Software as a Service (SaaS) companies monitor many Key Performance Indicators (KPIs) to measure the health of their revenue streams. The selection of SaaS KPIs depends on a variety of factors, including business model, targeted growth and the maturity of the company. But it’s safe to say that for SaaS companies, one of the most important KPIs to monitor is recurring revenue. A company’s ability to track and analyze recurring revenue can empower operations, facilitate funding and more.
About Recurring Revenue Analysis
Recurring revenue monitoring and analysis is a SaaS KPI used by management, investors and bankers to evaluate the health of a company’s revenue stream. Depending on the company’s product offering and sales model, it will monitor Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR). For a SaaS company, ARR is calculated and monitored when software subscriptions are renewed annually, and MRR is utilized when subscriptions are renewed monthly. In this piece, for the interest of simplicity, we’ll concentrate mainly on MRR, but the same principles (and potential benefits) apply to SaaS companies using ARR.
Recurring Revenue analysis is a basic SaaS concept, and it is easily generated if your operations and financial reporting are designed appropriately to access the necessary information. Strong MRR analysis utilizes cohort analysis to isolate the revenue data by month, and it should produce a waterfall report to track the monthly revenue stream. The waterfall additionally provides insight to the monthly cohort throughout the customer lifecycle – new, existing and churned. The waterfall also tracks and can identify customer onboarding issues, customer erosion/churn and customer life expectancy.
Want to learn more about related metrics? Read our recent blog: “Demystifying Common Subscription-Based Business Model Concepts.”
SaaS KPIs: Additional Company Benefits of MRR
MRR cohorts can be useful to management in other ways, including the verification of various metrics in the Onboarding stage of the sales pipeline. Because subscription-based software companies are required to onboard new customers prior to recognizing revenue, revenue recognition starts when a customer is live on the platform. In other words, management can confirm the onboarding team’s metrics by cross-referencing the MRR cohort analysis.
MRR analysis can also track customer churn, which plays a significant role in revenue monitoring and sales projections. Software-based companies spend significant amounts of money upfront developing software and then assessing the pricing from various inputs. Then, management identifies the break-even point and develops sales goals to achieve profitability. Because customer churn plays a significant role in achieving profitability, MRR analysis is critical to benchmarking.
Recurring revenue analysis also helps subscription-based companies determine an average customer life expectancy over time. This is valuable because a longer life expectancy can translate into a quicker roadmap to profitability. Management will likely promote add-on products or activities to increase revenue generated from existing customers and focus on improving the product experience compared to competitors to acquire new customers. MRR can track fluctuations for each cohort as well as the customers within the monthly cohorts.
SaaS KPIs: MRR Lifecycle and Need
As noted earlier, a company’s lifecycle influences the necessity for MRR reporting. As early-stage software companies are often focused on obtaining new customers, an MRR analysis may not be critical for operations at first. However, recurring revenue analysis becomes increasingly important as a company gains market share in its industry and shifts attention to customer retention. Software companies expanding operations and raising additional capital can also benefit from MRR analysis. They will need to show investors and bankers robust reporting and analysis packages to win over new investors and open lines of credit. MRR analysis is critical to bankers and the investor package to evaluate the health of recurring revenue.
Interested in SaaS revenue analysis and forecasting? Read our popular post: “Three Rules for Building Your SaaS Revenue Forecast.”
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About the Author
Brett has 14 years of diverse accounting and finance experience spanning several industries at companies including Assurant, eHarmony, Cornerstone OnDemand, Paradigm Talent and William Warren Group. He is an Ernst & Young alumnus with industry experience that includes SaaS, Real Estate, Construction, Insurance and Banking. As a consultant, Brett implemented critical financial structures and best practices for accounting and operational controls. Prior to joining 8020 Consulting, Brett held Controllership roles for a Real Estate Investment Group and SaaS companies. Brett holds a Bachelor of Business Administration in Accounting and an MBA from Kennesaw State University and holds a CPA license in the state of Georgia.
Categorized in: Financial Planning & Analysis