The Future is SaaS
Go to Metrics
Software as a service (“SaaS”) products offered through monthly or yearly subscriptions, allow customers to be asset light and avoid large up-front licensing fees and capital costs. On the other hand, such model unlocks recurring revenues for SaaS startups meaning that you don’t start your revenue from scratch every year, which happens to be highly valued by investors!
MENA cloud services revenue grew up to $3 billion in 2020, an increase of 21% over 2019. Out of which SaaS comprised 53%.
SaaS revenues stood at $1.6b and $1.8b in 2020 and 2021 respectively.
Such cost-effectiveness of SaaS is driving MENA organizations to increase their spending in the segment. Both for customers and vendors.
The tech scene is shifting to SaaS.
There are c. 345 SaaS companies today in MENA and we expect SaaS revenue to jump up to >$3b in 2025.
If you are SaaS startup today and looking to fund raise (be it equity or alternative finance), its critical for you to understand your key performance indicators related to growth (revenue, acquisition and retention in particular) to help you determine your goals, profitability, and runway.
Let alone that closely eying such metrics will help your startup develop its strategy and determine additional activities you can adopt to improve your performance.
We highlight below Capifly’s 4 types of metrics we look at when evaluating SaaS startups
- Unit economics: such as 1) Gross Margin, 2) Cost Acquisition Cost “CAC” Payback period and 3) Long Term Value (“LTV”) over CAC.
Above metrics allow startups to analyze cost to revenue ratio in relation to its basic unit. As a rule, basic unit for SaaS businesses is the customer.
Based on a per-unit analysis, unit economics shows how profitable a business is or how soon it will achieve profitability.
- Growth metrics: such as Annual Recurring Revenue (“ARR”) growth rate and Net Monthly Recurring Revenue (“MRR”) growth rate.
Your startup growth rate has a significant weight in securing alternative finance and speaking with investors in general. The spread in your annual recurring revenues is what will ultimately allow you to repay the debt (in case you are looking to secure alternative financing).
To effectively use ARR as a metric in your business, you must have customers agreements with a minimum duration of one year, or the majority of your term agreements must be one year or more.
Also, the speed on which you increase your ARR is critical, so we look into Net MRR Growth Rate which measures the month over month percentage increase in net revenues.
MRR growth is a measure of forward momentum, market traction and business expansion.
- Churn metrics: including Gross annual churn rate and Net dollar retention
SaaS calculate 2 variations of churn, logos i.e. customers and revenue.
Churn rate is one of the most important metrics to your business because it tells you how successful your marketing and product strategies are. If you know your customer churn rate, then you will know which measures are working to keep customers.
A low churn rate indicates high customer satisfaction, which means more revenue for your business in the long run.
Net dollar retention on the other hand is a metric used to measure a company's year-over-year performance. It compares the amount of revenue that a company brings in a given year from the previous year's existing customers. It does not factor in revenue from customers acquired in the present year.
Selling new subscription is expensive and calculating net dollar retention for SaaS companies is important as its measure the ability of SaaS to keep and generate more revenues from existing customers through up-selling.
- Efficiency metrics; such as SaaS quick ratio and Burn rate multiple.
In SaaS, the quick ratio is a simple efficiency metric that highlights your ratio of growth compared to churn and contraction
The SaaS Quick Ratio is a quick and easy indicator of how well your top line is growing relative to revenue reductions. It can act as a red flag or a green light in terms of whether to expect net recurring revenue to increase or decrease and for this reason, it’s an investor favorite.
Moreover, burn rate multiple calculates how much you are spending -net of revenue- to generate one dollar of new revenues.
Conclusion:
The growth metrics of for SaaS not only shed light on the performance and efficiencies associated with workflows but also help the decision-makers identify problem areas and initiate meaningful activities.
When you measure your metrics, you’ll be able to evaluate the success of your strategies, and improve your fundraising capacity.
Sources: Gartner, Crunchbase and Capifly analysis