We’ve previously discussed the process of developing a financial model for your SaaS company, in a simple, easy to update format. While financial models are challenging for every business, SaaS companies have unique challenges and a focus on recurring revenue and customer loyalty. SaaS financial modeling is uniquely complex and requires careful thought. Luckily, we’ve done the hard work of developing a financial modeling process for your SaaS company.
If you do the hard work of financial modeling upfront using our detailed methodology, your model can be updated regularly based on your current financial situation. This helps you set realistic goals, more accurately predict growth and forecast your recurring revenue, and understand how many new customers you need to acquire to meet those goals.
Measuring your financial success, forecasting future growth, and developing a sales and marketing strategy that supports those efforts is critical for any business. SaaS businesses, specifically, face unique challenges.
First and foremost, you’re dealing with a digital product that comes with a set of demands for convenience and performance that most other businesses don’t have to face. On top of that, you have the uniquely critical task of incentivizing customer loyalty.
With Baremetrics, you’ll have everything you need to track, measure, and optimize your SaaS financial metrics. Get started with a 14-day free trial.
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Accounting for recurring revenue
As a SaaS business, you rely on customer loyalty and subscription revenue. This takes the form of monthly recurring revenue (MRR) and annual recurring revenue (ARR). These numbers refer to the total regular income you can expect in a given amount of time, based on your subscribers. If you’re building a financial model with aggressive growth and operational goals, you might struggle to accurately forecast your MRR.
When considering your recurring revenue, you need to be sure to account for contraction—that is, the amount of revenue lost each month to regular churn. This brings us to our next challenge of SaaS financial metrics.
Churn Rate and Customer Lifetime Value
Churn rate refers to the percentage of customers or revenue lost in a given period. For your SaaS business, you should calculate churn in the same window as your subscription periods: if renewals are monthly, calculate churn monthly. You should also calculate churn quarterly and annually to have a clear sense of whether you need to refocus your marketing efforts from acquisition to retention. If you haven’t appropriately forecast your churn—both voluntary and involuntary—you can say so long to your carefully constructed financial model.
Your churn rate also helps you understand customer lifetime value: that is, the amount of money a customer contributes to your revenue from their initial subscription date to their cancellation date. If you have a clear sense of both churn and lifetime value, you'll be able to set accurate growth predictions within your financial model and understand how many customers you need to acquire in a given period to reach your specific MRR and ARR goals.
Without clear reporting of SaaS metrics, you’ll never be able to appropriately forecast churn, reduce your involuntary churn through dunning, or make significant improvements to your customer lifetime value.
Baremetrics is one of the only tools on the market that offers a dedicated dunning solution. Get started with a 14-day free trial to help reduce your involuntary churn.
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Understanding SaaS customers through financial metrics
The best way to predict your MRR and plan for growth is to do your best to understand your customers—they are, after all, your most important financial asset. Customer retention analysis lets you see after what period of time your customers are dropping off for an accurate picture of the customer lifecycle. You also need to know retention efforts are working, helping you improve your overall churn and in turn impact your SaaS KPIs.
If you leverage a customer analytics tool, you’ll be able to visualize critical financial data about your existing customer base, such as key demographic information, average revenue per user, and average customer lifetime value. You'll also be able to track both cancellations and downgrades, which have a significant financial impact for your business. You’ll also be able to automate the process of requesting feedback and gaining key cancellation insights.
Striking a balance between financial metrics and customer satisfaction
When you make changes to your SaaS business, you can expect to see some customers drop off or complain. If you roll out a new product feature, an update, or a rebrand, you’ll see some churn. If you change your pricing, you’ll likely see some drop-off.
If you’re regularly monitoring your key metrics like customer acquisition cost (CAC), customer lifetime value, customer churn rate, and average revenue per user, you’ll know roughly how much MRR you need to meet your operation cost and growth goals, and the number of customers you need to get there. You can then choose a pricing model that meets those goals, and helps position you for future success without giving your prospects sticker-shock.
Improve your SaaS Reporting With Baremetrics
With the right SaaS financial modeling software, you won’t run into the challenges of manually building reports and calculating KPI numbers. With Baremetrics, you’ll be able to visualize key data points in a central, customizable dashboard that automates the reporting process, and help your sales team excel at customer retention. You can easily develop reports to support your financial modeling activities, support revenue growth, and improve your business position.
If you’re ready to overcome the challenges of important SaaS metrics, start your 14-day free trial of Baremetrics today.
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