Understanding Financial Metrics for SaaS firms

Yash Shah (00:01.486)

Awesome. I think we are live. Let's just wait for a couple of seconds for people to join in. And then maybe we start. You guys are able to hear and see me fine? Yep. yes. We have a couple of people joining in. So perfect. So let's get started for today. Hello and welcome to Momentum Office Hours. My name is Yash and I'm joined by the leadership team at Momentum 91, Shane.

Jay and Kaushik to discuss topic of the week, financial metrics for SaaS firms. Our goal is to provide you with actionable insights and practical strategies that you can apply to your own products and companies. Throughout the session, we encourage you to engage with us by asking questions, sharing your thoughts. This is a fantastic opportunity to learn from each other and gain new insights that can help drive your SaaS initiatives forward. So let's get started. Jay, Shane, Kaushik, how are we doing today?

Doing good? Good. Very beautiful. All good. So then we started. So what do we want to discuss in terms of financial metrics, financial questions? Just ask up, please. So for the start, Yash, I would like to ask, what are the critical financial metrics that founders should track, especially at early stage? Because many times it happens that people are not from financial background or may not have that much detail about it.

tech side but now they also have to make sure of things so what would be those initial metrics that you know they should track? the first thing that you want to measure is what is the cost at which you acquire a customer so customer acquisition cost. A lot of people measure customer acquisition cost as the amount of money that they've invested in paid marketing or organic marketing

and just divide that by the amount of customers that they've acquired, but that's not the right way to go about it. You want to include compensation of other people who are working on marketing and sales, needed activities as a part of customer acquisition cost as well. And so the first thing to nail down is your customer acquisition cost. Second thing is your annual sort of contract value, like your average annual contract value. Third thing,

Yash Shah (02:29.101)

would be to figure out your customer lifetime value. And so your customer lifetime value in early stage of SaaS companies, one of the biggest arguments that we see is that you've been out in the market for three or four months. How do we know what our customer lifetime is? And so it's very simple. It's one upon churn. So as an example, if your churn is 3 % month on month, then your customer lifetime is 36 months. So it is just one upon.

your monthly churn that will give you customer lifetime in terms of months. And so then with these two, three metrics, you are able to put together sort of your unit economics. Unit economics is customer is your cost of acquiring a customer. Another component is your cost of goods sold, which is your cost of providing service, which is how much does it cost you to serve the customer? And then the third piece

is what is the total revenue that you'll be able to get out of the customer in the lifetime that they have. An ideal SaaS company will typically see 1 is to 3 or higher ratio between customer acquisition cost and customer lifetime balance.

Interesting. So as you know, once a company grows from early stage to, you know, stage, I am sure a lot of metrics, more metrics needs to be tracked upon and the complexity of the financial structure to change and increase. So is there any preliminary precaution that a founder should look into while the company is being grown? These metrics are definitely something which needs to be tracked upon and

discussed upon on vConvex basis, right? But are there any critical nuances that needs to be taken care of from the initial state as well as the company grows? Yeah, so first let me sort of talk about what are some of the metrics that you should track as and when you start to grow or as and when you start to sort of prepare to grow. Are you guys able to see my screen? Yeah. perfect. So for our repeat viewers,

Yash Shah (04:44.429)

You may already know that we were running a SaaS product company before called ClientJoy for our new people who've been joining us. ClientJoy was a SaaS company which was serving freelancers and agencies. It was a small ticket-inbound SaaS firm and these are our numbers, right? So I'll just zoom in for you a little bit so that you are able to see them a little better. But so from a metrics standpoint, your metrics are broken down into a couple of different parts.

But largely you want to measure growth metrics in terms of this is for inbound again. So you want to measure visitors and signups. So you want to figure out how many website visitors did you have? What was the month on month growth? How many people subscribed? And these subscribers are subscription to your resources or blog or whatever it is that you have. What is the month on month growth in those numbers? How many signups did you have at the beginning of month? So as an example, by April 2020, when we started measuring

We already had about 1700 odd signups by that point of time. How many new signups have you achieved in that particular month and what is a month on month growth? Your website visitor to sign up conversion ratio, signups at the end of the month. The next you want to try and figure out how many customers out of those signups have become as paid customers. So you want to start beginning by customers beginning of the month with 349.

