Misleading Measures: Tying Metrics Back to Cash
Let’s dive into the metrics often being used for measuring SaaS company performance and why they might not tell the whole story. Simply, where do these metrics tell us our company is booming when cash flow is reeling?
MRR + ARR
The Issue:
There is a disconnect between when revenue is generated and a client is billed vs when the client actually pays for services. This can lead to a company being very cash poor despite all other indications showing strong growth, revenue, and net income
The Solution:
Invest your time or hire people to make sure you are collecting cash from your clients
They aren’t going to reach out and make sure you collected your money – that’s your responsibility
There are a number of technology solutions and outsourced companies that help with collecting cash. Ultimately, a call to your connection at the company might be the only way to get paid
Paired Metrics to Track:
Days Sales Outstanding
Track how long it takes you to collect cash to make sure that the contracted revenue is turning into collected cash
Overdue Balances
Make sure you are tracking your overdue balances and creating an allowance for bad debt — even the best companies can’t collect every last dollar.
Implement a process that cash collection escalates to the next level up when it converts from current to overdue, overdue to past due, and past due to past due 90+
NRR + GRR
The Issue:
Retention rates and product stickiness are often viewed as equivalent, however, there is a huge difference between contractually required retention and active choice to renew. This is especially true in the early stages of a business where revenue and customer growth can mask underlying retention issues.
The Solution:
Make sure you understand when client contracts are coming up for renewal
Connect with your clientele before renewal time to make sure they feel taken care of
Connect with your clients intentionally outside of renewal period so they know you’re not just there for a sale.
Contracts that auto-renew in the B2B space can seem like they solve this problem but unless you plan on enforcing you 30 day notice period, you can’t use it as an alternative to talking with your clients
Set clear definitions of what is an expansion sale vs a new sale
These can change as you grow – but make sure to go back and relabel sales if your definitions change
This helps track when expansion is coming from good product, good customer service, or good sales people — or a combination
Paired Metrics to Track:
Track your renewal rates upon contract expiration and set up other methods for tracking customer happiness such as Net Promoter Scores.
CAC to LTV Ratio
Learn about CAC, LTV, and CAC to LTV Ratio
The Issue:
During the early stages of company growth, there isn’t enough historical data to determine the lifetime value of an acquired customer. Alternatively, if you try to use churn rate as the method for calculating the LTV, churn rates can be misleading during early stages of a company as well. When churn rates are <10%, LTVs can be astronomical and hard to rationalize in early revenue stages.
The Solution:
Depending on the industry, look at reorder rates, renewal rates, or client use rates to create ways to measure likelihood of churn
You can better predict the likelihood of churn and create a more reasonable LTV metric
We sometimes recommend throwing away LTV as a metric and instead looking at first contract value and then first two year customer value
These aren’t a great way to answer the question of “how much would we pay for a customer” in the long term, but they serve as metrics to track and improve on during the early stages
Paired Metrics to Track:
Replace LTV with an easier to track metric like initial contract value, average annual value, or other shorter term metrics until you have sufficient long term data. Alternatively, focus entirely on minimizing CAC for the short term until you know that there are different values of customers.
