, Search Engine
e-mail Optimization (SEO)
generation
Small to Midmarket Customers – High
Small to Midmarket Customers - Low touch, land and
touch, partner/ reseller based sales, shorter
expand, short sales cycle
sales cycle
Sales Model
Enterprise Customers - High touch, direct Enterprise Customers - High touch, direct sales force, lengthy
sales force, lengthy sales cycle sales cycle
Sales Traditional sales incentives and Elaborate compensation plans, with significant focus on ACV
Compensation compensation plans structured towards and multipliers/ decelerators based on service mix, billing,
Plans bookings and revenue recognition contract length and renewal
Sales Cycle within the customer’s IT environment. significantly more complex IT and
This has enabled business teams within operational environments (multiple
Typically, the sales cycle for traditional an organization, rather than centralized geographies, large data/ record
software providers is a lengthy one that IT, to directly buy SaaS solutions. SaaS volumes, preferred vendor criteria,
incorporates a high-touch, direct sales companies also have a strong support SLAs). Additionally, their higher license
process. base for retention, due to multiple touch requirements and integration costs result
The cycle is considerably shorter for points within the organization that create in longer decision timelines that involve
SaaS providers, due to lower upfront cross-sell and up-sell opportunities. multiple stakeholders.
costs (operational effort, financial For enterprise customers, the sales
commitment, and switching cost), quicker cycle may not vary between on-premise
deployments, and seamless integration and SaaS. Enterprise customers have
Marketing Campaigns Providers that have a hybrid on-premise Sales and marketing expenses
and SaaS offering are faced with the for traditional Software vendors
SaaS providers often employ a “land additional challenge of creating different
20-30%
and expand” business strategy, applying marketing tactics to support each business
marketing strategies that focus on model. Some SaaS providers combine
of revenue
customer acquisition. Those strategies both traditional, on-premise and SaaS
include combining digital marketing incentives, both for the internal sales force
(websites, social media, search, e-mail) as well as for prospective clients. SaaS
with integrated campaigns (events, providers directly appeal to customers Sales and marketing expenses
sponsorships, media and analyst relations) of on-premise solutions with aggressive for pure SaaS vendors
Common practices for increasing pricing comparisons that focus on the
customer acquisition and referrals include
engaging prospects in free trial programs,
Total Cost of Ownership (TCO) benefits of
working with a SaaS provider.
40% of
providing them with on-boarding and
assistance trials, and inviting them to
revenue
participate in online user communities. KPMG Research"
Partnership support “Customer acquisition and
Both on-premise as well as SaaS providers balancing growth and sales capacity, while retention is critical to the
leverage partnerships to support their considering all compensation mechanisms, SaaS business model.
market growth. The partner ecosystem including equity and options, to retain sales
for on-premise providers is mature with team talent. These programs should focus
Sales teams have a crucial
attractive market opportunities across on ACV, rather than bookings, as the key role to play and must be
the customer lifecycle that address metric that drives compensation. incentivized accordingly,
system implementation, maintenance and Additional factors that impact sales
upgrades. with tailored compensation
compensation include new customer
Building and nurturing a robust partner bookings, contract length, upsell and plans. The objective is to not
ecosystem is critical for SaaS providers renewal. Finally, in light of its subscription only generate the best and
looking to expand internationally, and scale business model and associated payment
models (advance vs. arrears, annual vs.
most profitable customer
their operations more rapidly. Partners earn
SaaS-related compensation in a number quarterly), SaaS solution providers are relationships, but also to retain
of ways, including incentive-based referral increasingly aligning commission payouts and grow these customer
fees, revenue sharing of implementation to customer billing. This alleviates the cash
and professional services, and joint go-to- flow strains that SaaS providers face in the relationships over time. Sales
market initiatives. early years of operation when the costs of compensation plans therefore
acquiring customers are higher.
need to be indexed on ACV,
Sales incentives On-premise and SaaS providers offer
the key metric for SaaS, with
distinct commission structures and costs.
Sales compensation programs are multipliers or decelerators to
As a result, sales commissions must be
designed to align with the SaaS sales life
managed effectively to enhance market align behaviors around other
cycle. To maximize sales performance,
penetration while limiting cannibalization.
SaaS providers must set the right goals, metrics such as Average
Contract Length, Billing
terms and Up-sell. The sales
Key Success Factors for pure SaaS offerings
effectiveness drivers detailed
in this paper are thorough and
–U
nderstand and identify customer core versus edge buyers
provide a good guide to the
–A
ttract sales talent to sell an annuity-based product offering, need for robust lead
management tracking metrics relevant to
–D
evelop the right sales compensation plans to incentivize and retain sales talent SaaS businesses.”
–L
everage non-traditional marketing channels —M
ike Kourey, CFO of
–B
uild and grow partner ecosystem with a viable incentive mechanism Medallia
– Invest
heavily on customer acquisition and retention (most start-ups do not have the
kind of reputation and brand value that on-premise providers enjoy, making customer
acquisition a key priority)
– Maintain
high engagement across multiple customer touch points and incentivize
S&M for higher engagement
–O
ptimize costs while maintaining high customer base growth and strong renewal
rates
Business Model Dynamics (continued)
“Good product development Service and support

and support processes always
involve metrics, but in the Traditional
Saas offering
world of cloud solutions, On-premise offering
metrics are often one of
Delivery On-premise Cloud-based support
the keys to success. Cloud
architectures can provide
Installation Core customization Configurations/extensions
the most direct, unfiltered,
actionable insight into how Professional Training, integration, customized
Maintenance, training
your product is used. In a cloud Services onboarding
context, you also have a level
of control over the DevOps Support Phone Multi-channel, self-service, phone
environment that doesn't
apply to deployed software
The SaaS service delivery model impacts The SaaS delivery model typically requires
(at least not for the provider), data management, privacy and residency, the availability of 24/7 support, as the
which means you can put and data security, both for core business service is provided remotely. The nature
those metrics to good use and support functions. As mentioned of service and support for SaaS can
in constantly optimizing your previously, data privacy and residency include a range of proactive tools (such as
laws and their associated requirements application performance monitoring and
offerings. On the flip side, you
can significantly impact global SaaS usage monitoring) and self-service tools
also take on the operations businesses. Keeping abreast of public (such as chat applications, Wikis, user
responsibilities for scalability sentiment1 and understanding developing communities, and e-mail). SaaS providers
and performance, adding legislation is critical to leverage potential use value-added, professional services
a new dimension and new benefits while mitigating adverse impacts. beyond implementation as a key element
Furthermore, the current compliance of differentiation. The speed and ease of
challenges to the solutions landscape in which SaaS solution providers implementation are important customer
you provide.” operate is broad, with a number of selling points.
reporting standards.
— Matt Quinn, CTO and EVP SaaS solution providers are focused on
Products & Technology at creating an agile service and support
Compliance includes infrastructure, which enables business
TIBCO
SOC 1 & 2, ISAE 3402, growth expansion while providing
differentiated and tailored services to
and SOX 404 customers.
– Invest in ensuring application security

– Understand compliance requirements in market of operation and incorporate into
product features
– Invest significantly in hardware (data centers) to support hosted applications delivery
– Invest in 365/24/7 support
– Invest in self-service tools and channels
– Build value-added professional services layer (especially true for start-ups)
1. See for example the EU-US Safe Harbor agreement that has been overturned. The EU data can still be
transferred and stored in the US, with appropriate model clauses formalized between providers.
Finance Organization
Traditional On-premise offering Saas offering
Meeting short-term revenue and earnings targets

are significantly dependent on FP&A team execution
Short-term Meeting short-term and long-term revenue targets (i.e., quality of financial modeling and forecasts)
revenue and are significantly dependent on the sales management – as revenue predominantly comes from existing
earnings team execution – as a significant proportion of bookings (including Churn) and change in deferred
guidance bookings translates to revenue upfront relating to revenue.
license revenue
Sales management team should continue to focus
on Net ACV to accelerate growth
The Finance organization and CFO play as well as pricing and profitability Quote to Cash (Q2C) infrastructure in
significant roles in SaaS businesses, as analyses. order to support rapidly growing business
they are the principal drivers for evolving The Finance function must also develop and customer expectations. Integrating
internal behavior and communicating and adopt relevant tools and systems sales and business operations can support
externally. As a result, the finance to support the SaaS business model. growth in sales, order accuracy, and
function should actively support business Several companies have invested in ultimately customer satisfaction.
strategy execution. Identifying, tracking systems and infrastructure geared to Finally, the finance function has a role to
and communicating (both internally and support this model, such as new billing play in supporting the sales teams and
externally) the most relevant metrics is engines, revenue recognition systems and helping align their sales compensation
paramount to achieving this objective; revamped ERP suites. programs to the SaaS business
the finance function needs to adapt and imperatives. As a business partner with
structure itself accordingly, attracting the The ability to support and interface with
core business activities is essential. To this the right tools and analytics, the finance
appropriate talent, with seasoned FP&A function is uniquely positioned to support
team members capable of execution end, SaaS solution providers depend on
their finance function to transform their and drive changes in the business model.
(quality of financial modeling and forecasts)
– Adopt tailored billing (i.e. subscription based billing), invoicing, revenue recognition
processes and systems (billing engines, revenue recognition systems, etc.)
– Identify and attract seasoned finance profiles
– Identify, define, develop and track the right SaaS business metrics
– Invest in flexible and dynamic analytics and automation tools
– Communicate around the right metrics internally, to change and drive new behaviors
– Communicate the right metrics externally, for analysts to understand and value the
SaaS business performance
Business
Drivers
Optimizing
performance
for success
Business Drivers: Optimizing performance for success
With their unique business SaaS businesses face significant financial the pace of growth and gradually, with
model, SaaS companies cannot losses in their early years, as they must sufficient scale, the business begins an
invest heavily in sales and marketing to optimization process. Eventually, the
be evaluated by traditional
acquire new customers. Due to their business generates sufficient profit/cash
performance metrics. Accurate revenue model, they derive returns to cover its costs and provide cash for
assessments of financial and from those investments over a longer additional investment. At that point (all
operational health require an period of time compared to traditional other costs remaining equal), the business
understanding of the drivers software companies, who employ a more stabilizes and becomes profitable.
predictable maintenance model.
relevant to the SaaS business,
along with the meaning that As the SaaS business scales up, customer
acquisition costs (CAC) cause it to burn
they convey and their relative cash rapidly. The recovery is slow, which
significance as the business may in turn lead to a cash flow problem.
evolves from launch to a stage of Losses typically grow proportionally to
stability.
Stages of growth of a SaaS business
Key Stages of Scale &

Launch Stabilize
Growth Optimize
For a SaaS business, the choice between providers to select the right growth opportunities. To preempt this challenge,
growth and profitability is critical, yet investments and communicate to the it is essential to assess the performance
delicate. Balancing longer-term economics market about the profitability impact for of the SaaS business using metrics that
with short-term profitability is key for each as well as the outlook during each are relevant to each stage in the SaaS
success. stage of growth (through to maturity). business lifecycle. The choice between
As SaaS is typically a winner-take-all Many SaaS stakeholders, especially those growth and profitability, for instance, is
market, growth becomes a priority. that are unfamiliar with the SaaS business addressed for key drivers in the following
However, investments made for growth model, do not understand this growth sections, as well as within the summary,
can decrease profitability in the short- vision. As a result, they decrease market which covers combined metrics analysis
term. In order to be valued and rewarded growth initiatives in the early, loss-making (Unit Economics Framework).
accurately, it is important for SaaS solution years, thereby impeding future growth
Growth Profitability Sustainability
The following three dimensions provide a lens through which these

drivers can be categorized: Each of these broad indicators comprises
several components. For example,
customer growth and revenue growth
Growth Profitability Sustainability are sub categories of growth, and each
requires its own set of metrics.
Growth Profitability Sustainability
Business Drivers (continued)
The three categories are broken down into sub categories as follows:
Subscriptions per
CLTV Billings per Customer
Customer Customer
Growth Drivers Number of Customers
Accelerating
Average Revenue per
Growth TCV (Total Contract Value) Bookings User or per Account
Backlog Calculated Billings Deferred Revenue

