“Measure what matters.” That’s one of our favorite sayings at Maxio.

Sure, your teams may say they care about their OKRs, KPIs, etc, but if you don’t have the right tools to track those metrics and report on them regularly, you have no way of knowing if your day-to-day work is contributing to those goals.

For starters, it’s incredibly difficult to gather real business insights when your data lives in disparate systems. Without visibility into key metrics like churn rate, customer lifetime value, and user retention, it’s impossible to understand what’s driving growth.

This is why tracking your team’s data on a centralized SaaS dashboard is so important. 

In this article, we’ll explore common challenges with gathering SaaS metrics and how purpose-built dashboards can help your teams provide real business impact. Let’s take a look.

What are SaaS dashboards?

A SaaS metrics dashboard is a visual display that centralizes subscription data and metrics for SaaS companies. Packaged in an easy-to-use interface, SaaS dashboards transform raw analytics into actionable business intelligence. 

Rather than digging through spreadsheets, your executives can use these dashboards to visualize key SaaS metrics on demand through interactive charts and graphs. Some common dashboards provide insights into metrics like customer acquisition, account expansion, churn risk, recurring revenue forecasts, sales performance, and more.

For example, Maxio’s Days Sales Outstanding (DSO) dashboard helps Finance teams calculate DSO on a monthly, quarterly, or annual basis to supplement the way they build their financial forecasts.

By consolidating all your SaaS data into a customized dashboard, your teams can get visibility into what’s really driving business growth. Whether it’s improving your net revenue retention rate or reducing subscriber churn, SaaS analytics dashboards help make progress more transparent so you can course correct based on real data (versus gut instinct).

Benefits of using SaaS dashboards: Better data, better decisions

SaaS companies that adopt data dashboards position themselves for smarter decision-making and streamlined operations. Plain and simple. Let’s explore some of the top reasons SaaS businesses should invest in analytics dashboards.

1. Centralized access to critical SaaS metrics

Rather than compiling readings from disparate sources, SaaS dashboards enable users to monitor their most important metrics from a unified analytics tool. This single source of truth helps growth companies make better business decisions as they navigate the SaaS maturity curve.

Important metrics like subscriber growth, churn rate, and recurring revenue get updated automatically instead of through manual data entry. Visualizations transform complex metrics into intuitive charts on role-based dashboards. Your executives can also use these dashboards to gain visibility into the health and trajectory of subscription sales and account expansion initiatives.

Centralized data access also surfaces unexpected or hidden correlations through cross-metric analysis. For example, linking support ticket volume to account churn may reveal opportunities to improve retention through superior customer service. Without integrating SaaS datasets, these types of actionable insights will just get lost in the gaps.

In short, having all the pieces of the subscription sales and account management puzzle in a centralized dashboard clarifies which knobs you should be turning to drive business growth.

2. Greater visibility into business performance

SaaS dashboards dismantle the departmental data silos that restrict leadership’s view into core operations. By consolidating analytics into interactive, visual reports, your teams will gain transparency into performance across the organization—not just what’s happening in their department.

Stakeholders ranging from the sales team to the C-suite can review insights into revenue growth, customer engagement, and account health on their own time. Not to mention the customized views that most dashboards are capable of producing that ensure each user sees the most relevant key performance indicators (KPIs) for their role.

For example, the sales dashboard tracks new customer acquisition rates alongside the net promoter score (NPS) from customer success. If NPS declines among recent cohorts, leadership can correlate sales practices to churn predictors and coach sales reps accordingly. Or, the finance dashboard reporting on profitability margins can help your sales team right-size pricing and identify expansion opportunities.

3. Deeper understanding of business needs

SaaS analytics dashboards deliver more than static snapshots of your subscription data—they also give teams a much deeper understanding of the overall health of a business.

Rather than deciphering abstract figures on a spreadsheet, stakeholders can generate custom dashboards showcasing the key performance indicators that are most relevant to them. Your team members can then use these interactive interfaces to take the SaaS metrics that are most relevant to their department and turn them into easy-to-understand visuals.

For example, an executive may notice churn creeping upward on their KPI dashboard. With just one click on that churn metric, they can filter the dashboard view to the customer segments that are driving churn.

The ability to drill down into your business’s most important metrics ultimately helps eliminate any gaps that may exist between your data and strategic decision-makers. And while you don’t have to be checking your metrics 24/7, SaaS companies that leverage these dashboards will always have a better pulse on subscription performance than their competitors.

4. More user-friendly than spreadsheets

While spreadsheets are fine for storing subscription data, SaaS dashboards ultimately transform your metrics into intuitive visualizations that your teams can easily refer back to. Charts, graphs, and gauges allow users across different skill levels to digest insights quicker as well.

Fortunately, it’s not too difficult to implement some simple dashboard design principles to make your dashboards more readable. And you don’t have to be an expert designer either. Many popular SaaS dashboard tools come pre-built with clean layouts, thoughtful color coding, and whitespace that helps users focus on what matters most.

