RevOps Metrics for SaaS Companies and VCs

RevOps is the opposite of functional silos. It’s the alignment of sales, marketing (and DemandGen if separated from Marketing), and customer success (and support if separated from success).

Tracking RevOps metrics, a particular subset of SaaS metrics, is the best way to identify problems and fix them. And the greatest weapon (or flaw) when presenting to VCs. But that’s not all.

Rallying around metrics and the KPIs attached to them boosts team morale and increases collaboration. There is, of course, a critical first step, making sure the numbers are real.

Once you’ve got that covered, here are figures that should be front and center for all departments to see.  

 

RevOps Metrics for the Whole Company

 

MRR / ARR

Monthly Recurring Revenue (MRR) is the amount of revenue being collected each month. This figure informs forecasts and is used to set weekly goals to ensure growth over time.

MRR is broken into different channels such as new business MRR, expansion MRR, and reactivation MRR. There’s also contraction MRR and churn MRR which is revenue loss from downgrades, discounts or cancellations. You get the complete picture by tracking Net New MRR.

 

New New MRR formula for RevOps and VCs
Net New MRR = (New MRR + Expansion MRR) – (Churned MRR + Contraction MRR)

Churn Rate

It’s the ultimate indicator of a SaaS company’s viability. The percentage of customers or revenue that exits each month. Churn becomes deadly at scale. For example, a churn rate of 5% with 100 customers is manageable – just five customers. The same rate with 10,000 customers results in losing 500 customers and the accompanying revenue each month.

As with MRR, there are different ways to look at churn depending on the business.

The simplest being,

 

Customer Churn Rate Formula for RevOps and VCs
Customer Churn Rate = # of customers who churn in a given period / Total # of customers at start of the period

 

This doesn’t account for revenue loss, losing one customer paying $5,000 a month is worse than losing five customers paying $500.

Net MRR Churn Rate shows if your upsells and upgrades are doing enough to counter churn and downgrades.  

 

Net MRR Churn Rate for RevOps and VCs
Net MRR Churn Rate = (Sum of churn and contraction MRR) – (Sum of expansion and reactivation MRR) / MRR at start of period

 

Many SaaS companies rely on bi-annual or annual contracts. This allows customer success teams to focus on providing value throughout the contract and earning a renewal. In that case, renewal rate is a relevant metric and should correlate with customer satisfaction.

You can calculate renewal rate by customer or MRR revenue.

Customer renewal rate = # of customers who renewed contract / Total number of contracts up for renewal

 

MRR Renewal Rate formula for RevOps and VCs
MRR Renewal Rate = MRR of renewed subscriptions / Total MRR of subscriptions up for renewal

 

Negative Churn

The holy grail of subscription revenue and a major RevOps goal is achieving negative churn which means expansion (upsells and upgrades) revenue is outpacing revenue lost from cancels and downgrades

This means cohorts with negative churn become high-yield savings accounts.

There are three traditional methods for achieving negative churn:

  • Seat expansion: Salesforce used this approach on their way to $8 billion in revenue.
  • Resource or service expansion: The straightforward approach has been used by storage giants like Box and the video hosting platform Wista
  • Cross-sell and upsell: This method has been mastered by API companies that offer different packages for programming needs, such as Twilio who went public in June.

 

The Funnel

Embracing metrics and formulas is difficult for some employees, understanding the company’s customer funnel is an effective way to think about RevOps visually.  

There is an infinite amount of variations to SaaS funnels. They all share the core journey,

 

SaaS Customer Journey

 

Tunguz argues a 10% improvement in any phase of the funnel will provide an equally positive return to conversion. You can determine time spent on various stages and optimize.

Each department can contribute to funnel optimization. Sales, DemandGen, and marketing directors look at Customer Acquisition Cost (CAC), the cost of sales and marketing efforts divided by the number of converted customers.

Customer success and support can improve the funnel by providing a quality customer experience and expanding spend over time. An advocate program can drive referrals and awareness – which makes the funnel into more of a cycle.  

 

RevOps Metrics for VCs

 

Other metrics might not excite the whole company; some are even labeled “VC Metrics” because they have little value outside of raising capital. Nonetheless, they need equal attention.

Quick Ratio

Adopted from the finance world, quick ratio refers to a company’s liquidity ratio. The SaaS Quick Ratio gained attention when Mamoon Hamid, Partner at Social+Capital presented at a SaaStr conference.

 

SaaS Quick Ratio formula for RevOps and VCs
SaaS Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)

 

The formula provides insight into whether revenue growth is efficient. New business deals and upsells should be outpacing churned revenue and loss from downgrades, etc.

Hamid stated that a quick ratio of 4 indicated healthy growth and manageable churn. Others point out that a quick ratio of 4 may not be enough for sustainable growth if churn is eating a high percentage of revenue.

 

Retention Heatmap / Cohort Analysis

Using a cohort analysis to understand retention is popular with VCs because a company with soaring sign ups might be losing them at a high rate. The underlying issue is hidden on a chart of sign-ups each month.

 

Cohort Analysis

 

It also helps you understand customer lifetime so you can focus on onboarding or adoption efforts.

The heat map element of this analysis is when the percent of cohort retention fades from green to red as accounts leave.

 

Heatmap Element of Cohort Analysis

 

With this format, you can interpret horizontal drops as problems with a specific cohort – such as onboarding issues or the rollout of a beta product. Drops along the vertical axis indicate the end of a term or a critical LTV point.

 

Early Stage LTV and Modern Variations

The LTV:CAC has been a widely used metric, with 3:1 indicating the right amount of sales and marketing spend based on customer payout. The documented limitations and criticism of the 3:1 benchmark, show updates are required. For instance, LTV:CAC assumes constant churn rates and inevitable churn and the LTV formula itself is invalid if a company has negative churn. Here’s a look at LTV for today’s SaaS world.

Customer lifetime value is usually defined as,

 

LTV formula for RevOps and VCs
LTV = ARPA / Customer Churn Rate

 

David Skok has created a more accurate LTV formulas for early stage startups. For instance, a wide range in ARPA (average revenue per account) means that revenue churn rate would be the better stat. And it’s important to consider gross margin into consideration. This is the difference between revenue and COGS (cost of goods sold) – typically >80% for SaaS companies.

 

Skok LTV formula for RevOps and VCs
LTV = (ARPA * Gross Margin %) / Revenue churn rate

 

Skok goes further by factoring in a discount rate into LTV, usually 10%. This is needed to get an accurate LTV value when a company has negative churn. It’s also more reliable for investors because it accounts for the unpredictability of the future. This formula is

 

Skok's Other LTV formula for RevOps and VCs
LTV = (ARPA * Gross Margin %) * (1/(1-K) + (G*K)/(1-K)^2) Where K = (1 – Churn Rate) * (1 – Discount Rate)

 

CMRR or MRR Over Time

Contracted (or Committed) Monthly Recurring Revenue or CMRR follows the theme of adjusting formulas, so they are more accurate over time and account for realistic scenarios.  

 

 

CMRR formula for RevOps and VCs

CMRR = (MRR + Guaranteed Expansion MRR) – (Anticipated Downgrade & Churn MRR)

 

This accounts for guaranteed renewals and upsells along with expected downgrades and churn. CMRR is often defined as a “VC Metric” instead of a core SaaS metric, but it can help those with enterprise level sales cycles get a more accurate picture. You can also drill down into CMRR per subscription level or customer.  

 

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