Revenue
Growth Drivers ACV (Annual Contract
ACV to Billings Ratio
Time to Recognize
Value) Deferred Revenue
Average ACV ARR/ MRR/ QRR
CAC (Customer Acquisition R&D Spend as a % of Marketing Costs as a %

Costs) sales of ARR
Cost Drivers Sales Cost as a % of
CTS (Cost To Serve) ARR
Optimizing
Margin Drivers Gross Margins Recurring Margins Service Margins Mix
Profitability
Cash Flow from Operating Cash Flow
Months Up-front
Cash Flow Operations Margins
Drivers Free Cash Flow Net Cash per Share
Growth Efficiency Index ARR quota per FTE Renewal Rate
Sales & Marketing Customer Acquisition by

Quota FTE by Channel Channel
Efficiency
Sales & Marketing
Expense/$ bookings LVR (Lead Velocity Rate) Typical Acquisition Path
Sales Effectiveness
Drivers Sales FTEs for Acct. Avg. time for new sales Leads-to-trial
Growth/BD Sales FTEs recruit to book a deal conversion rate
Trial-to-paying-account
ARR/Sales FTEs Sales Cycle Length conversion rate
Average Length of
Bookings/Sales FTEs
Contract
Securing
Sustainability Retention Customer Churn Net Revenue Churn Quick Ratio
Drivers Gross Revenue Churn

Dollar-based Net
Expansion Rate
Customer Experience
Volume and Types of
Products per Customer Support Tickets Altitude Metric
User Adoption
Drivers Number of Features
NPS (Net Promoter Score)
Accessed per Customer
“Software as a Service (SaaS)
One must evaluate and apply these 1. Growth
metrics across the SaaS business life cycle is an industry still in its
in a weighted fashion, as their relevance Growth, as measured by customer
count and revenue, is the most critical
relative infancy. However,
and significance vary depending on the
performance indicator for SaaS companies, the inflection point for cloud
stage of growth.
especially in their early years of operation. has been crossed, and the
First, one must define each category and The rate of growth is linked to financial
its associated drivers, charting their relative
adoption of SaaS solutions is
success and used to measure competitive set to increase significantly.
importance along the SaaS business life positioning in the market, first-mover
cycle. Refer to the appendix for details on advantage, and the capacity to capitalize Successfully balancing rapid
how these drivers are calculated. on the network effect and move rapidly up growth and longer-term
For the essential drivers to track – CLTV, the SaaS business model life cycle. economics with short-term
Churn and User Adoption - we have profitability is critical for
included proposed levers to guide
actionable strategies.
1.1 Customer Growth success for public SaaS
There are three ways to achieve customer companies. The key concepts
Although these drivers can be tracked
growth: outlined in this publication
internally, some are tracked by external
stakeholders. A. Increase customer base (number of including unit economics and
As the external metrics are based on
customers) the “Rule of 40” provide a
publicly available information, they may B. Maximize sales penetration with sound foundation to measure
not provide sufficient insights to the each customer (subscriptions/ and manage this delicate
management team to manage and drive customer) trade-off. At RingCentral, we
growth effectively. However, they are C. Maximize Customer Lifetime Value have been unique in continuing
critical to track, as the results are expected (CLTV)
to meet or exceed guidance provided to to demonstrate high growth
investors and stakeholders. Internal teams Initially, SaaS companies focus on and concurrent substantial
should also track external metrics. increasing their customer base, tracking improvement in profitability.”
drivers such as the number of customers
The external or internal nature of each and subscriptions per customer. However, —C
lyde Hosein, CFO of
metric is identified, using the following these drivers do not accurately assess RingCentral
legend: customer growth. Selling SaaS is a long-
term proposition; therefore Customer
Metrics Metrics Lifetime Value (CLTV) is a far more
tracked tracked insightful metric to use.
internally externally CLTV is a holistic metric that includes
insights into other key drivers, such as
Investors and analysts will examine Annual Recurring Revenue (ARR), Cost
external metrics over time (annually, to Serve (CTS), and Churn (more details
quarterly), tracking them for a group on cost and churn drivers in following
or portfolio of companies. They typically sections 2 and 3).
use trends, year on year growth and few CLTV can be difficult to calculate,
investors use Trailing Twelve Months especially since it includes variable metrics
(TTM) timeframe to effectively compare associated with the customer, such as
companies performance, given fiscal year churn and gross margin. However, it is a
calendars may differ among individual critical metric for a SaaS company because
companies within a portfolio. it can help focus on customers that offer
the highest average lifetime value (LTV).
It is also a critical input on where to peg
the Customer Acquisition Cost (CAC), as
the CLTV represents the return on the
investment (CAC).
Disaggregating and segmenting the customer base can provide powerful insights
that can be leveraged to maximize growth.
During the launch phase, SaaS providers
Levers to Maximize CLTV
are focused on customer acquisition (CAC)
– Growth – achieved through cross sell and up- and increasing customer subscriptions.
sell During this phase, it is equally important
Increasing Annual Contract to focus on the projected lifetime value of
– Product discounts to close deals
Value (ACV) each customer by measuring CLTV.
– Controlling discounting practices to eliminate
perpetual discounts As a SaaS business matures, while it may
need to focus less on customer acquisition
– Monitoring Cost to Serve expenses and Cost to (and associated costs), it should continue
Serve expenses as a percentage of Revenue to track the number of subscriptions per
– Controlling operational expenses by reducing customer, at least through the scaling
Lowering Costs
customer/ account specific costs, and by and optimizing phase: through renewals,
optimizing infrastructure (data centers and farming the installed base becomes key
colocation) after the initial growth.
– Proactively preventing and reducing customer As the business matures, providers should
Increasing Customer churn – number of customers begin tracking billings per customer
Retention while continuing to track CLTV. The
– Reducing dollar amount of churn – dollar value
latter, as well as CAC, become easier to
of churn
measure as more data points become
available (it typically takes 6-12 months
or more of operations for reliable data to
Customer Growth DriversCustomer
– Definitions
Growth Drivers be generated). Mature companies and
providers implementing hybrid scenarios
Estimation of the projected total gross margin value of may find it challenging to track the CLTV
CLTV: Customer Lifetime Value
a customer over the lifetime and CAC, due to shared costs (both on-
Number of customers who have given a financial
premise and SaaS costs), which require
Number of Customers allocation.
commitment for usage of the service
A SaaS business should ensure that
Includes the sum of all products subscribed by a single
Subscriptions per Customer customer account CLTV, in the steady phase, remains at
least three times the value of CAC to
ensure viability, especially since SaaS is a
Billings per Customer Monthly or annually, sum of billing per customer
high-risk business where the impact of a
technology shift is significant.
Investors in SaaS companies
focus on calculated billings,
Key stages Scale and Target range which is calculated by adding
Launch Stabilize
of growth Optimize quarterly revenue to the change
in deferred revenue from the prior
Measured across the SaaS business life cycle More than 3
CLTV
times CAC quarter to the current quarter. If
Measured essentially
at launch
a SaaS company is growing its
# of customers
bookings, either through new
Measured essentially at launch and scale business or upsells/renewals to
Subscription/cust.
existing customers, billings will
Billings/customer
Measured essentially at scale and stabilize increase. Some investors believe
that calculated billings, rather
than revenue, is a better forward-
looking indicator of the health of
1.2 Revenue Growth a SaaS company for two reasons:
Revenue is a critical metric for a SaaS For a SaaS business, the timing of billing
business. However, since Revenue is is important as it can alleviate the cash (1) R
evenue understates the true
a critical metric for a SaaS business. flow constraints that SaaS companies value of the customer because
However, since revenue for SaaS delivery face in their early years. Generally, SaaS it gets recognized ratably
accrues and is recognized over time, it is companies bill enterprise customers
important to analyze revenue by drivers annual-in-advance with 30-day payment (2) D
ue to the recurring nature
or proxies, such as bookings, calculated terms, and 30 to 45 days prior for renewals. of revenue, a SaaS company
billings, recurring revenues, deferred Some companies offer recurring, auto could show stable revenue
revenue, and backlog. payment options tied to a customer’s bank over a period of time (just by
account or credit card.
Backlog is derived from Total Contract working off its billings backlog),
Value (TCV) and represents bookings that Total Contract Value (TCV) is the total which could make the
have not yet been billed. As such, it is value of the customer contract. TCV
includes one-time and recurring revenue, business seem healthier than it
not yet included in deferred revenue (i.e.,
out periods of TCV not yet recognized in but only the recurring revenue for the truly is.
deferred revenue). Additionally, one should period specified in the contract (generally
Some investors also further
consider the time required to recognize includes all years for which the substantive
deferred revenue and backlog as termination penalty is required to cancel the calculate New Billings, as the
revenue. contract). SaaS companies bill customers difference between current year
Since revenue is recognized based on
annual-in-advance, which represents the billings and previous year billings
Annual Order Value (AOV) and in some multiplied by the renewal rate.
accounting standards, one must examine
cases Annual Contract Value (ACV). Backlog
billing data. SaaS billings, can be paid It can be challenging to use
represents deferred revenue from bookings
in advance for a year or periodically
throughout the lifetime of the contract,
that have not yet been recognized. Backlog Calculated Billings as a metric,
metrics include the percentage of annual if a company employs non-
such as quarterly or monthly.
revenue recognized from contracts at
the start of the year and the percentage
standardized billings policies (i.e.
of quarterly revenue recognized from when billing customers monthly,
contracts at the start of the quarter. quarterly, annual-in-advance or
Bookings and deferred revenue are further three years in advance) or when
analyzed based on seasonality and in light
they have time and material
of seasonal cash flow.
professional services revenue.
Annual Recurring Revenue (ARR), In cases where there is upfront billing revenue growth can provide a good
Monthly Recurring Revenue (MRR) and without revenue recognition, solution picture of the company’s health but only
Quarterly Recurring Revenue (QRR) are providers treat the unrecognized portion if it is considered alongside the average
similar drivers that measure the amount of the billing as deferred revenue, which remaining life to recognize this revenue.
of revenue to be collected by a company represents services booked and billed but
Looking only at the increase in deferred
over a stated period of time. They can be not yet rendered.
revenue is an unreliable indicator because
measured annually, monthly, or quarterly, This is a controllable factor for the it could reflect factors such as a change in
and they are important for subscription- company and provides a steady revenue billing terms (from monthly to an annual
based companies as they show the stream in the near term. It is treated as a billing cycle), a change in customer mix
value of contracts and the business as liability item in the balance sheet, which (SMB to enterprise) or other factors.
a whole. The Average Revenue per decreases over the life of the contract as
User or per Account (ARPU or ARPA) Although the change in deferred revenue
revenue is recognized.
is also tracked, either per-month or and calculated billings do not provide
per-year, as an additional measure of A SaaS company can show growth in the best insights into growth drivers,
the amount of revenue generated per deferred revenue if the average dollar external stakeholders still watch them
customer or customer account. Changes amount over the remaining life of deferred closely. These external metrics, along with
to ARPU/ ARPA need to be analyzed for revenues increases without the actual internal metrics, are relevant data points to
underlying drivers - customer size, product revenues increasing. Therefore, deferred accelerate growth.
mix, pricing to understand impact of
controllable factors vs. competitive factors.
Revenue Growth Drivers