Out of these 100 people who signed up, we converted 13 new customers in that month. And so that conversion rate is about 12.8-ish odd percent. How many did we lose? How many joined? I'll cancel their subscription or the revenue contraction happening for whatever reason. How many customers did we have at the end of the month? And then what was the month on month growth? And then whatever revenue that you have from a financial matrix standpoint, this is an INR. So it might not make a lot of sense, but

But this is the piece that's important. And so what you want to see is split of revenue between your one-time revenue versus your MRR at the end of the month, was the total revenue, average revenue per account, month on month recurring revenue growth, month on month total growth. And then from a cash outflow standpoint, you want to divide that into two segments. One is your cost of providing service, which is your product, infra and utilities.

Yash Shah (07:08.471)

So salaries, rent, electricity, servers, licenses, repair, vendor payments, other overheads, total direct, overflow, whatever the case may be. So all of that goes under here. then customer acquisition costs, right? Which are your marketing and sales costs. So all the salaries, as I just mentioned, all the salaries that you paid, ads and any other inorganic spend, total customer acquisition costs, CSE per sign up and CSE per paid customer. And then ultimately you come with your gross profit, which is your

revenue minus your product and final utilities cost. And then your net profit within the SaaS case is the same as EBITDA. And so that is net revenue minus product minus CSE. And then cumulative net profit is since you're going to have recurring revenues, so you want to measure it on a month on month basis. And so this we've been tracking month on month for like three years. So this is the whole like a really big spreadsheet that we have over here.

But this is sort of how we track them. Every projection starts with assumptions, And so assumptions are fairly simple. So assumptions, you want to make sure that when you're writing your projections, and we get to projections in a bit as well, but when you're writing your projections, you want to make some assumptions and then your real life scenario should match with those assumptions. And so you start with, know, what do you expect your monthly churn to be? What do you expect your visitor to sign up conversion to be?

Just as a simple example, we assumed for visitor to sign up conversion to be at 8%. However, as an example, in August of 2020, our visitor to sign up conversion rate was 21%. So here we were doing better, but over here we are doing worse, which is 4%, 2%, 6%, all of them lower than 8%. And then you have, what is sign up to paid conversion? What is monthly order value? What is the cost of acquiring customer?

Is this industry standard? Is this ambitious? Is this conservative? And so on. So that sort of leads you to create this dashboard.

Yash Shah (09:15.691)

Yes, so you have mentioned about customer churn, right? So just an actionable insight that you would give for an early stage SaaS firm which has limited resources, but how could they reduce the customer churn at their initial stages, knowing that it is at a very bad stage? How could they take some actionable insights that would help them with that?

Firstly, it's important to identify and break down the churn. So churn is not, well it seems like one metric, but there is a lot more to it. And so let me take you through that, through another piece and I'll explain to you a little bit. So as an example, ConvertKit or Kit as they call it, is a building public company and they use Stripe to collect all of their payments. It's again a small ticket inbound SaaS.

and they've chosen to make their metrics public. So you'll be able to see everything over here, what is their lifetime value, their MRR growth rate. They're currently doing about $3.6 million in monthly recurring revenue. And then you'll be able to break everything down. So the first challenge with trying to fix your churn is that you should not look at churn as one number. You want to firstly break that down into user churn,

And by the way, all of these are numbers that are available over here. You can just change the dates over here and make it all time. And you'd be able to see their complete journey in terms of your ConvertKit's complete journey in terms of how they've grown and how their metrics have been since January of 2013. But they actually launched sometime over here. So they actually launched in February of 2015 or somewhere around that.

So from 2015 to 2024, they are approaching their 10th year in operations. So you'll be able to see all of their journey and points over here. But coming to churn, you'll be able to see, break it down into user churn, revenue churn, net revenue churn, net revenue retention, churn subscription and retention tables, right? So you want to figure out why is the churn happening? Is the churn happening because account has contracted, so the licenses have been returned.

