Thanks to lingering effects from COVID-19, including the macro double whammy of inflation and high interest rates, we’re tackling 2023 under unpredictable economic conditions and a potential recession on the horizon.
To dig into what this means for SaaS businesses in particular, Baremetrics CEO Brian Sierakowski sat down with Przemek Gotfryd, co-founder and COO of Capchase, and Jamie Maynard, Director of Strategic Originations of Capchase.
Together, they discussed how SaaS companies can thrive in the year ahead, including which key metrics businesses should keep an eye on.
Capchase is a non-dilutive funding solution for SaaS businesses. Founders partner with Capchase to get the capital they need to grow without having to give up a piece of their company in the process.
This blog post shares some of the key takeaways from our talk with Przemek and Jamie, “Stay One Step Ahead of 2023 as a SaaS Founder.” To access the full event recording, you can do so here.
What SaaS Metrics Should Founders Monitor in 2023?
When it comes to metrics, Brian’s advice is to be proactive and have a plan. After all, tracking a metric is only useful if you’re clear on what it’s telling you about your business.
In addition to your usual alphabet soup of SaaS metrics, we recommend paying attention to the following metrics to signal shifts in performance that might be linked to economic factors.
1. Trial Health
When we talk about trial health for SaaS and subscription businesses, we’re usually referring to two things:
The frequency of new trials
The quality of leads that start trials
Over the next few months, you’ll want to be on the lookout for a decrease in new trials, as well as differences in the types of companies starting trials (e.g. company size, products trialed, the role of the person trialing, etc.). Both factors can greatly impact your new recurring revenue.
In addition to frequency and quality of your trials, you’ll also want to keep an eye on conversion rate and canceled trials.
Churn always matters, in both prosperous times and otherwise. Whether your primary business goal is to generate cash or grow as quickly as possible, a high churn rate can signal fundamental issues in your business. It can also get out of hand if not addressed.
To reduce and prevent churn, you must learn more about who’s churning, why, and the financial impact of the why.
Who’s churning: Simply knowing which of your customers is churning isn’t enough to be strategic. You must dig a little deeper to stay ahead of a growing churn rate.
Why they’re churning: Some of the most common reasons for cancellations we see in SaaS are technical issues, business shutdowns, uncertainty about how to use the product, and making the switch to a less expensive tool.
The financial impact of the why: In the event you can’t save a customer, you should collect cancellation feedback. This feedback can help you calculate the amount of revenue lost for each reason. Seeing the financial impact driven by each reason is super helpful for prioritizing your team’s focus.
For example, maybe your Starter plan has the highest customer churn rate among other plans. Or, your medium-sized customers tend to churn after three years.
Some reasons can’t be helped, like when someone shuts down their business. However, for many other reasons, there could be opportunities to intervene and save the customer.
If manually asking people why they’re canceling and calculating the revenue lost by reason sounds tedious and time-consuming, you’re not wrong.
3. Net Income
Net income might sound obvious, but a lot of founders lack a clear idea of what they’re making at the bottom of their profit and loss statement over the course of the month. Founders must have a clear understanding of not only their revenue and cash flow but also expenses. This is especially important during periods of economic instability.
As a first step towards improving your Net Income, consider building a scenario forecast. By forecasting your baseline, best-case, and worst-case Net Income scenarios, you can make better-informed decisions around hiring, infrastructure use, and other cost centers for your business.
4. LTV to CAC Ratio
If you’re seeking capital or preparing to, keep in mind that capital providers look at ROI-related metrics to signal resilience and the likelihood of survival. One common example metric is the LTV (lifetime value) to CAC (customer acquisition cost) ratio.
However, monitoring LTV and CAC in 2023 might look a little different than in past years. Here are two things to keep in mind:
An increase in churn will decrease your LTV.
Some customer acquisition channels have become cheaper recently thanks to decreased demand. However, many companies are looking to cut back on expenses, and may be harder to sell to.
One way to improve your LTV:CAC in a shorter amount of time is to incentivize your customers to upgrade to annual contracts so you can get paid upfront.
5. Rule of 40
If you work at a larger SaaS company, you may already be familiar with the Rule of 40, or R40.
It’s the idea that a software company’s combined revenue growth rate and profit margin should equal or exceed 40%. Or as Jamie describes it, “year over year, top-line revenue growth.”
Given its difficulty to achieve, R40 has long been used as a marker for success among large and mature SaaS companies, but that might be changing.
In their 2022 Benchmark Report, Capchase found that successful SaaS companies are hitting between 80% (R80) and 110% (R110) at different stages. Among companies that go public, the best performers achieve 60%.
This means that not only is R40 possible, but even better margins are possible, as well.
Nonetheless, it’s important to remember that these impressive figures come from mature companies; smaller companies should think of R40+ as a destination metric to work towards.
Founders: Move Forward With Caution and Optimism
Although the economy feels rocky right now, there’s a lot of hope for the SaaS market.
As Przemek points out, “Whether there might be a recession in the US, nobody knows yet. But the SaaS spend is still going to grow by 10-20% this year because digitalization isn’t going anywhere.”
So founders, continue to proceed with caution. Look closely at your numbers and control your destiny, but stay open to the possibility of new growth opportunities.
And in the event you want to take advantage of a growth opportunity but need capital to do so, check out Capchase and its unique approach to alternative financing.
If you’re looking for financial insights to help you navigate 2023 and beyond, try Baremetrics. Our toolkit makes it easy to track SaaS metrics, trial health, churn trends, and more.
Start your 14-day free trial of Baremetrics today.