Revenue Growth Drivers – Definitions
TCV: Total Contract Value Total value of the customer contract
Out year bookings not yet recognized in

Backlog
deferred revenue
Annual Contract Value of a specific subscription

ACV: Annual Contract Value agreement
Average Annual Contract Value of subscription Metrics used to analyze

Average ACV agreements bookings on a monthly basis:
A New ACV
Bookings Sum of all closed deals in a particular year B Upsell ACV
(usually an annualized number)
C (A+B) Recurring ACV
Sum of revenue during the period (i.e. a quarter) and D Churn
Calculated Billings change in deferred revenue E Down sell/ Scope
Reduction
Ratio of how much has been billed to the annual value F (C-D-E) Net ACV
ACV to Billings ratio of a particular contract – evaluation of billing patterns
# new customers
Periodical recurring revenue over a specific period that # lost customers

ARR/ MRR/ QRR does not include one-off fees
Average Revenue per User or Average revenue per user or account, either per month
per Account or per year
Deferred Revenue Portion of a billing, liability on the balance sheet, which

represents services that have not yet been provided
Time to recognize deferred Period of time over which services will be provided and
recorded as revenue. A typical measure tracked is the
revenue % of contracts that are within 1 year
During the launch phase, the number of
customers and deal sizes are relatively
small. Therefore, Annual Contract Key stages Scale and
of growth Launch Optimize Stabilize Target range
Value (ACV) and bookings can be a
Measured across launch and scale
helpful predictor of future revenue
TCV/ Backlog
growth. Bookings are analyzed as an Measured across the SaaS business life cycle
annualized number since they may be ACV / Bookings ACV: 100-200%
tied to contracts with varying durations Measured across scale and stabilize growth
Calculated Billings
(month-to-month, annual, or multi-
year subscriptions). The following ACV to Billings Ratio 1:1
Measured across the SaaS business life cycle
components should be considered .
Annual Growth of
ARR/ MRR/ QRR
when performing an ACV analysis: revenue: 25-36%
Average Revenue per Measured essentially at launch and scale (depending if provider
A. New ACV: ACV from new customer User or Account public/ private)
contracts, which is further analyzed to Deferred Revenue
see what the business is buying and Measured across launch and scale
Time to recognize
at what price deferred rev.
B. U
psell ACV: additional sales to
existing customers, which include
subscription upgrades/ complements/
expansion, to evaluate what upgrades G. N
umber of new customers: Number agreement by looking at the annual value
have been acquired and at what price of new customers acquired over the of a contract and calculating the amount
by existing customers month, analyzed per channel/service that has been billed to date.
C. R
ecurring ACV: ACV from existing offering/customer population Another indicator that one should monitor
subscription contracts, which is further H. N
umber of lost customers: Number beginning with the launch phase is the
analyzed to see which subscriptions of customers lost due to churn over the Average Revenue per User (also calculated
programs customers engage in, and month, categorized by the reason for at Customer and Account level). As the
subscription-based revenue trends renouncing the service offering SaaS business stabilizes into its maturity
D. Churn: loss of customers and/or As the business enters the growth phase, it typically has implemented a
revenue during the month, analyzed to phase and begins scaling and optimizing series of annual recurring contracts, along
determine and ultimately alleviate churn operations, it begins collecting money with leads for new customers. To grow the
factors from its customers, turning bookings existing customer base of annual recurring
into billings. As a result, the metrics that contracts, SaaS businesses focus on upsell
E. Down sell/ scope reduction: the and cross-sell opportunities, an effort to
portion of bookings attributable to assume greater relevance at this stage
are revenue (recognized and deferred) and limit churn and increase billings. As the
offerings proposed to customers business stabilizes billings and revenue
who renounce the initial purchase, or calculated billings.
recognition stabilizes, and the rate of
that reduce the scope of their current The ACV to billings ratio is also important deferred revenue eases (unless there are
subscription/ service and provides relevant insights during changes to multi-year billings).
F. N
et ACV: ACV from new and existing the launch phase. This ratio evaluates
customer contracts for a particular year, billing patterns and measures the billing
adjusted for lost ACV attributable to efficiency for a particular subscription
churn
2. Profitability Cost Drivers – Definitions Cost Drivers

One should analyze the profitability of a CAC: Customer Acquisition Total cost of sales and marketing efforts to acquire a
SaaS company in terms of costs, margins Cost (per Customer) new customer, including the cost of on-boarding
and cash flow, along with the related
drivers for each of these segments. This CTS: Cost to Serve Costs of initial investment, all running costs, ongoing
customer service, upgrades, and client relationship
section also covers the need to balance
growth and profitability and introduces the Total amount spent on Research and Development
R&D spend as a % of Sales
“Rule of 40” concept. expressed as a percentage of total sales revenue
2.1 Costs Sales cost as a % of ARR Total cost of sales expressed as a percentage of
annual recurring revenue
One of the biggest determinants of SaaS
profitability is Customer Acquisition Marketing cost as a % of ARR
Total cost of marketing expressed as a percentage of
Cost (CAC). CAC is generally not included annual recurring revenue
in calculating CLTV, as CLTV equals the
gross margin from the customer over
the customer lifetime. However, CAC is
compared with CLTV to determine and
optimize the CAC payback period.
CAC is akin to an investment cost to Key stages Scale and Target range
Launch Stabilize
acquire a customer for a SaaS business,
of growth Optimize
and estimating the CLTV enables Measured
essentially at launch
the business to assess payback and 20-33% of CLTV
CAC
appropriate ROI on this element. spent on CAC
Measured across scale and stabilize Recovery Time
Cost to Serve (CTS), generally expressed Cost to Serve 1-1.5 years
as a percentage of revenue, is another R&D spend as a percentage of Sales
R&D
important cost component that impacts
profitability. To effectively manage CTS, Sales Cost
Sales cost as a percentage of ARR
SaaS companies should have effective
Marketing cost as a % of ARR
product and database server architecture Marketing Cost
(modular architecture). A complex and
ineffective architecture could lead to
an inability to achieve benchmark gross
margins. Costs as a whole are often large In the initial stages of a SaaS venture, company should develop a more modular
and staggered, while revenues are more CAC can be greater than projected CLTV. architecture from the outset, incorporating
predictable. However, as the business grows, CLTV scalability as a design principle.
increases, with profitable businesses In the early stages of the SaaS business
R&D spend as a percentage of Sales
capable of maintaining a CAC that is life cycle, in an effort to increase brand
compares the strength of companies, as
considerably less than CLTV. awareness and credibility, providers
it reveals the effectiveness of research
expenditure relative to overall sales Similarly, CTS can be significantly higher in will likely choose to service enterprise
(capitalized and amortized R&D costs, the first two stages of growth. It typically customers, However, this approach carries
form part of this analysis). stabilizes later in the business life cycle, its own risks, and one should undertake
depending on the solution provider’s these large projects only if they do not
Sales Cost and Marketing Cost as a
ability to leverage economies of scale compromise profitability and resourcing.
percentage of ARR show the relative
and market maturity. However, in some In such cases, management may need
amounts of sales and marketing
situations, it might be difficult to stabilize to track these large projects separately,
expenditure to a company’s annual
CTS if a SaaS company has a complex depending on the maturity of the SaaS
recurring revenue, or steady income
product or database server architecture. company.
stream.
In order to ensure CTS stabilization, the
2.2 Margins Margins Drivers – Definitions
Gross Margins costs include application

Gross margins are calculated as the difference between
hosting costs, customer on-boarding Gross Margins subscription revenue and costs (including application
costs, customer service costs, R&D hosting costs, etc.) over subscription revenue
amortized costs vs. capitalized costs and
third-party fees (such as software license Recurring Margins Recurring profits generated from running the SaaS business
and data fees).
In-house team contribution to gross margins versus third-party
While gross margins are important, SaaS Service Margins Mix
service providers contribution to gross margins
businesses should analyze recurring and
non-recurring margins separately.
Recurring Margins are the profits that
are generated from running the SaaS Key stages Scale and Target range
Launch Stabilize
subscription business. As investors favor of growth Optimize
companies with a strong cash flow,
the recent trend for emerging software
companies is to expand operating margins. Measured across the SaaS business life cycle
Gross Margins Gross margins 30-40%
Service Margins Mix can help ascertain
the economic value of partnerships, as
it measures the contribution to gross Recurring Gross
Recurring Margins
Margins 83-85%
margins of third-party service providers
and partners. At launch and scale, it is Measured at launch and scale
Service Margins Mix
crucial to monitor and evaluate the value
proposition of partnering with third-party
service providers.
2.3 Cash Flow

As they expand, SaaS companies face billing terms when contracting with their spend. A strong cash flow appeals to
increasing cash flow challenges. At the customers. Smaller providers looking to bill investors and demonstrates a healthy
same time, investors now turn their in advance usually need to incentivize their financial picture.
attention to a healthy cash flow that is customers through price discounts and However, investors also consider the
linked to increased operating margins. promotions. impact of pre-paid multi-year deals while
While it is critical for SaaS companies to Cash flow from Operations and calculating operating cash flow margins,
know when they will generate positive Free Cash Flow need to be measured and adjust for cash from long term
cash flow, the ideal timing of achieving a throughout the life cycle of a SaaS deferred revenues.
break-even status is imprecise. The timing company, and is as important as analyzing Net Cash per Share is a measure of a
of cash collection – such as upfront billing, revenue and profitability drivers. Heavy company’s cash divided by the number
where the SaaS solution provider bills the investment in the early stages of a SaaS of shares outstanding. It represents the
customer the entire value of the contract business results in lower operating cash percentage of a firm's share price available
at the beginning of the subscription period flows. It is therefore important to track this for immediate spending on other business
– can help in synchronizing receipts with driver so that the business can prepare for activities, such as research, marketing,
expenses. However, only established future growth and profitability. or other financial activities. It is also an
solution providers can command such Cash on hand provides opportunities to important liquidity measure that signals if
expand and increase investment in other the company would need access to capital
areas, such as expanding research and in the near term.
development or increasing marketing
Foreign Exchange
A global customer base can make SaaS businesses more denominated and foreign currency denominated customer
vulnerable to FOREX risks and currency fluctuations, contracts, calculating growth rates using constant currency.
which can in turn impact revenue and profitability. The Hedging strategies – Currency fluctuations can have
impact becomes more pronounced with growth and scale, adverse impacts on the operating income and cash flow
as companies expand their global reach and geographic of SaaS solution providers that operate internationally.
diversification. Different hedging strategies, in terms of revenue and cash
SaaS providers with large international operations may want flow, are available to mitigate such volatility.
to report their financial performance on a constant currency Such an approach requires strategic planning, with
basis, using constant exchange rates (market analysts and accurate currency exposure forecasting (which currencies,
investors use constant currency basis for their analyses and what volumes and over what horizon) and cash flow at
valuations). risk evaluation (which factors in correlations between
Impact on deferred revenue – Deferred revenue is currencies).
recognized based on the foreign exchange rate at the date Financial instruments, such as options and forwards, are
it is recorded in the financial statements. Future revenue usually combined to hedge forecasted sales in the normal
is correspondingly recognized at the same rate as when course of business and reduce the risk that earnings and
deferred revenue was originally recognized in the financial cash flows will be adversely affected by exchange rate
statements. For example, a strong U.S. dollar at the time fluctuations. Hedging programs must be reviewed on an
deferred revenue is recorded in the financial statements, ongoing basis to ensure effective coverage of forecasted
would result in relatively lower revenue recognized in future cash flows (and any changes to forecasts), and proper
periods, even if the U.S. dollar subsequently weakens. As calibration that matches current foreign exchange market
such, it may be important to disaggregate ACV, deferred conditions and outlook.
revenue and revenue by U.S. dollar
Cash Flow Drivers – Definitions Cash Flow Drivers