On the other hand, spreadsheets often require manual number crunching and formula building to derive meaning. And once you’ve done all that, there’s no guarantee that they’ll be easy to read. Dashboards, meanwhile, take care of the heavy lifting behind the scenes so users can spend most of their time acting on insights instead of processing data and trying to build out reports.

What SaaS metrics and KPIs belong on your dashboard?

With endless data available, determining the most crucial SaaS KPIs to monitor can be challenging—but not if you have the right SaaS reporting tools. Once you’ve chosen an analytics platform to build your dashboard with, you just need to come up with a few key performance indicators (KPIs) that your team members can rally around.

Throughout this section, we’ll cover the essential SaaS subscription metrics across customer acquisition, account expansion, and retention that you should be tracking on your teams’ dashboards.

Here are the SaaS KPIs you should consider tracking:

MRR and ARR

Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are crucial SaaS metrics that quantify predictable revenue streams. MRR allows companies to monitor subscription performance month-over-month. Meanwhile, ARR projects future revenue based on the current subscriber base over the next 12 months. Tracking MRR and ARR over time provides visibility into growth and retention trends. Both metrics spotlight the overall health of the recurring revenue engine that sustains SaaS businesses.

Customer acquisition cost (CAC)

Customer Acquisition Cost (CAC) measures the average cost to acquire a new paying customer. By factoring sales and marketing expenses required to generate new business against net new customers, CAC spotlights spending efficiency. Monitoring CAC ensures customer growth remains profitable over the long term. No revenue metric on a SaaS dashboard offers more useful insights than keeping tabs on CAC to optimize and forecast budget needs per company growth objectives.

Customer lifetime value (LTV)

Customer Lifetime Value (LTV) represents the average revenue generated by a customer throughout the entire lifespan of their relationship with the SaaS company. Comparing LTV or CLTV to CAC helps determine overall business profitability. Monitoring LTV also assists with budgeting for customer acquisition and gauging whether accounts warrant additional investment for retention or expansion. Given its role in quantifying long-term subscriber value and sustainability, LTV deserves a top spot on any analytics dashboard.

Average revenue per user (ARPU)

Average Revenue Per User (ARPU) quantifies net revenue driven by the average customer account over time. An increase in ARPU signals successful upsells or add-on purchases. Meanwhile, declining ARPU could reflect lagging feature adoption or reveal an opportunity for optimized packaging and pricing strategies per customer segment. Monitoring ARPU benchmarks whether existing accounts expand meaningfully amid efforts to grow the customer base.

Customer churn

Customer churn represents the percentage of customers that discontinue subscriptions over a given timeframe. Because acquiring new customers costs more than retaining existing ones, managing churn is critical. Churn dashboards monitor cancellation trends, identify at-risk accounts, and inform retention programs. No metric better indicates growth troubles and renewal optimization opportunities than sudden or excessive customer churn.

Customer retention

Customer retention measures the percentage of subscription customers that continue service during a given timeframe. Retention ratios demonstrate the stickiness of a SaaS product suite and inform budget planning. Tracking retention over the lifetime of a customer cohort also spotlights opportunities to improve long-term engagement through initiatives like customer success programs or loyalty incentives. Much like churn, monitoring retention rate trends forms a health check on the most profitable growth lever – expanding within existing accounts.

SaaS dashboard examples

There are hundreds of software-as-a-service dashboards used at companies every day to track everything from product launches to marketing campaigns to employee headcount. In other words, if you can collect data around a business function, chances are you can visualize that data on a dashboard.

Here are some SaaS dashboard examples across sales, marketing, and finance that you can use as a reference.

Sales dashboard: Geckoboard example

A Sales dashboard offers insights into customer acquisition and pipeline performance to inform staffing, activities, and tools for driving growth. Tracking key metrics like lead generation, sales cycle analysis, conversion rates, and rep-based trends helps keep the focus on strategic priorities. 

These dashboards also help identify potential coaching opportunities to assist sales teams in meeting their revenue goals. With an analytical lens on sales operations via customized dashboards, SaaS leadership can foster data-driven decision making for sustainable business growth.

As an example, here’s a sales pipeline dashboard from Geckoboard. Using a dashboard like the one shown here, Sales teams would be able to view their quarterly performance, average deal value, sales cycle lengths, highest value opportunities, and more all in one place.

sales pipeline dashboard from Geckoboard

Marketing dashboard: Zoho example

A Marketing dashboard delivers visibility into campaign performance, lead generation, pipeline velocity, and the return on marketing investment. Monitoring these metrics enables data-driven decisions on budget allocation, channel mix, creative assets, and content strategy. 

Marketing dashboards also quantify the impact of specific programs on acquisition and retention. By linking campaign analytics to sales outcomes, teams can optimize activities for the highest yield at the lowest cost.