Yash Shah (11:40.161)

but the customer is still there and they are being or you want to figure out whether the customer has gone away or you want to figure out whether the churn has happened because the customer is still with us, the amount of licenses are still with us but they have moved between plans, right? So they've figured out that they were on a higher plan before and they don't need that and so they moved to a lower plan or you included a couple of functionalities into the lower plan and so they moved, right? So you want to first break down all of your churn into

into all of these pieces, user churn, revenue churn and this is not that difficult to do. It sounds like a lot of work but if you're using Stripe to collect payments, you can use Bear Metrics or you can use a couple of other platforms that exist out there to get all of this data. It already calculates on your behalf. The other thing that you also want to do apart from breaking down the churn

is also to identify cohort level churn. So you also want to, I'll move back to the screen.

Yash Shah (12:53.677)

For some reason I lost the ability to stop the screen share. So one of the other things that you want to do with your churn is you want to have cohort level churn. So you want to have churn measured for different geographies, for different industries, for different size of customers. And then you want to see where is the churn actually happening. And then amongst those, what types of

churn RBC. It is once you have that in front of you, you realize that there are more than 80 % of cohorts where churn is not happening and the other 20 % of the cohort is responsible for other 80 % of churn. And then you only want to very specifically address that. And then once you identify the reasons, then there are a lot of ways to address it. We've done different sessions on billing, know, how design can help, how pricing strategies can help.

how reaching out to the right customers can help and so on and so forth. But looking at, the first mistake is looking at churn as one number.

Yash Shah (14:04.703)

So similarly, I think this also gives a follow up question with respect to the lifetime value also, right? I don't think even that is not a single term that also has breakages within. So could you share some insights on that also like its impact upon a long term effect on the product, I mean to run the company as well as the product? No, so I think journey in early stages, at least for the first year of SaaS operations,

Churning the first year of SaaS operations is useful to figure out customer lifetime and then breaking down customer lifetime into cohorts eventually helps you identify the cohort with which your product resonates the most. It's a way there is product market pricing GTM fit, right? Where the go-to-market channel that you're using is also sustainable and repeatable. Where the pricing is acceptable, where the product offers just enough amount of value and

and the customer also is renewing and converting. So once you identify that this is the lower hanging fruit for the product that I have, then what you want to do is you want to double down onto those cohorts. And so I think especially in the journey of going from $10,000 in MRR to $100,000 in MRR, this is the journey that you want to follow. You want to figure out the churn as per the cohort.

figure out the customer lifetime by one upon churn and then whichever customer cohort is promising on the spreadsheet is promising for the best lifetime value. You want to identify product, market, pricing, GTM, channel fit and then take the company forward from there. So that's your roadmap from 10k to 100k. That's so spot on. You have a clear vision now. Yeah.

Yeah, hopefully. Fingers crossed. I just wish I knew this when we started ClientJet. It was an extremely expensive way of learning these things. But yeah, I know for sure. We typically share these insights on our consultation calls, Yash. But this is very helpful for a lot of people out there. Yeah, no. So the idea with these sessions is so that

Yash Shah (16:27.969)

we can share the learnings that you had while building our own product, and specifically from a finance standpoint, right? So because a founder is required to focus on a lot of things, they're required to focus on fundraising, they're to focus on acquiring customers, on building the team, making sure that the product is done well, the pricing experiments, all of these things. And so anything that we can do as momentum to reduce that cost of learning, we'll try it.

That's actually my another question, which you just mentioned is that what are the industry metrics, the standards that we need to maintain with respect to these metrics that we just discussed? And also what are the metrics that from a fundraising perspective are more important? Could you share some insights about that? So fundraising, I'd say that fundraising at the time of not having the product is the easiest.