Cash generated from ongoing business activities, that provides
Cash flow from operations an indicator of the health and liquidity of the enterprise
Measures available cash flow minus all capital expenditures,

Free Cash-Flow or cash flow required to maintain or acquire assets
Cash generated from core operations per dollar of sales. A high

Operating cash flow margins margin can indicate efficiency at converting sales to cash
Net cash for a company, divided by its shares outstanding –

Net cash per share only applicable for publically listed companies
Measure of the sales team performance in achieving more

Months Up-front customers’ payment in advance
As mentioned previously, SaaS businesses upfront cash flows of the on-premise customer and the amount of time
make significant upfront customer license business. This creates a cash flow required to cover this initial investment
acquisition investments at launch to crunch for SaaS providers. (for illustration purposes, a Customer
secure their customer base. Cash inflows Acquisition Cost of $5000 is considered,
The following chart shows the impact
from these investments are generated with a $450 monthly subscription gross
of customer acquisition cost for one
over time, which is different from the margin).
Cumulative cash flows for one customer

$12,000
$10,000
$8,000
$6,000
$4,000
Month 11
Month 1
Month 3
Month 5
Month 7
Month 9
$2,000
$0
Month 13
Month 15
Month 17
Month 19
Month 21
Month 23
Month 25
Month 27
Month 29
Month 31
Month 33
Month 35
$(2,000)
$(4,000)
$(6,000)
This example reveals negative cash flows positive cash flow occurring in January of The more customers that are acquired,
for the first 11 months following customer the following year. This cash flow crunch the greater the rate of growth and positive
acquisition for one customer, with the first is a necessary prerequisite for growth. cash inflows, as illustrated in the graph
below:
Cumulative cash flows for multiple customers
$250,000
$200,000
$150,000
$100,000
$50,000
$0
1
11
13
15
17
19
21
23
25
27
29
31
33
35
$(50,000)
th
th
th
th
th
th
th
th
th
th
th
th
th
th
th
th
th
th
on
on
on
on
on
on
on
on
on
on
on
on
on
on
on
on
on
on
M
$(100,000)
$(150,000)
Cumulative cash flows for 1 customer Cumulative cash flows for 5 customers
Cumulative cash flows for 20 customers
One way to alleviate this cash flow

crunch is to incentivize customers to pay
Key stages Scale and
in advance. This can be done through Launch Stabilize
of growth Optimize
financial incentives, such as discount
programs. This is typically feasible only for
existing customers, as new customers
are less likely to accept advance payment
terms. Measured across the SaaS business life cycle
Cash Flow metrics
Getting more customers to pay in advance
can help to reduce churn. The switching
costs for these customers are higher, Measured across
which increases customer lock-in. Months Months Up-front launch
Up Front is the metric used to monitor the

sales team performance in achieving more
customers paying in advance. It can be
used to incentivize team members as they
seek to sign customers to such a program.
Once the installed customer base has
generated sufficient cash to cover the 2.4 “Rule of 40”
initial acquisition costs, profits and cash There is a trade-off between growth and desirable. This rule recognizes the short-
flow will become positive, with the return profitability. One can target profitability term impact on profitability due to a focus
on investment proportional to the initial (and reduce spend/ focus on growth) on growth. Based on this rule, a company
buy-in. As customer acquisition growth or focus on growth (at the expense of in the growth phase with an 80% growth
increases, profits and cash flow balance short term profitability). This is primarily
increase commensurately. To further
accelerate growth, providers may pursue
because of Customer Acquisition Costs Rule of 40% =
for customer growth, while the Customer
another round of investment. Lifetime Value takes longer to realize and Year over year revenue
As the prospect of additional losses and recoup the initial investments. growth + pre-tax operating
cash flow shortfalls may make investors As the business matures and enters the margins or free-cash flow
wary, it is vital for both start-ups and “scale & optimize” phase, a new set
industry veterans to communicate in of rules can be introduced that gauge
advance of a new round of growth performance and help navigate growth and rate that produces 40% negative margins
acceleration, in order to secure sufficient profitability. is acceptable. Given the premium attached
funding for the company’s future and to growth for a SaaS business, the inverse
sustained growth. One such rule, which evaluates the relationship—80% margins and negative
relationship and balance between growth growth— is viewed unfavorably by
and profitability, is known as the “Rule of investors.
40”. This rule considers the sum of growth
rate and profitability: While one can consider this ratio at
launch, the optimum point at this stage
Used by market analysts and investors, would need to be as high as possible and
Rule of 40 proposes that a combination not benchmarked at 40% – which is the
of growth and profitability yielding 40% is threshold when operating at scale.
3. Sustainability Sales Effectiveness DriversSales Effectiveness Drivers
– Definitions
Monitoring the long-term sustainability of a Sales FTEs for Account Measureofofsales

Number revenue
staff
growth
devoted
efficiency
to account
- relationship
growth divided
between
by
Growth Efficiency Index
SaaS business is critical for success, with Growth/Sales FTEs for BD the number
costs incurred
of staff
to increase
taskedgrowth
with newandbusiness
actual revenue
development
growth
particular focus paid to sales effectiveness,
Annual recurring
Measures revenue of
the effectiveness divided by the
Sales and numberspend
Marketing of in the
retention and user adoption. ARR/Sales
Sales and FTEs
Marketing Efficiency previous period to generate revenue growth in the current period
sales staff
3.1 Sales Effectiveness Sales and Marketing Expense/

Bookings/Sales
$ bookings FTEs
Measure of how much a company spends on Sales and
Average number of bookings per member of sales staff
Marketing (S&M) for $1 of booking
Because the sales and marketing function
in a SaaS company works differently from Sales FTEs for Account The growth
Number in thestaff
of sales number of qualified
devoted leads
to account growth divided by
Lead Velocity Rate (LVR) month-over-month.
the number of staff tasked with new business development
Growth/Sales FTEs for BD
that of traditional software providers,
measuring sales effectiveness in a SaaS Average time for new sales Time taken for a new member of by
thethe
sales staffoftosales
makestaff
a
ARR/Sales Annual recurring revenue divided number
business is crucial for understanding its recruit to bookFTEs
a deal booking from the time starting at the firm
performance metrics. As noted earlier,
treat enterprise customers differently Sales Cycle LengthFTEs
Bookings/Sales (Days) Time fromnumber
Average initial interaction
of bookingstoper
themember
completion of the
of sales sale,
staff
in days
when considering sales effectiveness.
Undertaking large projects early in the Average duration inRevenue
monthsquota,
or years
Average
ARR Length of Contract
quota per FTE Annual Recurring by of
thea number
typical of total staff
SaaS business life cycle boosts brand subscription contract
awareness, but one must weigh this
against execution risks, profitability, and Renewal
Quota FTE by Rate
Channel Measure of achieved renewals for all contracts up for
Sales quota for each member of staff, categorized by channel
renewal (in terms of customer or contract value)
the diversion of resources away from
product development. Average time for new sales Time
Customer Acquisition by New taken for a and
customers newsubscribers
member of categorized
the sales staff to make a
by the
recruitChannel
to book a deal booking
method from the time
or channel starting at the firm
of booking
Typical Acquisition Path The growth

Grouping in categorization
and the number of of
qualified
sales toleads month-over-
subscribers by their
Lead Velocity Rate (LVR) month
(% of cohort) type and method of becoming a subscriber
Sales
ARRCycle Length
quota (Days)
per FTE Time from
Annual initial interaction
Recurring to theby
Revenue quota, completion of the
the number sale,staff
of total
Quota Length
Average FTE by of
Channel
Contract Average duration in months or years of a typical
Sales quota for each member of staff, categorized by channel
subscription contract
Sales and Marketing Expense/ Measure of how much a company spends on S&M per $1 increase
Renewal Rate Measure
in revenue of achieved
–actual renewals
revenue for lookfor all future
back, contracts up for
revenue for
Actual or Future Revenue Growth renewallooking
forward (in terms of customer or contract value)
outlook
Customer
Sales Acquisition
and Marketing Expense/ Measure of howand
New customers much a company
subscribers spends onbySales
categorized and or
the method
by$ bookings
Channel Marketing
channel of (S&M)
bookingfor $1 of booking
Leads-to-trial conversion
Typical Acquisition Pathrate Measuresand
Grouping the categorization
success ratio inofpersuading leads to by their
sales to subscribers
(funnel
(% metric)
of cohort) try out
type andthemethod
productof becoming a subscriber
Trial-to-paying-account
Leads-to-trial conversion rate Measures
Measures the
the success
success ratio
ratio in
in converting
persuadingtrial
leadssubscribers
to
conversion ratemetric)
(funnel (funnel metric) into customers
try out the product
Trial-to-paying-account Measures the success ratio in converting trial subscribers

conversion rate (funnel metric) into customers
The Growth Efficiency Index (GEI) is