This Google Ads analytics dashboard from Zoho is a great example of the insights busy marketing teams can plug into one place. Within this specialized dashboard, performance marketers can study their ad conversion rates, average cost per click, and compare ad performance over a five-month period.

Google Ads analytics dashboard from Zoho

SaaS metrics and analytics dashboard: Maxio example

SaaS analytics platforms like Maxio consolidates key subscription data into customizable dashboards for comprehensive business visibility. 

Maxio’s centralized interface tracks revenue metrics like MRR and ARR in real time while monitoring customer health via churn, retention, and engagement scores. These financial views also assist with cash flow, billing analytics, and financial planning activities. 

With an out-of-the-box dashboard aligning to common SaaS KPIs, platforms like Maxio allow companies to focus on improving their SaaS product, user experience, and making better business decisions instead of report building.

Maxio dashboard

Why not use a spreadsheet instead?

While spreadsheets like Excel provide basic data tracking, they fail to deliver the automation, integrations, and customization that a growing SaaS business needs to stay agile.

For high-growth startups, spreadsheet templates quickly become inadequate when you factor in the rapid pace of growth, vertical shifts, and financial ups and downs that are common with these types of businesses.

Spreadsheets are also notoriously difficult to collaborate inside of. Dashboards, however, centralize important insights by pulling data from many different integrated data sources. This way your team doesn’t have to assign spreadsheet management and maintenance to one person. 

And finally, spreadsheets just weren’t built to turn your business’s KPIs into meaningful data visualizations. At the end of the day, choosing to upgrade to a SaaS dashboard will give your entire team an intuitive visual interface to uncover data patterns, track performance trends, and ultimately make better business decisions.

Using Maxio to monitor your SaaS metrics and analytics

So there you have it. Now you know the metrics you should be tracking, what makes central SaaS dashboards a must-have tool across teams, and you even have a few examples of dashboards to reference.

Now, all you need is a platform to help you build these dashboards to use across your own organization. This is exactly why we built Maxio. Our platform helps SaaS businesses master core metrics around customer acquisition, account expansion, billing, finance, and more.

Want to start making better decisions about the future of your business? Schedule a demo with our team to get started.

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Your Plug-and-Play SaaS Metrics Dashboard

In this template, you’ll find a comprehensive set of pre-built SaaS metrics (that you can trust) to wow investors and make key business decisions with confidence.

Chart your path to profitability with metrics like:

  • Subscription Momentum (ARR, customer count, average ARR)
  • Churn & Retention (churn rate, renewal rate, net revenue retention)
  • Customer Lifetime Value (CLV)

Revenue modeling. It’s the most difficult aspect of financial planning, especially for startups that don’t have historical data to extrapolate future revenues. If you’re new to the software-as-a-service (SaaS) space, you may be wondering what the differences are between revenue modeling for subscription businesses as opposed to non-subscription companies. 

In this post, we’ll outline the two primary differences between revenue modeling for each type of business model.  

The primary differences between revenue modeling for a subscription SaaS business model vs. non-subscription business are how revenue is recognized over time vs. up-front and how your billings will affect your balance in deferred revenue. 

Revenue modeling: revenue growth over time

For non-subscription businesses, future revenue is unknown because it depends on future sales that have not yet occurred. This can cause major headaches when trying to estimate future revenue and cash flows. Non-subscription businesses often do not have an associated term; therefore, revenue is recognized on the date of sale.  

See the following example:  

Revenue Modeling_Non-Sub Based Revenue

By contrast, most SaaS solutions sell subscriptions with a start and end date, and revenue is recognized over the stated term. There are also several different types of pricing strategies that you need to consider before building a SaaS revenue model. For example, a single SaaS company may offer a freemium model, a flat-rate monthly subscription, and custom sales-negotiated pricing across their different product offerings.

However, modeling revenue in a SaaS business comes with its own set of upsides too.

For instance, it’s easier to forecast future revenue in a SaaS business because the future revenue recognition is known on the date of sale.  See the following example: 

Revenue Modeling_Sub Based Revenue

When modeling revenues for subscription-based businesses, think of the layers of a cake. Your Total ARR number is the entire cake, but you need to understand how that revenue grows over time, i.e., the cake layers that make up the whole. That growth is measured as follows: 

New business: Number of new customers*Average ARR

Expansion: Growth from existing customers, including upgrades, price increases, users or products added

Contraction: Declines in business from existing and continuing customers, including downgrades, price decreases, fewer users or products 

Churn: Loss of existing customers 

Revenue modeling: deferred revenue 

Deferred revenue is an accounting principle related to the accrual method we talked about before. Deferred revenue is revenue that you can’t recognize just yet because the service hasn’t yet been performed. 

