How to Navigate the Alphabet Soup of SaaS Metrics

How to Navigate the Alphabet Soup of SaaS Metrics

By Brandon Metcalf June 6, 2022 at 3:23 pm

Not all SaaS metrics are the same, even the ones that are sometimes called the same thing. Although they are numbers and data at their core, they’re incredibly and unexpectedly subjective. That’s because there are so many different ways to calculate things, and different jargon that even people in the same niche will use differently.

These terms — ACV, ARR, churn, NDR, CAC, LTV, the list goes on — are thrown around freely by SaaS professionals. But it’s important to ask yourself whether you really understand what they mean and what the numbers are trying to tell you.

You can’t just calculate metrics for metrics’ sake. The point is to convey the success of your business, both to investors and to your team internally.

Here are some of the pitfalls SaaS professionals run into when calculating metrics for their business.

In the software world, most companies are looking at three categories of top-line metrics: bookings, billings, and revenue. 

  • Bookings = contracts signed. Bookings count the amount clients are going to pay for the length of their contract, even if they haven’t paid it yet. 
  • Billings = invoices issued. Billings count the money you’re owed because the invoice is already out for it.
  • Revenue = money paid by your customers. Recognized revenue counts the money after you’ve delivered your product.

 

Even industry pros and investors can end up confused among these metrics. At Place, we’ve definitely run into situations where clients are measuring one thing and calling it the name we typically use for something totally different.

For instance, take bookings and recognized revenue — or better yet, ACV or ARR. These can be relatively easy to mess up because they’re conceptually similar.

When the contract is signed and you close on an opportunity inside Salesforce, that’s when you get to book that deal. Salesforce has always handled bookings brilliantly — the process of taking your sales pipeline and winning a deal is seamless. You can count that money the client has agreed to pay you in bookings. But you can’t count that money as recognized revenue (ARR) until you’ve provided the product or service. That’s the difference.

I’ve been in situations where one party is talking about recognized revenue, and the other party cannot get something even close to the same number when they run the calculation. After some serious confusion, we came to the realization that what one party considered recognized revenue was what the other party would call bookings. There are so many of these contradictions out there in SaaS metrics.

 

Even if you understand the buzzwords and how to differentiate among them, it’s ultimately not enough — you have to understand the ‘why.’

Customer acquisition cost is another example of a metric where it’s easy to unintentionally muddy the waters. The goal of this metric is to tell you how much it costs to get a customer on board. 

But the real question with customer acquisition cost is what exactly to include in the calculation. Is it only select types of sales and marketing expenses, or all of them? Does it include account executives’ salaries? How much advertising and marketing spend gets counted? What about 30-day free trials of the product? You’re going to incur a lot of expenses to expand your relationships with potential customers, and you’ll ultimately have to make the call on what to include and what not to include.

Even if the whole team agrees about what expenses go into the calculation, what time frame do you look at? The sales cycle is 30-60 days for us at Place, so I’d likely use 90 days of expenses to calculate how much we’re spending to acquire these customers. But at Talent Rover, it took us two years to close our deal with our dream client, Adecco. So that changes the equation, too.

With customer acquisition cost, as with any metric, it’s critical for leaders to understand the “why” behind the calculation. If you’re spending three times the lifetime value of a customer to acquire them, that’s a lose-lose situation for your business and a sign that something is wrong with your sales process.

 

Due to the very nature of metrics, businesses need flexibility in their SaaS solutions.

When there are so many different metrics to run, different ways you can calculate the same metrics, and tweaks you can make to your calculations to get your numbers to work, businesses need tools that can shift and change over time as needed.

Interestingly, many of the products targeted at high-growth and early-stage SaaS companies are incredibly rigid. If you use their product exactly how they want, you’re fine — but there’s very little room for customization. 

I suggest finding solutions built on Salesforce, which offer more flexibility based on the unique needs of your business.

 

Looking for a good place to start? Check out Place’s offerings on AppExchange here.