a measure of revenue growth efficiency
across launch and scale, a composite Key stages Scale and
metric that combines cost and revenue. of growth Launch Optimize Stabilize Target range
This index looks specifically at the Measured at launch and scale
Growth Efficiency Index
relationship between costs incurred to
Measured at launch and scale GEI < 1
grow the company and actual revenue Sales and Marketing
efficiency
increase (if any). Identifying these costs Measured at scale
FTE’s drivers
means differentiating between the Measured at launch and scale
recurring spend used to support day-to-day contract length
LVR LVR 10-20%
higher than MRR
operations (Cost of Goods and Services, Sales cycle/ Average
Measured at launch and scale
General and Administrative Expenses) and contract length
growth spend (namely sales and marketing Renewal Rates
expenses, as well as customer success Measured at launch
Customer Acquisition
expenses – which consists of a dedicated
team for on-boarding new customers, Funnel Metrics
managing customer references and so on).
Achieving a GEI less than 1 is desirable,
as this indicates that revenue growth
exceeds costs incurred. A GEI greater
than 1 is an indication to recalibrate S&M providers begin mapping FTEs (Full Time Lead Velocity Rate (LVR), or Lead
spending. Employees) dedicated to new customer Momentum, measures the growth in the
Tracking and benchmarking the GEI growth (hunting) and FTEs servicing number of qualified sales leads month-
is particularly useful to more precisely existing client accounts (farming), along over-month, on a monthly basis. This
calibrate growth efforts and goals. It with linking investment in sales force real-time metric is a revenue and growth
reflects, at a high level, the sales and optimization to financial success via drivers trend indicator, which needs to be tracked
marketing team’s effectiveness at such as ARR/ Sales FTEs. alongside other forward-looking metrics.
generating revenue growth. As the business stabilizes into a phase of LVR is helpful when measured against
Sales and marketing spend efficiency maturity, the focus shifts to exploring up- sales growth. Assessing the relationship
is also measured across launch and scale, selling and cross-selling opportunities with between the two can detect underlying
like the GEI. This metric investigates existing customers. At this point, metrics and structural problems. As sales leads
the relationship between sales and such as FTEs dedicated to up-selling (with are generated, sales growth should
marketing spend and revenue growth a view on increasing subscription revenue) proportionally increase. If sales leads are
across different periods. Typically, this ratio and FTEs dedicated to cross-selling (with secured but sales growth does not follow
examines spend incurred in the previous a view on increasing product revenue) proportionally, this may indicate that either
period and the resulting revenue growth, gain significance – especially among the sales team quality is decreasing or
a metric that reveals sales and marketing larger SaaS solution providers, who have the product is not keeping pace with
efficiency. sufficient manpower to staff dedicated the competition. Either way, corrective
teams. measures should be pursued.
As the business graduates into a growth
phase, optimizing the sales force remains In the launch phase, the focus is on Average Contract Length is a useful
critically important. At this stage, solution hunting and acquiring target customers. In metric to track from launch through the
this phase, it is more important for SaaS scaling phase. The SaaS business model
solution providers to invest heavily in their favors a longer contract, as it secures
sales force and marketing teams, making a more sustainable cash flow. As such,
sure that a steady stream of qualified average contract length is a good indicator
leads is generated and converted to paying of the contract portfolio’s health and
customers in the least amount of time. can also serve as a metric on which to
incentivize the sales teams.
Renewal Rates is used to assess 3.2 Retention
the health and performance of a SaaS
portfolio. Customer retention is as Churn, or the loss of customers and/or Additional tools and analyses are required
important as customer acquisition. The revenue during a set period of time, can in order to fully understand and mitigate
renewal rates, whether looking at number significantly impact the growth of a SaaS churn. One such tool is cohort (customer
of customers or contract value, is the company. Although churn may not be as group) analysis, which regroups and
flipside of customer churn. A higher meaningful during the launch phase, as a evaluates new customers for a given
renewal rate indicates marketing and sales company grows, even a relatively low rate month. This analysis is performed month-
effectiveness and is also an indicator of of churn can substantially impact revenue to-month and over the lifetime of the
customer loyalty. and earnings. Because of its impact on relationship with the customer. It offers a
growth, churn is a must-track metric comparative analysis between different
As mentioned previously, customer across the SaaS business lifecycle. customer groups and provides insight
acquisition is key during the launch phase. into seasonality patterns, evaluating
To maximize acquisitions, one must Customer Churn refers to the number
of customers that have discontinued their the effectiveness of measures aimed at
understand the target audience behavior alleviating churn (such as new product
and track the effectiveness of marketing subscription during a given period of time.
One must distinguish between revenue- features) and how different customer
and sales campaigns. This allows the groups react to such actions. Cohort
enterprise to devise strategies and test or dollar-based churn and customer-
based churn for an accurate analysis of analysis also provides insight into the
customer-acquisition channels, directing number of customers that are lost over
customer acquisition costs and efforts performance.
a period of time while identifying when
on the channels that yield the most Net Revenue Churn measure the churn stabilizes.
customers and the steadiest stream of revenues lost during a given period due
revenue. to the loss of customers or lower run rate Dollar-based Net Expansion Rate
due to reduced features or users. A loss (DER) is another measure of customer
Finally, from launch through scale, retention, measured at one point in time.
funnel metrics measure the sales team of non-subscription-based- or shorter-term
products/services can lead to revenue It presents a comparative analysis of
effectiveness at converting a lead into aggregate revenue for existing customers
a paying customer across the sales churn.
(those in place for at least 12 months) for
cycle. The leads-to- trial conversion rate Customer churn is dependent on the the current year against the prior year. It
measures the success ratio in persuading size and total number of customers. As provides an image of revenue sustainability
leads to try out the product (i.e. visitors-to- customers vary by size and value, there and is a marker of the quality of customer
trial could be an appropriate replacement is an important distinction between losing relationship over time. DER can also be
for a company where the strategy aims a top customer versus losing a bottom completed by a measure of how much
at maximizing visitors). The trial-to-paying customer. For a company with varying support subscription revenue is added
account measures the conversion product pricing, dollar-based churn is a over time.
rate to the next stage, or how a lead more relevant indicator of performance.
becomes a paying customer with a signed Dollar-based churn is also a key metric The “Quick Ratio” provides a view of
subscription contract. for larger companies, as the focus is to a SaaS business’s growth efficiency. It
accelerate growth, which can be achieved combines two SaaS metrics (revenue
through negative revenue churn (which and churn in this case), and is used by
occurs when the expansions/up-sells/ investors and internal management to
cross-sells to existing customer base quickly benchmark growth performance.
exceeds the loss of revenue from churn).
Customer churn is measured in terms Retention Drivers

Retention Drivers – Definitions
of net subscriber additions (net increase
in the number of subscribers) and Customer Churn Net Subscriber additions and net subscriber churn
net subscriber churn (change in the
number of subscribers), and it reveals Revenue churn without upsells of existing
Gross Revenue Churn customers
the number of customers that were
lost or did not renew against the total
Dollar Retention Rate (DRR) percentage of revenue
number of subscribers for a given period. Net Revenue Churn renewed from the previous year
SaaS businesses tend to focus more
on customer churn in their early years, Dollar-based Net Expansion Measure of customer retention and support
as their objective is to acquire as many Rate subscription revenue expansion over time
customers as possible to gain economies
Measure of growth efficiency, which combines
of scale. Churn Prevention is the success Quick Ratio revenue and churn.
rate in reducing churn over a period
of time.
Revenue Churn and dollar expansion
rates become important in the later
years as the company becomes mature Key stages Scale and
of growth Launch Optimize Stabilize Target range
enough to up-sell, cross-sell and drive
deeper engagement within each customer
account. For measuring revenue churn, a
Net Revenue Churn or Dollar Retention Customer Churn
Measured across launch and scale Customer Churn <10%
for enterprise segment
Rate (DRR) metric is sometimes used.
DRR includes the benefit of up-sells, Gross Revenue Churn
cross-sells and price increases based on
Measured at stabilize
GAAP subscription revenue recognition. Net Revenue Churn
If the DRR is 100 percent, it means the
Measured at scale and stabilize
company has renewed 100 percent of its Dollar-based Net DRR ~110%
Expansion Rate
revenue from the previous year. DRR has
Measured at launch
significant flaws because it considers both Quick Ratio Quick Ratio = 4
lost revenue from customer cancellation
(i.e., lost customers due to unhappy
customers) as well as down-sell and
up-sell to existing customer (satisfied
customers). As such, it would be better a negative value. This metric should be is 4, which means that for every $1 of
to disaggregate the data and analyze analyzed across the entire SaaS business revenue lost during a specific month,
Gross Revenue Churn to determine how lifecycle. $4 should have been added. As the
much revenue is lost without considering business scales, it becomes more difficult
Finally, the “Quick Ratio” provides a
up-sells, and understand the causes of to achieve the target of 4. This ratio is
snapshot of a SaaS business’s growth
customer cancellations and down sells. therefore primarily to be used at launch as
efficiency, particularly during its launch
Gross revenue churn will always be higher an additional metric for revenue growth.
phase. The commonly accepted target
than net churn because it cannot have
Levers to Minimize Churn
– Increase the revenue from a client by exploring additional opportunities once a
Up-Sells and Cross-Sells relationship has been established
– Demonstrate additional value to current offerings used by customers
– Optimal charging and pricing set for usage-based billing models

Usage/overage-based Billing
– Incorporate levels of price sensitivity
– Continue to grow the overall customer and revenue base organically to reduce
New Customer Acquisitions the impact of any customers that are lost
– Reduces the turnover and risk of losing customers on a frequent basis with
greater lock in for contract duration
Longer-term contracts
– Establishes longer relationships for guaranteed business
– Staff top talent to customers with low NPS scores to increase retention
Focus on Risk Segments
– More accurately segment customers to assess churn risks while highlighting

Channel/Product Segmentation strategies for retaining business
– Customer interaction and engagement on customer product needs and the ways
to retain their business
Customer Engagement
– Feature sets that are sticky – determine what parts of the product are beneficial
for retaining customers and reducing churn
– Constantly track customer satisfaction and analyze reasons for contract

cancellation and customer churn
Customer Retention – Track user adoption, a leading indicator of customer satisfaction > for specific
metrics, please refer to section 3.3
3.3 User adoption

To sustain its business, a SaaS company is being used after the subscription begins. the point of view of sustainability, any
needs to closely monitor account health During the launch phase, drivers such as metric around user adoption should only
and user engagement. Lack of user number of sign-ups, number of log-ins, and consider the base of monetized usage or
adoption can lead to churn, and SaaS users on free trial are important to monitor users who drive revenue.
solution providers need to watch several and analyze, as they reveal customer
drivers that reflect how well the software acquisition and adoption. However, from
Levers to Maximize User Adoption

– Analyzing product usage to improve usability
– Increased trial conversion to full subscription, and encouraging
Product Usage
full and early use of the product during a trial
– Identify up-sell opportunities at early opportunities based on

Feature Usage usage patterns and customer feedback
– Analysis of issues experienced by users to help on product

support and to determine fixes/patches that may be required
Volume and type of support tickets – Develop products based on the needs and perceived
limitations of current offerings
– NPS is a customer loyalty metric. This metric can provide

insights into Leading practices and drive focus to issues
revealed by lower scoring customers
Net promoter score (NPS) – A best practice guide can document learnings from successful
strategies and be used as a reference for customer/account
management
In the initial phases of a SaaS business, User Adoption Drivers
User Adoption Drivers – Definitions
tracking product subscription data
Number of products that each individual subscriber purchases.
and feature usage data are critical. This Products per customer An attach rate is sometimes disclosed, which also measures
can be either at an individual customer success in increasing products per customer
account level or for the business overall. Number of features accessed Proportion of total features that are used by subscribers
As the business graduates into the growth per Customer
phase and then into maturity, it becomes
important to look at the volume and type Volume and type of Support Total number of instances raised to support, the types of issues
of deployment and delivery support that Tickets Raised encountered and study on timings and variety of problems
existing customers seek.

