How Healthy is Your SaaS?


How Healthy is Your SaaS?

General Messaging

Private SaaS companies experiencing growing pains can examine a few metrics to ensure they’re still moving in the right direction. Actively monitoring these KPIs as a SaaS company continues to scale allows leadership to pivot and make necessary changes before organizational and resource allocation errors become baked into ways of working. These KPIs extend beyond the usual annual recurring revenue, sales and marketing expenditure, and EBITDA metrics. JLA’s Industry Scorecards offer a framework to peer under the hood of a SaaS company, perform a routine checkup, and establish a future roadmap to improve long-term health.

Themes and Metrics

Beyond the most obvious measures of SaaS health, leaders should also monitor revenues, expenses, and investments as they relate EBITDA, R&D, and ARR. The Rule of 40 is a common SaaS industry measure, where revenue growth plus EBITDA margin should equal at least 40%. This is a particularly important albeit broad measure for venture capital and private equity investors looking to fund a SaaS company. It helps identify whether investments in the company are resulting in the appropriate amount of growth. If we want to peer deeper under the hood, R&D is a good starting point. As new SaaS companies add employees and executives take on new responsibilities, R&D can get away from you. On a high level, R&D as a percent of revenue should be 29% or lower. R&D Performance, on the other hand, tracks the revenue associated per R&D dollar, calculated as:

(Current year revenue – previous year revenue) / previous year R&D

JLA advises this measure to be 1.7 or above. R&D Performance can function as a double-edged sword, with SaaS companies needing to invest in R&D to remain competitive in a market flooded with SaaS offerings but simultaneously tracking this spending to determine whether they can draw a causal link between innovation investment and its impact on the bottom line. Additionally, SaaS CFOs employ a 20% or lower rule of thumb for the portion of total R&D spending devoted to servicing technical debt. Higher levels of technical debt, product maintenance, and rework can suggest an R&D organization saddled with dealing with problems that are rooted in the past.

Year-over-year growth in annual recurring revenue is also a critical measure, tracking total active customers multiplied by the average billed amount per customer. The 2021 KBCM SaaS survey aggregates responses from 350 private SaaS companies, providing a YoY median organic ARR growth of 28%. Smaller companies averaged higher, with companies achieving $5-25M in revenue sustaining 30% in ARR growth, and private SaaS companies >$100M in revenue landing at 20%. Customer acquisition cost (CAC) ratio, another good benchmarking measure, leverages ARR to exhibit the effectiveness of attracting and winning new clients. The formula here is:

Fully Loaded Sales and Marketing / Total ARR Bookings

The 2020 median blended CAC lands at 1.20. In other words, $1.20 in sales and marketing spend is needed to acquire $1 of new ARR across all customers.

As younger SaaS companies look to win new deals, monitoring ARR growth, EBITDA, and secondary measures like CAC ratio provide the opportunity for an “at-home” checkup. Like checking bloodwork or BMI, regularly monitoring SaaS health ensures that companies are scaling properly without embedding flawed practices deep in the company. Monitor early and accurately, and rely on prevention as opposed to “fix-ups” later. Benchmarking against industry peers on these performance-based measures can help remove some the blinders many growing tech companies may wear as they continue their journey to becoming a successful SaaS.

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