In non-subscription businesses, sales are transactional, so revenue is recognized immediately. There is no need to defer revenue recognition because all revenue is recognized as soon as it occurs. See the following example: 

Revenue Modeling_Non-Sub Based Deferred

In subscription businesses, by contrast, the service is performed over a period of time; therefore, revenue is recognized bit by bit over the duration of the term. As the term goes on, your revenue goes up, and your deferred revenue balance goes down. This is important for reporting purposes because deferred revenue is recorded as a liability on your balance sheet. 

Revenue Modeling_Sub Based Deferred Revenue

The equation becomes more calculated when you factor in billing frequencies. At many SaaS companies, customers are billed all up-front to simplify things. After all, it’s always better to have cash-in-hand sooner rather than later. 

However, for companies where that’s not possible, billing frequencies have a huge impact on the cash runway, something that’s essential to budgeting for business operations and reporting to potential investors.

8 common pricing and revenue models found in SaaS businesses

There’s no one-size-fits-all revenue model for SaaS companies. Instead, most software businesses use multiple revenue models to fully represent the value provided by their tools and services. It’s also equally important to choose the correct pricing model for your business as this is what will be responsible for capturing the value.

Choosing the right mix of revenue and pricing models can put your company in the perfect position for revenue growth and stickiness. But on the flip side of that coin, if you choose a pricing model that doesn’t align with the unique value your company provides, you could experience huge revenue leaks and missed opportunities.

In this section, we’ll explore the eight revenue and pricing models that SaaS businesses frequently use to strike that perfect balance between value provided and revenue generated. You may even consider using one of the following models in your own business.

1. Subscription model

The subscription model involves charging a recurring flat fee, usually monthly or annually, for access to a SaaS product. It’s also the model people typically associate with the popular SaaS tools. Under this model, customers pay a recurring subscription to continually use a software tool or platform on a month-to-month basis.

How It Works

In the subscription model, users pay a flat monthly rate to access the core feature of a SaaS product — this doesn’t include any add-ons or additional models. These subscriptions can also be tiered to feature limits, number of users per account, usage capacities, or other levers to justify a fixed monthly rate. As a result, this model lends itself well to both business and consumer use cases.

Pros and Cons

The subscription model provides predictable recurring revenue streams by design. This is because it incentivizes software providers to focus on improving customer relationships to ensure they continue paying for software access each month. Offering customers discounts for annual commitments or multi-year terms is another big perk of this model, as it allows business leaders to increase their customer lifetime value and forecast future revenues more easily.

On the flip side, companies also run the risk of customer churn on a monthly basis under this model. But overall, monthly subscriptions are a staple SaaS monetization strategy, and they’re not likely to disappear anytime soon.

2. Usage-based model

Unlike flat-rate subscriptions, the usage-based model prices access to SaaS products based on actual volumes consumed. In other words, customers pay precisely for what they utilize rather than bundling a set amount of features or models into a single subscription tier.

How It Works

In usage-based pricing, certain SaaS metrics are used to measure how customers are charged for their usage — metrics like:

  • API calls made
  • Data storage space used
  • Computing power leveraged
  • Data transfer volumes

…drive incremental usage charges.

This model also gives customers better bang for their buck based on their usage of a SaaS product — lower utilization customers pay less, while higher activity ones pay more.

Pros and Cons

Usage-based pricing aligns costs very closely to the value delivered per customer. This is because companies only need to pay for the precise resources their customers are using at any given time — generally speaking, at least. 

However, there are some challenges that still exist within this model. 

For instance, spiky or volatile usage across a customer base can make it difficult to accurately forecast revenue throughout the year. Additionally, other variables like seasonality and swings in the market can impact a company’s bottom line unexpectedly if they’re solely operating under a usage-based pricing model.

3. Per-user model

Next up on the list is the per-user pricing model. The per-user approach charges subscription fees based on the number of individual user accounts on a SaaS platform (e.g. number of employee licenses or seats on Zoom, Slack, etc.).

How It Works

Per-user pricing aligns directly with the number of employees or end users that need access to the software tool in question. Typical pricing includes:

  • $5 per user per month
  • $50 per user per year
  • Volume discounts at tier levels like 10, 25, 50+ users

Pros and Cons

Charging per user allows companies to scale their tech stack costs in direct proportion to the number of users in their organization who need access to these tools. This means that small teams typically pay less, while larger companies using a greater number of licenses will pay more. 

However, the “per user” approach discourages account sharing behaviors as it can lead to unwanted revenue leakage for software vendors. Similarly, per user pricing also makes it more difficult to forecast future revenues when compared to a less volatile pricing model like flat-rate pricing.

4. Transaction fee model

Unlike fixed or consumption-based pricing, transaction fee models charge a small percentage based on activity volumes like payments or shipments handled within a SaaS platform.

How It Works

Most transaction fee models work by taking a small cut of volumes transacted through a SaaS platform. These fees can be based on different variables such as:

  • Payments processed
  • Subscriptions billed
  • Orders shipped
  • Appointments booked
  • Leads generated

The most common transaction fee percentages range from 1-5%, but these percentages can vary widely based on the industry, use case, TAM, and any other variables that impact who is using the software and what they’re using it for.