If you don't have the product, if you don't have the customer, you're selling a dream and there are no metrics through which you can measure a dream. You're selling hope. so is a fund, it's fundraising without the product is a function of the founder and their sales. But as soon as you have the product, as soon as you have the first customer, that's when the questions from the investors become, become multifold. And that's what I realized when he raised without the product, it was, it was easier.

and but then once we had some metrics, some traction, then becomes more and more difficult. So I'll actually take you through that, right? So let me share, this might require sharing an entire screen. Are you guys able to see, see notion? Yeah. I am ready if could zoom a bit. Yeah, I'll take you through that. So should be a little better now. Yeah. Yeah. Perfect. So, so I'll take you through what

did we use to pitch ClientJoy to investors? And how did it, how it went? So this is sort of a room that we created for investors. They could basically look through our deck from start to finish and then make a decision as to whether we are a company that they'd like to fund. They were able to see our website, customer community, exploring ClientJoy without the sign up, our wall of love, product roadmap, universe, product updates and.

Yash Shah (18:53.569)

And then we had our video and what our users have to say and the fundamental philosophy and everything from start to finish over here. But from an investment standpoint, here's the piece that we would share with the investors with whom we started to have interesting conversations. So first couple of meetings are done. The analyst has moved the deal to a partner.

IC conversations have started to happen. And so at that point of time, you want to share a couple of things. You want to share that you've been consistently pushing out product updates. So you had product updates consistently available on a public link as well. You also wanted to share, okay, there's a challenge. Is there a challenge or are you guys there? No, no, we're here. Okay, perfect. And then the financial dashboard that I just showcased to you guys.

our community, some basic company details, understanding our customers and all of those things. And then even our internal monthly updates, right? So as an example, in April, 2022, we used to sort of divide all of our updates into team, product, growth and ask. And so team, we lost our tech lead to a 240 % hike offered by other company in April, 2022. This was the COVID years.

when people were getting work from home, left, right, and center job offers. And then, so we've taken some measures to make the rest of the tech team stable. And then what did we launch in the product? What did we do new in growth? And then what are some of the asks, right? And so that along with financial dashboards, now whenever I reach out to a future investor, they'd be able to see our complete history as to what's been happening in the company.

and the fact that we are consistent with making product updates and the fact that they have the financial dashboard also in front of them at any point of time they can see and they can have, they might have questions around which months were good, which ones were not, why were they good or bad and so on and so forth. So having complete track record and transparency and all of that is extremely important. One of the things that is, and it doesn't take a lot of time, it takes probably half an hour to 45 minutes every month.

Yash Shah (21:15.757)

to keep all of these things in. But it just requires discipline and consistency. And if you have that, then it's extremely meaningful. But Shane, you've been quiet for a while. What do you think? What are your thoughts on that? I'm blown away by how it's very different to see how a SaaS P &L is set up from a services company. How much really and truly, how much more is involved.

And I think a lot of founders, me myself included, when I started my business, I took templates from mentors, coaches, people that worked with us. And that slowly evolved over time into something bigger and better. And then you go, we went through a number of accountants and different accountants focused on gap accounting. And then we, but then we entered into a realm of a profit first world.

which I don't know if you have ever heard of that framework, Profit First, it's a book. Have you heard of that? Yeah. So we started with that and then that gave us a lot more visibility and understanding. But one thing that I can see very clearly right now is where we didn't as a business factor in the company churn, because all we focused on was revenue, clients, expenses, team, profits, tax bills, whatever else came with it. But had we paid attention to

those two metrics and understood how to break it down at a granular level, peel the onion back. think it could have made, again, it's the awareness, it's the knowledge, it's the lack of knowledge or abundance of knowledge that I think this can, even a call like this or just a video like this can really change the game for somebody. And if they were to say, hey, can you show me how to build a P &L for my business like that would

Would you invite guests to send that message to you? Yeah, no, absolutely. And so talking about changing the game, it's an amazing segue to what I was going to show next. So one of the things in the spirit of helping SaaS companies reduce their cost of learning, one of the things that we've worked on is we've created a lot of templates. So if you like.

