Trends in Operational Metrics Show Demand for Greater Insights

Rob Reid, CEO, Intacct
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Every modern business uses software management sys­tems, but the best use systems bring strategic, opera­tional, and financial data together to support and opti­mize a performance-driven organization. For software companies, this requires new attributes, focus changes in metrics, and a comprehensive view of growth.

Elevation of SaaS metrics

More and more software companies are focusing on a few com­mon SaaS metrics to measure growth, success and value. The op­erational measures, like CMRR (Change in Monthly Recurring Revenue), churn, Customer Acquisition Cost (CAC), and Cus­tomer Lifetime Value (CLTV) are being presented to executives, investors, and board members with equal billing alongside tradi­tional GAAP-based financial reports like an income statement, balance sheet, and statement of cash flows.

The elevation of these SaaS metrics to board-level and Wall Street reporting legiti­mizes the value of SaaS met­rics as a primary indicator of the health and value of a software company. This represents a new trend in financial reporting and performance measurement.

Challenge in SaaS metrics

The challenge with SaaS metrics, how­ever, is ensuring that they are calculated with the consist­ency and accuracy of traditional GAAP financial measures, which are subject to well-established accounting guidelines and financial controls.

 With the right measurements in place, software companies are on the verge of being able to dramatically increase their business by having the insights necessary for explosive growth and high customer satisfaction 

Software companies want to make reporting SaaS metrics as straightforward as creating an income statement at the end of the month; yet the source data for SaaS metrics is general­ly not completely contained within an ERP system. Therefore, software finance leaders are challenged to report SaaS metrics in a timely, accurate manner outside of their normal financial reporting process.

Measuring successful execution of strategy

The ability for CFOs to have automatic, accurate SaaS metrics that can also be viewed by dimensions and attributes that define suc­cessful execution of company strategy is revolutionizing the way software companies make decisions and measure the results of those decisions.

Fortunately, modern best-in-class cloud ERP systems are able to meet the reporting and insight needs of software companies. By seamlessly integrating with other business systems, a cloud ERP system can centrally and automatically calculate SaaS metrics us­ing business data from multiple systems. This process delivers SaaS metrics that a CFO can trust, calculated with the same level of accuracy and control as GAAP reports within the financial system of record.

Not only are the SaaS met­rics complete, accurate and timely, but the metrics can be viewed through the unique lens applied by an individual software company by industry, segment, package, product, channel, etc. in addition to an aggregate view.

New perspective sees growth as not just an outcome

Respondents in Sand Hill Group’s “Software CEO / CFO Outlook 2015” report revealed the number-one metric their companies use to track their business is revenue growth. This is not a surprise, as revenue growth drives a significant portion of a software company’s future prospects. A software company’s valuation, funding and IPO timing tend to be driven by revenue growth, with many software business leaders believing that the major­ity of their company’s value at IPO will be driven by its revenue growth rate.

The study found that 48 percent of sur­veyed companies in 2015 track their business using the revenue-per-customer metric—a significant increase over the 33 percent of companies that reported using this metric in Sand Hill’s 2014 study. The increasing use of the revenue-per-customer metric in 2015 shows that software companies are not look­ing at growth as an outcome that must come at all costs but, rather, a result of being strategic about customer targeting and segmentation in order to drive growth from revenue- and profit-generating customers.

The 2015 study found the fourth most commonly used metric is MRR (Monthly Recurring Revenue). The surprise is that CMRR (Change in Monthly Recurring Rev­enue) is not used by even more software companies as the industry shifts towards SaaS - and subscription-based products.

While MRR is a valuable metric for il­lustrating a software company’s current run rate, showing how much revenue is coming in for the month, CMRR focuses on the com­prehensive metrics of new billings, churn, upgrades, and downgrades. These metrics are used by subscription businesses to plan for future investment in sales, marketing, product, etc. and to forecast spending needs associated with sustaining, growing, servic­ing, or managing particular levels of recur­ring revenue.

Using churn to measure customer success

While CAC and churn are used less frequent­ly than other software company metrics, the study found increased usage in 2015, which continues a trend of widespread adoption of SaaS metrics as valuation tools by manage­ment, boards, investors and analysts. These stakeholders want to know about a software company’s dollar churn and company churn, which can be used to determine the health of the company, the solution and the relation­ship a software company has with its cus­tomers. They also want to know how much it costs to acquire customers so that the soft­ware company can be evaluated on how ef­fectively it acquires profitable customers for the long-term, rather than acquiring custom­ers who will pay little to nothing for software and services over time, and then not make a return on their CAC investments.

Churn continues to be a popular and valuable measure of a customer success pro­gram because churn is a natural consequence for software companies with customers who are not satisfied or successful. Yet churn should be used in conjunction with other success measures when evaluating the ROI of a customer success program.

Customer engagement is perhaps the hardest to measure but greatest indicator of the value of a customer success program. Measuring customer engagement based on customer activity both with and on behalf of their software vendor is an important way to predict and determine satisfaction and success.

In performance-driven companies, act­ing on insights from the metrics described above will help them understand strengths, weaknesses, and areas for improvement in achieving their goals. With the right meas­urements in place, software companies are on the verge of being able to dramatically increase their business by having the insights necessary for explosive growth and high customer satisfaction.

evision, phone use, air conditioning, or any number of other hotel amenities, the expectation is becoming common that Internet access should be provided at no ad­ditional charge.

Indeed, there is a growing trend, even among full service hotels that used to charge a separate fee for Internet access, to now provide access at no additional cost—though sometimes hotels use the offer of free Inter­net to at entice guests into their various loy­alty programs. Meeting planners also now assume fast and reliable Internet connections are standard as part of their agreements with the venues they use for their events.

One solution that has been adopted is to offer premium Internet connections for a small additional charge. The J.D. Power study shows that guests gener­ally don’t mind paying extra for the pre­mium service. This helps alleviate some of the bandwidth issues while bringing in some revenue to subsidize the costs of the necessary upgrades.

It is difficult to know at what point the growing hunger for data will flatten out. Un­til then, hotels will continue to chase band­width and deal with the challenge of our continued growing consumption for Internet content as a cost of doing business.

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