Pros and Cons

Similar to consumption-based pricing, the transaction fee pricing model ties revenues tightly to platform usage. This makes it easy for SaaS vendors to scale revenue as transaction volume increases.

However, the revenue generated from transaction fees can ebb and flow based on the types of transactions they’re using to generate revenue, as well as any seasonality that could impact the volume of these transactions. Startups using this pricing model may also find it difficult to get funded at first because they don’t have the same fixed monthly recurring revenues you’d typically find at companies using a flat-rate model. Additionally, building the payment and transaction capabilities required to leverage this type of model requires significant development work.

5. Freemium model

With a freemium model, companies offer a free, limited version of their SaaS product to attract user signups. Then, they can leverage their existing user base to upsell a small percentage of these customers to paid premium plans.

How It Works

Freemium models are designed to get potential customers in the door by giving them access to basic features and functionality. Once those users begin to show signs of retention, they can be upsold to a premium plan that would give them access to a greater number of features. Some of these premium features could include:

  • Greater usage capacities
  • Premium customer support
  • Brand customization and white-labeling
  • Dedicated account managers

This incentive-based approach is what makes the freemium model so profitable. First, you get users hooked on your software. Then, you upsell those users to scale revenue. 

Pros and Cons

SaaS companies can use freemium models to leverage broad accessibility and organic sharing to rapidly build and scale their user base. 

But only a small fraction of these free trial users will turn into paying customers. Because user acquisition and monetization are wildly unbalanced in this pricing model, companies considering this model will need to forecast their user conversion rates ahead of time. If companies can only convert a small percentage of free users into paying customers and still turn a profit, then this pricing model may be a good choice.

6. Integrated value-added services

Rather than just providing access to their software, some SaaS providers sell packaged bundles — these “bundles” typically include a blend of software subscriptions with customized professional services added on top.

How It Works

Within a value-added model, SaaS companies seek to scale revenue by upselling powerful add-on features that provide additional value to their users. A few value-added offerings include:

  • Implementation and rollout services: This typically includes done-for-you implementation services, data migration, and user onboarding and change management support
  • Ongoing administration: This includes platform management and updates, automation tools, and custom integrations
  • Training and enablement: This offering includes online and onsite user training, admin and power user education, and additional playbooks and collateral-related software training

This “white glove” approach allows software companies to unlock additional streams of revenue without needing to develop new products, features, or modules. Instead, they can leverage human-powered services to scale revenue and create a more personalized experience for their users.

Pros and Cons

Bundling professional services alongside a core SaaS offering can quickly raise a company’s average deal size and increase their customer satisfaction scores. However, the costs associated with these white glove services scale as well. Ultimately, companies using this model will need to determine if the additional revenue generated and increased user retention rates driven by these value-add services are worth the costs they incur.

7. Referral and affiliate fees

A referral or affiliate program rewards existing users for driving new customer sign-ups via word-of-mouth marketing. This is a great way for SaaS companies to generate additional revenue without needing to offer additional features, add-ons, or professional services.

How It Works

Typically, existing customers will share a unique referral link or code with peers who go on to purchase a piece of software. This can earn both the new and existing users incentives like:

  • Account credits
  • Free months of access
  • Cash rewards
  • Gift cards
  • Entry into contests

Pros and Cons

Referral programs incentivize organic evangelism, increase brand awareness, and can drastically reduce a company’s customer acquisition costs (CAC) when done well. However, getting these programs off the ground takes time and typically only works if you already have an engaged user base. There are also some short-term revenue impacts that companies should take into consideration when offering discounts and account credits to new users.

8. Feature-limited tiers

A feature-limited tier works by packaging and restricting advanced features and functionality based on pricing tiers. Users are then encouraged to upgrade their subscription plan at a higher cost to gain access to additional features, modules, integrations, or other features that could provide additional value. 

How It Works

With feature-limited tiers, companies can put a paywall in front of certain features, including:

  • Number of connected apps/data sources
  • Advanced reporting and analytics
  • Real-time visibility
  • API access
  • Premium support

Pros and Cons

Feature-limited tiers give SaaS companies the flexibility to serve both SMB and enterprise buyers through incremental plan constraints. However, the feature gaps between these pricing tiers shouldn’t overwhelm your basic users or underserve your premium ones — each pricing tier needs to strike the right balance of value provided and cost required for this model to be successful.