Yash Shah (23:41.069)

you know, looking at a projection spreadsheet and sitting out the budgets and paid acquisitions and all of that. All of these links creating your internal reporting spreadsheet and all of that. We've got a template for you which you can get completely for free. You can just put in your name and email ID over here. We'll link this below. can go to Momentum91.com. You'll be able to find resources, click on check all and you'll be able to

land over here and it's not just the financial metrics. We've got SaaS design resources, micro SaaS ideas, monthly dashboards, PRD templates, OKR templates, and so on and so forth. So you'd be able to get any and all of these resources completely for free. Just head over to Momentum91.com, click on Check All, and then you'll be able to find all of this. So this is extremely valuable for SaaS companies to

The other thing that we've also seen is that most SaaS companies are started by two founders, ideally one growth, one engineering or design or tech. And one of the things that we always see lacking is that there's no one to run the company. And so there are certain skill sets which don't require anything related to SaaS. So certain skill sets in terms of compliance, tax, accounting, financial projections.

you know, building the team, negotiating with vendors, figuring out the pricing. All of these are just like ability to read a balance sheet, ability to read a P &L statement. All of these things are just common sense items, right? That if you've done that a couple of times, you'll be able to do them extremely well. And so, I would strongly encourage one of the founding team members or key leadership members to just focus on running the company, right? Because that's as important as

And running the company, whether I running a mom and pop store or I building cutting edge, know, Mars conquering mission. Running the company pieces is similar. So, you still got to do all of those things. I think that's very crucial because in reality, we have seen a lot of companies fail not because their product was bad.

Yash Shah (26:03.085)

or they didn't crack the product market fit. Those things are something that you keep eye on and develop upon. It's probably because they didn't focus on running the company and running the team. Yeah. And... people were working for the software. So you won't believe one of the things that I realized with the client of ours was that they were using the third party service which offers an email and scheduling services, third party layer.

of sorts like a platform and they were paying $5 per subscription for which we were paying 99 cents for the exact same platform and the only difference was I got on a call with them a couple of times to negotiate and we were paying 99 cents for which that client was paying $5 the difference was that the client assumed that the pricing written on the website is true accepted it put in the credit card and started using it

When we got on a call with them and we said, hey, you we are going to need 500 licenses from you over the next few months. What can you do on price? And these are not, not world changing ideas. These are just common sense things that you would do as a founder. You should do. And those are like running the company related stuff. I think one thing people have to be made aware of though, when you say that is common sense is not common. Yeah, for sure.

As much as we'd want to believe it, that's one thing I used to say. It's just common sense. Are you stupid? This was when I was in my 20s and just one person you would never expect it from him. And he just said, Hey, you're Mahi. Did you know that common sense is not common? And I was just like, that makes sense. So true. So true.

It should be renamed. I will start a petition on change.orgy. Social sense. Don't call it common sense. It just sets the expectation too high. So, I had an interesting question. For funded SaaS companies, at what stage should they focus more on profitability versus growth?

Yash Shah (28:22.017)

because obviously initially since they are funded and since they are just getting started they would be focusing more on roadside but then when should they start focusing more on profitability? golden question right so and so these are the questions that don't have the right answers. There is no true or absolutely correct answer to this question because it depends on a lot of factors. Are you building a

SaaS where you have to educate the market. If yes, then profitability can happen later. But then you also have to make sure that if you're investing in educating the market, the market will not churn out as soon as they are educated. So that's extremely meaningful and that's extremely important. And so if that is the case, then you should not focus on profit.

at this point of time. If there is any other case, which is where your SaaS is easily replicable, technology is a commodity, anything else, your focus on profitability whether you're funded or not has to be there from day one. If your CAC to LTV is not one is to three, then you're doing something wrong. If you're spending more than 10 % to 12 % at 100K MRR, if you're spending more than 10 to 12%,

on your infrastructure costs or third party platform or software subscription costs, then there's something that's horribly wrong that's happening with your SaaS company. So there are these industries. if your website to sign up conversion rate is less than 7%, there's something wrong. The sign up to paid conversion is less than 5%, there's something that's horribly wrong. So these financial metrics are equivalent to like your

you know, red blood cell counts, your blood pressure, your body weight and all of these things, right? Now there are of course, edge cases. So there are edge cases where a marathon runner will have a resting heart rate of 40 or, you know, a heavy weight sort of, of lifting champion might weigh 250 pounds, but those are edge cases, right? For normal average, you know,