Customer loyalty metric that is scored between -100
Net Promoter Score (NPS) to +100, with positive scores considered good
This is a critical input for product
customization, product R&D investment
Usage of service (data volume, number of users,
decisions, troubleshooting and upgrades. Altitude metric computing cycles) / entitlements (monthly revenue)
Across all stages, SaaS companies should
track Net Promoter Score to gauge
overall customer satisfaction.
Altitude is another metric to be tracked
across launch and scale. The Altitude Key stages Scale and
metric is particularly useful as a measure of growth Launch Optimize Stabilize Target range
of service usage with regards to customer
entitlements, and it can help calibrate Products and Features
offers as well as pricing. Any measure of
usage can be employed, whether it is data # of features accessed Measured across launch and scale
per customer
volume (i.e. GB/ months) or computing
cycles (i.e. monthly SQL cycles). In terms Volume and type of
Measured across scale and stabilize
support
of entitlements, revenue can be put into
perspective with the measure of usage Measured across the SaaS business life cycle
NPS
selected. For example, some companies
define and track altitude as “Monthly SQL Measured across launch and scale
Altitude metric
cycles / monthly revenue”. This defines
upper and lower thresholds to determine
the levels at which usage customers
receive value for the money paid (whether
they are paying too much or not using the
service enough).
Summary – Unit Economics
The previous sections defined For instance, an investment to accelerate
Lifetime unit margin considers growth in the SaaS business would impact
essential SaaS business and the following key metrics: near-and medium-term profitability (higher
financial drivers, how to CAC), but would support longer-term
interpret them and when to - CLTV sustainability, given the winner-takes-all
track them across the SaaS Customer Lifetime Value, which is nature of the market. Similarly, investing
business lifecycle. Tracking a key Growth metric, in higher-touch customer support might
and analyzing these metrics penalize profitability in the near term
- CAC (higher CTS), but increase lifetime unit
individually is essential for margin and customer revenue as it
Customer Acquisition Costs,
assessing performance across which is a key Profitability metric, reduces churn.
specific dimensions— growth, Unit economics can also provide broader
profitability and sustainability. - CTS insights in terms of strategy. Consider
There are several areas of Cost to Serve, which is a key a SaaS provider looking to make an
inter-linkage between these profitability metric, acquisition. Target companies can either
be acquired to support growth or increase
dimensions. This dynamic profitability, depending on the strategy
- Churn
requires a holistic analysis or attrition, key sustainability pursued. Unit economics can help
to identify trade-offs and metric. determine the lifetime unit margin of the
consequences of strategic acquiring company in either scenario (all
decisions and thus support other factors remaining unchanged).
Lifetime unit margin can also help The key to success in the SaaS business is
business strategy execution.
assess short- and medium-term impacts to grow volume while leveraging scale to
One such holistic framework approach of a strategy or acquisition on growth, optimize costs, thereby ensuring healthy
is known as customer or contract unit profitability and sustainability. These cash flow streams and minimizing churn.
economics, which supports decision key business decisions come with Tracking and analyzing individual metrics is
making in the early stages, particularly consequences, and companies need to key for tracking success across individual
at launch. This framework highlights understand the trade-off and opportunity dimensions. However, unit economics
key relationships between metrics and costs of selecting one strategy over provides a holistic framework for analyzing
the impact of investment opportunities another. business performance and supporting
on growth, profitability and sustainability. strategy execution.
Customer or contract unit economics
uses lifetime unit margin as a marker to
measure customer profitability in terms of
the costs incurred in acquiring, servicing
and retaining the customer.
Leading
Practices
Critical steps for
achieving success
Leading practices: Critical steps for achieving success
For all SaaS companies—from Strategic Planning
startup to global market leader, Using traditional software business drivers
like Salesforce—the journey on a SaaS business can lead to unwise Leading practices
needs to be navigated carefully. business decisions. Understanding the Get leadership buy-in for a long-
The latest financial results of specifics of the cloud model, and more term cloud vision
specifically the SaaS model, is paramount
traditional software stalwarts – Decide on the right performance
to identifying and setting up the right
such as Oracle and SAP indicate business drivers. For example, under metrics
that despite a rocky SaaS start, the cloud model, valuation is driven by - Assign ownership of these
with numerous challenges, these subscriptions and bookings, rather than metrics
companies can achieve success. total revenue. Anticipating this can alleviate
operational challenges and enable setting - Fix goals and targets (markers)
Tremendous opportunities against these metrics and chart
the right controls and governance around
exist for companies that can the new focus drivers. an implementation roadmap
integrate relevant business Not only does the right set of drivers - Plan for continuous and
model benchmarks to gain a need to be identified, but ownership for seamless monitoring of
competitive advantage. each set also needs to be assigned to the metrics as well as user
different business units. Communication feedback
SaaS providers can expect myriad
of these drivers is also key. Traditional - Communicate around the
challenges at nearly every stage of
software providers that decide to transition metrics (also externally in the
growth, including planning, budgeting
to a SaaS business model will need to
for resources and forecasting, and when case of public companies
communicate their new SaaS drivers and
measuring the overall performance of the – Plan for revamping existing
forecast markers internally and externally
business against its forecasts. Companies business processes – particularly
to secure key stakeholder buy-in.
that have successfully navigated the
the sales and marketing
SaaS life cycle offer a number of Leading The sales, marketing and the finance
organizations need to be designed to organization and the finance
practices to avoid these pitfalls. While the
support a SaaS business. organization
transformation experience and success
mantra is unique to every business and SaaS providers often neglect the – Set up supporting systems that
depends largely on seamless execution, importance of user adoption and feedback. enhance customer experience
these Leading practices can provide As a result, despite offering a compelling – Build sophisticated usage
directional guidance to both existing product, many SaaS providers lose analytics in subsequent upgrades
SaaS companies and those considering a enterprise customers because of low and releases
transition to SaaS. adoption. SaaS delivery allows tracking
usage closely to draw meaningful insights
on usage behavior patterns. Neglecting
this opportunity and overlooking user
feedback can be detrimental to success.
On the other hand, by exclusively
emphasizing the core product offering, the
SaaS provider loses focus on supporting
systems, such as on-boarding, billing
and provisioning, all critical for sustained
adoption.
Budgeting and forecasting
Forecasting success for a SaaS business The market distinguishes short-term SaaS players across size
is limited by the amount of visibility guidance misses for on-premise providers
management has on recurring revenues, versus those for pure SaaS solution and stage of growth may
churn, renewals, and new subscription providers. An on-premise solution not be fully utilizing
internal and
growth. Precision in churn prediction provider typically misses its short-term
should be a high-priority area, as guidance because it lacks sufficient new
unforeseen churn impacts growth and
adds to costs, thereby impacting both
margin and cash flow. By closely watching
bookings (the result of market softening,
changing customer preferences, increased
competition or sales force effectiveness).
external data
usage patterns, providers can better For a SaaS solution provider, short-
to draw actionable insights
predict (and prevent) churn. term revenues and earnings are driven on churn management.
Cost calculations typically draw the predominantly by existing bookings.
attention of solution providers. However, Missing the revenue and earnings
guidance by a SaaS solution provider Leading practices
these may underestimate less obvious
cost elements, which can result in is viewed as a finance/FP&A issue and – Look out for all hidden costs and
significant repercussions. Cost of may create market credibility challenges
cash burn rate
compliance is one such element. In some that impact longer-term forecasts. It is
therefore essential to invest in FP&A skills – Keep a strong eye on CAC and
highly regulated industries (healthcare, for
and capabilities to develop robust financial CLTV, as well as churn
instance), misunderstanding compliance
requirements (HIPAA, for instance) may forecasting models. – Develop visibility on recurring
lead providers to understate cost. Similarly, revenue rhythm
underestimating CAC or CTS could derail
– Maintain visibility on new
the budgeting exercise.
subscription growth
Leading practices (continued)
Reporting and governance

SaaS businesses need to monitor dashboards should be designed to provide
performance against relevant KPIs on a timely performance reporting to different Leading practices
continual basis. Two factors can impede business groups.
– Inculcate a culture of
this process:
Granularity of reporting is another measurement
– Not inculcating a culture of measurement important requirement many SaaS
providers tend to overlook. SaaS – Develop disciplined financial
– Failing to implement disciplined financial processes
processes businesses are comprised of many
interrelated parts; tracking each can be – Consistently prepare and
The lack of a measurement culture can daunting. For instance, although business distribute different dashboards
lead to inaccurate data and metrics while & investment costs are integrated in tailored to the different parts of
placing increased administrative burdens traditional cost reporting, the two should the business
on employees. The lack of a robust be separately measured to drive more
financial process–one that enables end- informed decision-making. – Ensure timely performance
to-end control on invoicing, collections reporting
and renewals and that closely tracks If SaaS solution providers fail to invest in
revenues and expenses – will lead to proper reporting tools that measure and
operational hardships when the need for manage the relevant drivers at the required
measurement arises. level of granularity, it will face sustainability
challenges. It is critical to evaluate the
SaaS solution providers require sufficiently trade-off between the effort required to
mature frameworks, tools and systems gather detailed information and the value
that can handle standard reporting tasks that such insights provide. This balancing
while being flexible enough to extract approach helps prioritize metrics and
data for customized insights. Customized reports to grow and sustain the business.
Operational transformation priorities
The unique nature of the SaaS business – Sales force management: Sales force
necessitates a focus on key operational management is a critical requirement for Leading practices
areas. This is especially true for existing SaaS companies. This includes funnel – For “pure-SaaS” solution
product/ software companies that are metrics, growth/velocity metrics, sales providers, define and align
entering the SaaS market, as they must force productivity metrics, cost, churn around “must-get-right” factors
contend with business models and and cash flow. A key success factor is during the launch phase
go-to-market models specific to the designing the right metrics that align
existing business as well as the new SaaS the incentives of the sales force with – Existing companies launching a
business. the value drivers for SaaS, such as ACV, SaaS offering need to evaluate
bookings growth, up-sell and wallet- the strategy for the SaaS
Priority areas include:
share growth, advance payment and division upfront – whether it will
– Billing models: SaaS offerings typically churn management. be standalone/ separate at the
include monetization models such outset, completely integrated
as subscription, utility and Enterprise – Finance operations & processes: The
unique needs of the SaaS model have a or incubated at launch but
Licensing Agreements (ELAs). There separated based on scale
are variants including Freemium as well broad impact on finance beyond planning
as Try and Buy designed to attract new and touch on budgeting, forecasting – The fast-changing nature of the
customers. The variety of billing models and reporting. Key impact areas industry necessitates periodic,
coupled with payment options warrants include billing and invoicing, revenue strategic reviews to ensure
careful consideration. recognition, revenue assurance, external rapid course correction
reporting, investor relations, taxation and
– Pricing and profitability: The pricing compliance. Several companies have
models for SaaS offerings are complex invested in systems and infrastructure,
and include volume, bundle, renewal and such as new billing engines, revenue
customer-based discounting. Analysis recognition systems and revamped ERP
of profitability at a gross and net margin service velocity, and customer retention.
suites to support this model SaaS company leaders need to drive a
level is challenging, especially with
the addition of ELA variants for large – Product architecture: As a core design “Customer-first” culture and invest in
customers. An effective deal review principle, it is critical for the SaaS product talent management. Customer service
and margin analysis process including to be both modular and scalable. This and operations for SaaS companies
the deal desk composition is a key optimizes Cost to Serve (CTS) during the require a different structure, processes,
requirement for the SaaS model growth phase. Also key is to ensure an metrics, and governance,
open architecture, which ensures high – Regulatory compliance: The complex
– Customer segmentation: Customer system availability and interoperability
segmentation in the SaaS market nature of the SaaS business presents
with leading technology solutions, multiple compliance challenges,
uses usage and behavioral elements thereby enhancing adoption.
extensively. An added layer of complexity including data privacy, security & risk
is the choice of go-to-market channels, – Customer service and operations: management, licensing, transfer pricing
including direct, partner, reseller and Customer satisfaction is a critical and taxation (including cross border).
distributor. It is important to design success factor. The SaaS business Additional requirements are involved
a customer definition, hierarchy and model success is driven by rapid growth, when working with government entities.
segment definitionthat closely mirror the Complying with applicable requirements
solution provider’s business strategy. is essential for sustainability.
Appendix
Strategic drivers:
formulae and
examples
Appendix: Strategic drivers in detail
Growth
Estimation of the projected total gross margin value
CLTV of a customer over the lifetime
Number of customers who have given a financial

Number of Customers commitment for usage of the service
Customer Subscriptions per Includes the sum of all products subscribed by a
Growth Drivers Customer single customer account
Billings per Customer Monthly or annually, sum of billing per customer
TCV Total value of the customer contract
Out year bookings not yet recognized in deferred

Backlog revenue
Accelerating
Growth ACV
Annual Contract Value of a specific subscription
agreement
Average Annual Contract Value of subscription

Average ACV agreements
Sum of all closed deals in a particular year (usually

Bookings an annualized number)
Revenue Sum of revenue during the period (i.e. a quarter) and

Calculated Billings
Growth Drivers change in deferred revenue
Ratio of how much has been billed to the annual

ACV to Billings ratio value of a particular contract
Periodical recurring revenue over a specific period

ARR/ MRR/ QRR that does not include one off fees
Average revenue per Average revenue per user, either per month or per
user/per Account year
Portion of a billing, liability on the balance sheet,

Deferred Revenue which represents services that not yet provided
Time to Recognize Period of time over which services will be provided

Deferred Revenue and recorded as revenue
Appendix (continued)
Customer Growth
Customer Lifetime Value (CLTV)
CLTV CLTV is the ratio of recurring revenue to churn percentage that is

= (Average revenue per account the average gross margin (i.e., gross revenue less cost to serve)
* Gross Margin) that all customers will generate before they churn or cancel the
* (1/Churn %) subscription.
CLTV Projected Projected CLTV: The true reflection of CLTV is estimating the
= NPV {[ ]T [(ARR-CTS X (Churn + projected total gross margin of a customer over their lifetime. It
Capital interest rate)) / considers the NPV of the annually recurring revenue (net of cost to
(Churn + Capital interest rate – serve) spread across the life of the contract and discounted by the
Growth rate)]} churn rate, capital interest rate and the growth rate of the business.
Number of Customers
Number of customers represents those who have given a financial