Key metrics to include in your revenue model

If you want to determine whether or not your business is sustainable, you need to make realistic assumptions about your revenue growth rate and customer retention patterns. Here are the metrics we recommend you include in your revenue model to track these patterns:

  • Churn Rate: The percentage of customers canceling subscriptions each month. A high churn rate signals a company is facing issues with customer retention.
  • Customer Lifetime Value (CLV): The total revenue expected from an average customer over their entire lifecycle. A higher CLV typically means more revenue generated per user overall.
  • Annual Recurring Revenue (ARR): Your projected yearly recurring billings for renewals and new signups.
  • Average Revenue Per User (ARPU): This is the forecasted average payments collected per subscriber each year.

Correctly tracking the metrics above is key to properly assessing the health and long-term viability of your business. 

Common pitfalls when transitioning between revenue models

Switching to a subscription-based revenue model comes with its own set of growing pains, and many SaaS leaders don’t know how to properly set up or interpret these models to accurately track their financial performance month-over-month. These are the most common pitfalls that occur when transitioning to subscription-based revenue models (and how to avoid them).

1. Underestimating the impacts of deferred revenue liability

Shifting to subscription pricing can create a “deferred revenue liability” in most SaaS companies — this is money collected upfront for services that are yet to be delivered over the contract term. And when you factor in annual contracts, these deferred revenue balances can pile up into the hundreds of thousands to millions of dollars range.

The key to avoiding these deferred revenue balances is by reconciling your new sales with your existing deferred revenue drawdown rates. For example, if $10 million liability exists, and it draws at $2 million per quarter, then 8 million net new billing is required to post $10 million revenue that quarter. In other words, if you don’t reconcile your compounding upfront payments, you’ll be facing some pretty severe discrepancies during your monthly and quarterly financial reviews.

2. Focusing on new sales over renewals

In SaaS, renewals are just as important as new customer acquisition — especially as you start to scale.

With this in mind, your pricing strategies and sales commission structures should incentivize renewals equally to new customer acquisition. Not only do high renewal rates make it easier to forecast future revenue, but they also decrease the risk of volatility in your business caused by churned customers. 

Once you’ve built out the infrastructure needed to ensure customers, you need to ensure that your revenue models are capable of tracking new sales vs. renewals. This will give your executive team greater visibility into how revenue is ebbing and flowing in your business and whether these changes are the result of customer acquisition and churn or user monetization and subscription downgrades.

3. Not linking the model to a broader financial plan

When transitioning to subscription pricing, your revenue model can’t exist in a silo — it needs to connect with your broader financial planning efforts. For example, how is your monthly subscription revenue impacting your company’s revenue targets, profit margins, and cash flows?

If you don’t have visibility into how your monthly recurring revenue (MRR) is impacting your company’s financial health across these different variables, it will be near impossible to assess the health of your business on a monthly basis or make accurate future forecasts.

The complete guide to SaaS revenue modeling

Want to learn from the experts how to build a successful SaaS revenue model? Download The Complete Guide to SaaS Revenue Modeling today to get started with your own model.

In the guide, Burkland’s Debbie Rosler and Maxio’s Jon Cochrane dive into the key components of revenue modeling and even provide a template to help you get started. Here’s a quick preview of what you can expect to learn:

Chapter 1: Fundamentals of SaaS ARR and Revenue Modeling

Chapter 2: Bottoms-Up or Revenue Driver ARR Modeling

Chapter 3: Top-Down or Trendline ARR Modeling

Chapter 4: Forecasting Cash Flow Associated with ARR

Chapter 5: Key Takeaways and Free Metrics/Revenue Modeling Template

Key takeaways

  • The main difference between revenue modeling in a subscription vs. non-subscription businesses is how revenue is recognized. 
  • Projecting future revenues from a subscription business is less subjective because they are recognized over a specific period of time, whereas there’s no guarantee of future revenues in a non-subscription business.
  • Clearly understanding deferred revenue balance and how your future billing schedules may increase or decrease that balance becomes essential when projecting your future cash flows.

For more tips and tricks on how to build a revenue forecast, check out Ben Murray’s SaaS Revenue Forecast Model.

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The complete guide to SaaS revenue modeling

It’s difficult to build a SaaS revenue model that accurately reflects your future cash position. In this guide, we’ll show you exactly how to collect, measure, and use these metrics to build a long-lasting revenue model that will grow with your business over time.

What you’ll learn

  • Two methods for forecasting ARR
  • How to model cash flow associated with revenue
  • How to build an ARR momentum table

Get the ebook

Have you ever looked at your competitors that claim to be serving a ‘billion dollar market’ and wondered, “there’s no way their TAM is that large!”

If so, you’d probably be right. Sure, a founder could quickly spin up an idea of what their slice of the market looks like to pique the interest of the investors, but nine times out of ten, these claims don’t translate to actual paying customers.

But before you go pointing fingers at these founders, you have to understand that there are plenty of myths surrounding how total addressable markets (TAMs) are actually calculated and understood — we’ve dubbed these as the “5 myths of market sizing.” We even recorded a whole webinar on it which you can watch here.

In this article, we’ll be debunking these myths around TAM analysis and show you how to use this data to make better business decisions.