Yash Shah (30:50.785)

people going to work like you and I, there are metrics for BMI, there are metrics for what's the normal RBC count, the metrics for what your resting heart rate and blood pressure should be. Those are the metrics that I just spoke about. And that's what you want to adhere to. Once in a lifetime, of, sorry, once every couple of years, you'll have chat GPT sort of, or open AI sort of companies, which are SaaS companies and they can make a loss for five years and that's okay, because those are moonshot projects.

But for almost this platform which allows me to live stream, if they not hitting the metrics that I shared with you, it cannot scale. I think we have a question, how should a startup, SaaS companies categorize spend by department and priorities? So the priority is only one, the priority is always to acquire more and more customers. Because for a SaaS company, more often than not, customer acquisition is the mode.

because technology is a commodity and you want to acquire the amount of customers that you have in your ecosystem is an entry barrier for a competitor to enter the market. So that's number one focus in terms of priority for sure. But in terms of categorizing, so let's take a scenario. If I'm raising a million dollars as my seed or sort of a seed plus plus round,

I want to make sure that I'm investing 30 % or less in building the product, 60 % in acquiring customers. So, and that includes your marketing, salaries, sales, all the experiments that you need to do, all the channels that you have to be present on. And then eight to 10 % is company admin miscellaneous, all of those things. So that's, I would categorize that. I would jump in on that. So that interesting question, I put it there.

And in terms of so I think a lot of companies do want to focus on this part. So building the product is essential. So let's say you're building the product, but it's not ready and you want to acquire new customers and you have to build your pipeline. So where does a startup focus more of their attention in terms of that category on let's say GTM.

Yash Shah (33:15.885)

enablement, sales enablement, marketing, top of funnel activity, social, cold calling for a SaaS company where let's say the product is fairly priced, 20, 30K a year. Where would you categorize or prioritize your focus between sales and marketing? so if it's if it's 20, 30K, it's a high-dicket SaaS. High-dicket SaaS, is a

there's an outbound play that can happen. then inbound is sort of a hygiene activity or a little bit of a trust building exercise. And so you want to do SEO and you want to do social media and you want to do ads and all of those things. But you want to do that in a smaller measure than investing on cold outbound because cold outbound, whether it is calling, emailing, LinkedIn, whatever the case may be, still today is an extremely predictable way of generating pipeline and

closing sales and closing deals. There's also another assumption within this, which is that if you're selling, if anyone's selling a SaaS solution that is 20, 30K a year, it's not going to be a bottom up approach. It's not going to be adopted by the customer facing people or users in the organization and then slowly find its way to the top management. It's typically going to be top down.

And so top down people don't make search queries, right? So they're running like a $10 million annual run rate business. They're not going to search for solutions. are going to ask for referrals. They are going to read their emails and they're going to pick up the phone. And so in those cases, they're not going to start searching for good solution to do whatever, right? To manage my oil and gas factory. They are not going to search that, right? So you want to go to events.

You want to go to, you want to write emails, you want to give them calls, you want to be present wherever it is that they are, you want to build networking events, host breakfasts and things like that. So then that's the GTM channel and that should, so if I were to split the 60 % of a million dollar fundraise, I'd put 40 % in all of these activities and then 15 to 20 % in ads to retarget and SEO and all of those things.

Yash Shah (35:43.597)

That's helpful. I think, this was, are unfortunately out of time. can talk about, I would love to talk about this for hours on end. This is essentially what we do, day in and day out. But that's all the time that we have for today. Thank you for everyone for joining in. seeing you in our next streams. For now, it's a goodbye and also just a quick reminder.

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