#Customers = commitment for usage. This excludes users on free trial, number of
Total sign-ups – Free Trials log-ins, etc. The user base should only include monetized usage or
users that drive revenue.
Subscriptions per Customer
Subscriptions-per-customer includes the sum of all products

Subscriptions per customer =
subscribed to by a single customer account. This does not measure
=(Products subscribed by
different instances of access by a single customer account/
customer account)
subscriber.
Billings per Customer

Billings per customer =
(amount invoiced per customer)/ Sum of billing for a specific customer, measured yearly or monthly.
month
Revenue Growth
The various components of revenue for a SaaS company are best explained through the simple illustration below:
ABC Inc., a SaaS solution provider has the following set of customer subscriptions:
Customer Lead converted Contract commitment Upfront commitment Contract Value
A Jan’15 Yearly US$200 US$2,400
B Jan’15 Monthly US$120 US$120
C Feb’15 Yearly US$120 US$1,440
D Feb’15 Yearly US$120 US$1,440
E Mar’15 Yearly US$200 US$2,400
F Mar’15 Monthly US$200 US$200
G Apr’15 Yearly US$120 US$1,440

Assumption: Customers with yearly plans pay upfront for the whole year; customers with monthly plans pay on a per-month basis.
Total Contract Value (TCV)
TCV =
Total value of the customer contract, including one time and recurring
(Upfront and recurring payments
revenue, over the entire period specified in the contract.
over life of subscription)
Backlog
Backlog results from the out year bookings not yet recognized in
Backlog =
deferred revenue. Backlog metrics include the percentage of annual
(out year bookings not yet
revenue recognized from contracts at the start of the year and the
included in deferred revenue)/
percentage of quarterly revenue recognized from contracts at the
revenue at start of period
start of the quarter.
Number of Customers
ACV = Annual value of the customer contract, including one time and
(Upfront and recurring payments recurring revenue, over the first year of the agreement. ACV can also
over first year of subscription) be viewed in concert with Customer Acquisition Costs.
Bookings
Month Monthly Bookings
Jan’15 US$200 Yearly + US$120 monthly = US$2,520

Bookings =
(Closed deals,
with different Feb’15 US$120 Yearly + US$120 Yearly = US$2,880
prices and
durations) Mar’15 US$200 Yearly + US$200 monthly = US$2,600
Apr’15 $120 Yearly = US$1,440
Bookings is a contracted value. Each month, bookings only. Annual contract bookings represents the sum of all
represent the sum of all closed deals for that particular month closed deals in a particular year
Calculated Billings
Jan’15 US$200 Yearly + US$120 Monthly = US$2,520

Monthly

billing
= (Billing per Feb’15 US$120 Yearly + US$120 Yearly+US$120 Monthly = US$3,000
month
per customer)
Mar’15 US$200 Yearly + US$200 monthly+US$120 Monthly = US$2,720
Apr’15 US$120 Yearly+US$120 Monthly = US$1,560
– For contracts with yearly plans, billing has been considered –F

or contracts with monthly plans, billing has been considered
for 12 months upfront. on a per-month basis.
ACV to Billings ratio
Ratio of how much has been billed (yearly contract) to the annual value
Ratio =
of a particular contract. This typically evaluates billing patterns. The ratio
ACV/ Calculated Billings
becomes more favorable as more payments are made up-front.
Revenue
MRR

= Month Monthly Monthly Recurring Revenue (MRR)
= (Revenue per month
per customer)
Jan’15 US$200 + US$120 = US$320
QRR = 3 X MRR
ARR = 4XQRR
Feb’15 US$200 + US$120 + US$120 +US$120 = US$560

Total Revenue
= ARR +Non-Recurring Revenue US$200 + US$120 + US$120 +US$120 +US$200 + US$200 =
Mar’15
US$960
US$200 + US$120 + US$120 +US$120 +US$200 + US$200 +
Apr’15
US$120 = US$1,080
– The monthly recurring revenue (MRR) for each month – Quarterly recurring revenue (QRR)/Annual recurring revenue
comprises the monthly revenue recognized for each contract, (ARR) can be either a sum of individual MRRs or an average of
irrespective of the yearly/quarterly/monthly plan subscribed as particular months.
part of the contract.
– ARR is an annualized amount that can be added to annual,
non-recurring revenues in arriving at total revenue.
Average Revenue per User or per Account
Average Revenue The average revenue per-user or per-account metric measures the average revenue per
per Account = customer account over a given time period (typically average recurring revenue per account
ARR / Number of Customers over a year).
Deferred revenue
Monthly Deferred
Month Monthly Billings Monthly Revenue
Revenue
Monthly Jan’15 US$2,520 US$320 US$2,200

deferred
revenue Feb’15 US$3,000 US$560 US$2,440
= Billings –
Revenue
Mar’15 US$2,720 US$960 US$1,760
Apr’15 US$1,560 US$1,080 US$680
Time to recognize deferred revenue

Time to recognize
deferred revenue = Period of time over which services will be provided and recorded as revenue for a particular
average remaining life to contract. This metric is typically reviewed in context of the change in deferred revenue.
recognize revenue
Profitability CAC
Customer Acquisition Cost. Total cost of sales and
marketing efforts to acquire a new customer
Costs of initial investment, all running costs, ongoing

CTS customer service, upgrades, and client relationship
R&D Spend as a % of Total amount spent on Research and Development

Cost Drivers sales expressed as a percentage of total sales revenue
Sales Cost as a % of Total cost of sales expressed as a percentage of annual

ARR recurring revenue
Marketing Costs as a Total cost of marketing expressed as a percentage of annual

% of ARR recurring revenue
Gross margins are calculated as the difference between

Gross Margins subscription revenue and costs (including application
hosting costs, etc.) over subscription revenue
Optimizing Recurring Margins

Margin Drivers Recurring profits generated from running the SaaS business
Profitability
In-house team contribution to gross margins versus third-
Service Margins Mix party service providers contribution to gross margins
Cash Flow from Cash generated from ongoing business activities; indicator
Operations of the health and liquidity of the enterprise
Free Cash Flow Measures available cash flow minus all capital expenditures
Cash Flow Operating Cash Flow Cash generated from core operations per dollar of sales. A
Drivers Margins high margin can indicate efficiency at converting sales to $
Net cash for a company, divided by its shares outstanding –

Net Cash per Share only applicable for publically listed companies
Measure of the sales team performance in achieving more

Months Up-front customers payment in advance
Costs
Customer Acquisition Cost (CAC)
CAC

per customer CAC represents the sum of all one-time costs of all marketing and sales activities and the
= (Sales, Marketing costs physical infrastructure and systems required to motivate a customer to purchase. This
incurred during the period) / includes fully loaded labor costs, which are typically quoted as an average unit
Total number of customers added cost per new customer (generally it is the total department costs/ total sales and marketing
in the period costs)
Cost To Serve (CTS)
CTS

CTS as a percentage of revenue is typically used. CTS includes engineering, support,
= (Recurring Service Expenses)/ account management, customer service, billing activities, physical infrastructure, systems
revenue and fully loaded labor costs.
Spend as a % of revenue or sales R&D spend as a % of Sales

– R&D spend as a % of Sales = [ ] (Research & Development costs)/ Sales
Ratios evaluating spend
– Sales cost as a % of ARR = [ ] (Sales team costs)/ ARR
vs revenue
– Marketing cost as a % of ARR = [ ] (Marketing spend)/ ARR
Margins
Gross Margins
Gross Margin =
Gross margin includes elements such as application hosting costs, customer on-boarding
(Subscription revenue –
costs, customer service costs, and any third-party fees such as software licenses or data
subscription COGS) / Subscription
fees.
revenue
Recurring Margins
Recurring Margin =
Annualized Recurring Expense Recurring profits include sales and marketing costs of replacing churn, but exclude any
(COGS + G&A + R&D) / Entering other costs of growing the business beyond churn replacement.
ARR
Service Margins Mix
Service Margins Mix

In-house contribution =
In-house teams service margins/
gross margins
The Service Margins Mix identifies the contribution to gross margins from in-house teams
Third-party contribution = Third- versus those made from third party providers and partners, thus evaluating the economic
party service provider value of these partnerships.
service margins/ gross margins
–T
o be repeated for all partners/
third party providers
Cash Flows
Cash flow from Operations
– Cash burn rate = Cash spent per month, quarter, or year

Relevant cash flow
from operations ratios – Cash in cash out = Cash flow at the end of the month, quarter, year; revenue at the end of
the month, quarter, year
Free Cash Flow
Free Cash Flow =

Measures available cash flow minus all capital expenditures, or cash flow required to
Operating cash flow – capital
maintain or acquire assets.
expenditures
Operating cash flow margins
Ratio
 Cash generated from core operations per dollar of sales. A high margin can indicate
= cash flow from operations)/
efficiency at converting sales to cash.
$ 1 sales
Net cash per share
Net cash/share = Net cash for a company divided by its shares outstanding (applicable only for publically
net cash/ #shares listed companies).
Months Up-front
Measure of payment received in advance, which is critical for SaaS businesses. More
Months Up-front =
payments upfront can alleviate the cash crunch felt by SaaS businesses in their early
Avg. number of months payment
years. This metric can be used as an incentive for sales teams to persuade clients to pay
received up-front/ New bookings
in advance.
Sustainability Growth Efficiency Relationship between costs incurred to increase growth

Index and actual growth
Sales and Marketing Measure of sales and marketing spend vs revenue growth,
Efficiency future revenue growth and $ bookings
Sales, bookings, ARR, number of staff devoted to sales,

FTE’s based drivers average time for new sales recruit to book a deal
The growth in the number of qualified leads month-over-

LVR month.
Sales Effectiveness
Drivers Time from initial interaction to the completion of the sale, in
Sales Cycle Length days
Average Length of Average duration in months or years of a typical

Contract subscription contract
Customer Acquisition Customer acquisition by channel, typical acquisition path
Measure of achieved renewals for all contracts up for

Renewal Rate renewal (in terms of customer or contract value)
Measure of leads to trial and trial to paying account

Funnel metrics conversion, across sales cycles
Customer Churn Net Subscriber additions and net subscriber churn
Securing
Gross Revenue Churn Revenue churn without upsells of existing customers
Sustainability
Dollar Retention Rate (DRR) percentage of revenue renewed
Retention Drivers Net Revenue Churn from the previous year
Dollar-based Net Measure of customer retention and support subscription

revenue expansion over time
Expansion Rate
Measure of growth, efficiency, which combines revenue and
Quick Ratio churn
Products per Number of products that each individual subscriber

Customer purchases
Number of Features
Proportion of total features that are used by subscribers
Accessed per Customer
User Adoption Volume and Types of Total number of instances raised to support, the types of
Drivers Support Tickets issues encountered and variety of problems
Customer loyalty metric that is scored between -100 to

Net Promoter Score +100, with positive scores considered good
Usage of service (data volume, number of users, computing

Altitude metric cycles) / entitlements (monthly revenue)
Sales Effectiveness
Growth Efficiency Index (GEI)
GEI is a measure of revenue growth efficiency, which looks at the relationship between
costs incurred to increase growth and the actual revenue increase. Growth expenses
include sales and marketing expenses, as well as customer success expenses. The GEI
GEI = can also be measured on ACV.
Growth Expense / ARR Growth Additionally:
– ARR Growth = Growth Expense / GEI
- Illustration: consider a growth expense of 0.6 and a GEI of 1.4, with a churn rate of
25%, this would give a net ARR growth of approximately 18%
Customer Acquisition
– Number of FTEs dedicated to new customer acquisition