Defining TAM and SAM

Before debunking these myths around market sizing, we need to agree on some key terminology:

Total Addressable Market (TAM): TAM refers to the total market opportunity that is available to your company in a perfect world where you have the ideal product offering and 100% market share. Think of it as the entire universe that your product orbits in.

Serviceable Addressable Market (SAM): Also called Served Available Market, this is the subset of the total addressable market that you can realistically serve given your current products, pricing, processes, partnerships, and overall business model.

For example, if you’re launching new telemedicine software, your TAM may consist of all healthcare spending globally that’s expected over the next decade. It sets the outer bounds for what’s possible.

In contrast, your SAM factors real-world constraints on your end-user audience (e.g. developed countries with widespread smartphone adoption), product capabilities (e.g. urgent care not surgery), and addressable channels (e.g. partners that allow a white-labeled offering). The summed revenues of this subset are what make up our serviceable available market.

As Gustafson puts it, “Half the world is men. That doesn’t mean half the world will buy your shaving kit.” That’s what TAM vs. SAM is all about. TAM attracts headlines, while SAM attracts budgets, and getting both right allows you to make business decisions rooted in reality.

5 myths around calculating TAM

Now that we’ve defined TAM and SAM, let’s explore some of the myths that can undermine your TAM analysis.

Myth 1: A big market automatically equals success

Truth: Targeting a large TAM doesn’t guarantee customer acquisition. Instead, you need to be very deliberate in your product-market fit work to achieve competitive differentiation.

It’s a common fallacy among entrepreneurs and investors alike — the bigger the total market size, the easier it will be to achieve product-market fit, gain customers, and grow revenue. This is a talk track that has left many an entrepreneur with big ambitions and empty wallets.

While pursuing a huge market opportunity might seem enticing on paper, the size of the total addressable market (TAM) prize only matters if you have a credible and differentiated product and value proposition to capture it. Basically, unless you can differentiate yourself based on your company’s niche, GTM model, price, quality of service, etc., you’ll just get beaten down by the established legacy players in your market.

Myth 2: Pre-packaged TAM figures are sufficient

Truth: Forrester and Gartner don’t know your product, customer segmentation, or market penetration. Relying solely on these third-party data sources leads to unrealistic market sizes.

When developing a top-down view of your total addressable market potential, it’s tempting to solely reference the big analyst numbers that are already out there for your target industry or software category.

However, while third-party market research reports can be a helpful jumping off point, their broad conclusions don’t take into account your unique value proposition. In other words, they’re operating off sweeping generalizations about what your product does and who it serves.

Some of the other variables that industry headline figures ignore include:

  • Willingness to pay: Are your users underserved and willing to spend more for your unique benefits?
  • Current market gaps: Does your product fill existing gaps in the market?
  • Impact of realized pricing: How will volume discounts, product bundling, and temporary promotions lower your average selling price compared to list pricing?

If you really want an accurate depiction of your TAM, you shouldn’t rely on industry figures alone. Instead, you can conduct current user interviews, analyze your sales and discovery calls, or review industry benchmarker based on real user data to better understand your TAM.

Myth 3: Your TAM and SAM are the same

Truth: Claiming a market size based on adjacent or existing markets leads to inflated and inaccurate representations of your TAM.

Another common mistake is conflating the total addressable market (TAM) and serviceable addressable market (SAM). However, as defined earlier, TAM and SAM differ fundamentally in their market share assumptions.

While TAM refers to the total revenue opportunity with 100% market domination, SAM factors real-world constraints on product, pricing, partnerships, and promotions to arrive at a realistic group of customers you can actually serve.

Without defining your exclusive wedge into a broader market, new ventures can’t credibly claim multi-billion dollar SAMs in the early years. 

If you want a more accurate depiction of your SAM, you need to start factoring in the following variables:

  • Target personas: Industry, company size, role titles, and tech fluency
  • User behaviors: Current workflows, pain points, and switching costs
  • Direct competition: Incumbents, alternatives, threats
  • Go-to-market: Channels, partnerships, and promotions

By framing your serviceable addressable market against the wider competitive landscape, you can start carving out a realistic path to unlocking your broader TAM.

Myth 4: Adjacent market equals my market

Truth: You can’t claim an adjacent market to overinflate your own market opportunity.

When analyzing your total addressable market potential, it’s tempting to look at hot or rapidly growing adjacent spaces and claim, “Our market is that big!” But no… you can’t point to an adjacent market to inflate your own potential.

Instead, focus on analyzing your direct competitors — products that are targeting the same users or solving the same pain points. Sizing your TAM based on these comparable solutions will give you a better idea of your market potential.

Sure, an adjacent market analysis still provides useful context on general trends, partnerships, and future expansion opportunities, but it tells you very little about the customers you can currently serve.

Myth 5: TAM is static over time

Truth: Your TAM will continually evolve over time.