– Bookings per sales FTE = ACV/total number of sales FTEs
– Average time for new sales recruit to book a deal
Ratios looking at monetization – Leads-to-trial conversion rate = Trial subscribers/Leads
of customer acquisition efforts – Trial-to-paying-account conversion rate = Booked customers/Trial subscribers
– Customer acquisition by channel
– Sales cycle length
– Average length of contract = average duration (in months or years)
Lead Velocity Rate (LVR)
LVR =
Avg. [(Qualified leads for current
– Represents qualified sales lead growth.
month – Qualified leads for last
month) / – Helps define long-term marketing and product strategies
Qualified leads for last month]*100
Renewal Rates
– Customer renewal rate equals the number of customers who renewed their contracts /
Renewal rates in terms of number of contracts up for renewal.
customers and $
– $ Renewal rate equals the value of contracts renewed / value of contracts up for renewal.
Customer Maintenance
– FTEs dedicated to new customer growth/ FTEs servicing existing client accounts = (FTEs
that acquire new customers/ %sales FTEs that maintain existing customers)*100
Ratios looking at monetization of – ARR/Sales FTEs
customer maintenance efforts
– FTEs for cross-selling = (FTEs dedicated to selling more products/total FTEs)*100
– FTEs for up-selling = (FTEs dedicated to subscription revenue growth/total FTEs)*100
Sales and Marketing Efficiency
Sales and Marketing Efficiency = – Measures Sales and Marketing efficiency in generating revenue growth. This metric
Last period sales & marketing evaluates the relationship between S&M spend in the previous period versus attributable
expense/ (Current period revenue – revenue growth.
Last period revenue) – Another variant of this is known as the “Magic Number.”
Other ratios looking at sales and

– Sales & Marketing Expense/$ bookings
marketing effectiveness
Retention
Customer Churn
Customer churn =
#Customers cancelling contracts Represents percentage rate of customer cancellations over time, usually on an annual basis.
Total Customers*Elapsed time Can also be calculated as a ratio between renewing customers and expiring customers.
(annually)
Gross Revenue Churn
Gross Revenue Churn =

Revenue churn rate without effect from upsells or upgrades from existing customers.
(Churn and contracted revenue)/
Typically, revenue used in calculating Gross revenue churn is MRR or ARR.
revenue at beginning of period
Net Revenue Churn
DRR = Dollar-based retention rate (DRR) includes the benefit of upsells, cross-sell and price
(ARR at the start of the year) / increases based on GAAP subscription revenue recognition. If DRR is 100 percent, that
(ARR at the end of the year) simply means the company renewed 100 percent of the revenue from last year.
Dollar-based Net Expansion Rate
– Dollar-based Net Expansion Rate (DER) is a measure of customer retention at one point in
DER = time.
aggregate ACV at t for customers – An extension of this rate consists in evaluating how much support subscription revenue
already customers 12 months prior/ has been added over time, as a further indicator of revenue sustainability. This rate is
aggregate ACV at t-1 for customers calculated on an individual support subscription contract basis and is equal to the total
12 months prior subscription contract value at one point in time divided by the number of years remaining
on the contract at that point in time.
Quick Ratio
Quick Ratio = The “Quick Ratio” provides a snapshot of a SaaS business’s growth efficiency, particularly
(New MRR + Expansion MRR) / during the launch phase. It is used by investors and internal management to rapidly
(Cancelled MRR + Contraction benchmark growth performance and is constructed by combining two iconic SaaS
MRR) metrics, namely revenue (Monthly Recurring Revenue in this case) and churn.
User Adoption
Product and feature subscription
– Product purchase = Volume of products sold in a year/total number of customers.
Product and feature subscription – Feature usage = (Number of features purchased + number of annual upgrades)/total
number of customers.
metrics
– Volume and type of support tickets = Volume of support tickets/total number of
customers.
Net promoter score
– Promoters are loyal enthusiasts who will keep buying and referring services to others,
NPS thereby fuelling growth. Significant up-selling and cross-selling opportunities exist.
= (Promoters
– Passives are satisfied but unenthusiastic customers who are vulnerable to competitive
+ Passive customers
offerings.
+ Detractors)
– Detractors are unhappy customers who can impede growth.
Altitude metric
Altitude = Measure of usage

– Usage of service (data volume, number of users, computing cycles) / entitlements
(i.e. Monthly SQL cycles) /
(monthly revenue).
entitlements (i.e. monthly revenue)
Authors
KPMG: An experienced
team, a global network
KPMG’s professionals
combine industry knowledge
with technical experience Prasadh Cadambi
to provide insights that help Partner, Technology Industry
technology industry leaders Prasadh has over 20 years of experience and serves as a lead partner overseeing and
take advantage of emerging managing global audit teams. Additionally, he advises some of the world’s leading
business opportunities and software and SaaS companies to help them implement new business models and
transformation programs, complex transactions, M&A and capital raising transactions.
proactively manage business
He advices software and SaaS sell-side equity analysts on emerging accounting issues
challenges. and financial statement analysis. He has also authored numerous publications, including
Our network of professionals KPMG’s publication on building a successful cloud provider service. He is KPMG’s
in 155 countries, have representative on AICPA Software Revenue Recognition Task Force.
extensive experience
working with global
technology companies
ranging from the Fortune 500
to pre-IPO startups. We aim
to anticipate the short-and
long-term opportunities of
shifting business, technology
and financial strategies. Satya Easwaran
KPMG operates as a global Partner, Advisory
network of independent Satya has over 20 years of experience working with leading global companies across
member firms offering audit, USA, Asia, Africa, Australia and Europe. He serves as a Management Consulting
tax and advisory services. partner assisting CxOs in the areas of strategy, business and finance transformation as
companies continue to embrace new business models and digital innovation. He has
established deep C-suite relationships with leading global companies in the high- tech
and other sectors and helped them in conceptualizing and executing transformational
initiatives. He is a frequent speaker at industry forums and has also authored multiple
publications on leading practices in finance and transformation priorities.
Contributors
Co-authors KPMG would like to thank the following tech industry
Chaitanya Gogineni leaders for their valuable insights:
Director, Management Consulting Mark Hawkins, CFO, Salesforce.com
James P. Murphy Neil Williams, CFO, Intuit
Director, Management Consulting
Steve Cakebread, CFO, Yext
Lead contributor: Mark Culhane, CFO, Lithium Technologies

Mark Pele Bob L. Corey, CFO, CallidusCloud
Ron Gill, CFO, NetSuite
Additional contributors:
Mark Garrett, CFO, Adobe
Sutithi Chakraborty
Kevin Bandy, Chief Digital Officer, Cisco
Jonathan T. Hsiung
R. Scott Herren, CFO, Autodesk
Anuj Mathur
Mike Kourey, CFO, Medallia
Michael D. McCormick
Matt Quinn, CTO and EVP Products & Technology, TIBCO
Christopher Padden
Clyde Hosein, CFO, RingCentral
Patricia Rios
Parikshit Sinha
Siddharth Sureka
Adrien Vion
For more information about this publication, or to learn how KPMG can help
your Cloud (SaaS) business, please contact us:
Prasadh Cadambi Chaitanya Gogineni

Partner, Technology Industry Director, Management Consulting
+1 650-793-4129 +1 408-306-0480
scadambi@kpmg.com chaitanyagogineni@kpmg.com
Satya Easwaran James P. Murphy
Partner, Advisory Director, Management Consulting
+1 650-391-5365 +1 650-796-4163
seaswaran@kpmg.com jpmurphy@kpmg.com
For more information about the Technology Industry practice, please contact:
Gary Matuszak Richard Hanley
Global and U.S. Chair Technology, U.S. National Advisory Leader,
Media & Telecommunications Technology, Media & Telecommunications
408-367-4757 408-367-7600
gmatuszak@kpmg.com rhanley@kpmg.com
Jana Barsten Rusty Thomas
Global and U.S. Audit Sector Leader, Global and U.S. Tax Sector Leader,
Technology Technology
408-367-4913 408-666-4067
jbarsten@kpmg.com rcthomas@kpmg.com
Some or all of the services described herein may not be permissible for KPMG audit clients and
their affiliates.
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8 TMT Transforming Your Saas Business A Strategic Guide For Optimizing Business Performance

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Transforming

3 Background: Evolution of an Industry

9 Business Model Dynamics: A New Way of

15 Business Drivers: Optimizing Performance

38 Leading Practices: Critical Steps for Achieving

43 Appendix: Strategic Drivers: Formulae

Featured Industry Contributors

2 Neil Williams, CFO, Intuit

2 Steve Cakebread, CFO, Yext

5 Mark Culhane, CFO, Lithium Technologies

5 Bob L. Corey, CFO, CallidusCloud

7 Ron Gill, CFO, NetSuite

8 Mark Garrett, CFO, Adobe

9 Kevin Bandy, Chief Digital Officer, Cisco

13 R. Scott Herren, CFO, Autodesk

15 Mike Kourey, CFO, Medallia

16 Matt Quinn, CTO and EVP Products & Technology, TIBCO

21 Clyde Hosein, CFO, RingCentral

– Mark Hawkins, CFO of Salesforce.com

This paper highlights the transformational priorities

50% of the total cloud

20% of the global

SaaS installed workloads

IDC predicts the share of SaaS

Types of offerings Key transformational priorities

Note: highlighted metrics are the new SaaS specific metrics to be

— Mark Garrett, CFO of Adobe

With the above in mind, below are the key transformational

Key transformational priorities

“Must Have” Metrics

Product and pricing

Traditional On-premise Offering Saas offering

Release Cycle Generally up to twice a year Typically 6 to 8 weeks

Speed of Weeks or days - can be longer depending on

Sales and marketing

Traditional On-premise Offering Saas offering

“Good product development Service and support

Key Success Factors for pure SaaS offerings

– Invest in ensuring application security

Traditional On-premise offering Saas offering

Meeting short-term revenue and earnings targets

Key Success Factors for pure SaaS offerings

Stages of growth of a SaaS business

Key Stages of Scale &

Growth Profitability Sustainability

The following three dimensions provide a lens through which these

Growth Profitability Sustainability

Growth Drivers Number of Customers

Backlog Calculated Billings Deferred Revenue

Average ACV ARR/ MRR/ QRR

CAC (Customer Acquisition R&D Spend as a % of Marketing Costs as a %

Drivers Free Cash Flow Net Cash per Share

Growth Efficiency Index ARR quota per FTE Renewal Rate

Sales & Marketing Customer Acquisition by

Drivers Gross Revenue Churn

Revenue Growth Drivers

TCV: Total Contract Value Total value of the customer contract

Out year bookings not yet recognized in

Annual Contract Value of a specific subscription

Average Annual Contract Value of subscription Metrics used to analyze

Periodical recurring revenue over a specific period that # lost customers

Deferred Revenue Portion of a billing, liability on the balance sheet, which

2. Profitability Cost Drivers – Definitions Cost Drivers

9 Business Model Dynamics: A New Way of

15 Business Drivers: Optimizing Performance

38 Leading Practices: Critical Steps for Achieving

43 Appendix: Strategic Drivers: Formulae

16 Matt Quinn, CTO and EVP Products & Technology, TIBCO

“Good product development Service and support

– Invest in ensuring application security

– More accurately segment customers to assess churn risks while highlighting

– Constantly track customer satisfaction and analyze reasons for contract

– Identify up-sell opportunities at early opportunities based on

– Analysis of issues experienced by users to help on product

– NPS is a customer loyalty metric. This metric can provide

– For contracts with yearly plans, billing has been considered –F