According to Gustafson, “Markets are continuously evolving based on trends like globalization, consolidation, regulation, and innovation. Periodically reevaluating your TAM allows you to spot new adjacencies before competition stakes their flags there.”

In other words, a TAM analysis is never a one-and-done process. Several different assumptions go into market modeling, including growth rates, churn, and pricing, for example — you need to continually update these assumptions for your TAM analysis to remain relevant.

Additionally, if you aren’t regularly analyzing your TAM, you run the risk of getting stranded in a shrinking niche. By checking in on your TAM, you’ll be able to stay one step ahead of the competition and position your company for future growth opportunities.

How investors view TAM

Beyond your company’s own operators and executives, your TAM projections also inform the way investors think about fundraising and exit planning. Here’s a glimpse into how investors process market sizing assumptions:

Assessing opportunity and exit potential

Savvy investors typically apply various mental models to translate your future TAM into return potential. 

Some of the more common methods for calculating potential ROI include:

  • Target revenue at exit based on comparable exits or expected multiples
  • Required market share to hit target revenue if TAM is much larger
  • Feasibility of capturing required share given competitive assumptions
  • Expected dilution from future fundraising rounds

So even if you have a sizable TAM, investors will still scrutinize your company’s valuation and fundability based on the current trends and dynamics of your market.

Future market direction and evolution

Investors will also assess if your early TAM assumptions show any future potential for longer-term expansion. For example, many enterprise software companies are able to serve multiple verticals and customer segments — would your company be able to expand into an adjacent market? Or serve customers upmarket or downmarket?

Even if you have an incredible niche SaaS product, your company’s future potential will affect how investors assess your funding eligibility and exit valuation.

Timeframe considerations

While your TAM may reach billions of dollars down the road, investors care most about what markets will be accessible to you over the next 3-5 years. In other words, if your $10B TAM realization depends on some rapid shift in consumer behavior that’s decades away, investors will discount projected revenues or extend their projected payback timelines.

3 ways to measure and track your TAM over time

At this point, we’ve dispelled all the myths on TAM claims and have shown you how investors think about your market size from their perspective. Now, let’s explore a few techniques you can use to measure and track your total addressable market over time.

1. Market share analysis

Analyze competitor annual reports, third-party data, and related information like recent job postings, competitor reviews, or recent funding news in your space. Based on this data, you can start to determine if you’ll be able to compete for market share. For example, if the top players in your space represent 60% of total market share, you still have a solid chance of earning your own share of the market. 

2. Study market participation rates

Within your segment, determine how many customers, on average, are looking to switch solutions in a given year based on average market participation rates. If you notice that existing customers switch software vendors every few years, you can expand your future TAM based on these potential customers. The only caveat here is that these future prospects need to be a good fit for your product or service based on the pain points you help solve.

3. Examine the growth of your category

When it comes to measuring your future TAM, you’ll want to factor in how your market is projected to grow or shrink in the near future. You can use historical data from research firms and associations to inform these assumptions; however, you should also factor in external variables as well:

  • Are tech budgets expected to grow/shrink?
  • Is your vertical or sector becoming commodified?
  • Will there be future users experiencing a pain that you’re uniquely positioned to solve?

All of these variables will help you determine how your category is expected to grow or shrink in the future.

Your TAM serves a strategic purpose

In closing, let’s review some of the big takeaways from CJ’s thoughts on how to leverage your TAM correctly.

  1. The size of your market should be used to inform your business strategy, not inflate the egos of your founders and executives
  2. Be sure to draw a clear line in the sand of what your TAM vs. SAM looks like so you can accurately assess your current and future market potential 
  3. Conducting regular TAM analyses will keep your business decisions grounded in reality
  4. Be a student of your market. Keeping tabs on market trends and dynamics will make it easier to adjust your TAM as needed.

Ultimately, TAM exists to help your business leaders make better decisions about your company’s current and future trajectory—but you need the right data to inform your decisions.

If you want more insights on how to use your TAM, check out our full webinar with our CEO, Randy Wootton and guest CJ Gustafson, 5 Myths of Market Sizing: Debunking Common TAM Misconceptions.

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No metric takes into account all aspects of a business’s performance, and in fact, the more variables you add to a metric, the harder it is to unpack and address root causes.

That said, some metrics are better than others, and when assessing a SaaS company’s customer acquisition cost, calculating it as a return on investment (IRR) is more accurate and informative than calculating a CAC Payback Period (CPP) or LTV to CAC Ratio.

Why?

There are three reasons. 

  1. CAC Payback Period does not address churn, the most powerful driver of SaaS unit economics. It’s difficult to know if a CPP result is good or bad unless you know the underlying stickiness of the revenue stream. 
  2. Conversely, LTV to CAC emphasizes churn too much because it ignores the time value of money. If your company’s net retention rate (NRR) is above 94%, the assumed lifetime value of your customers becomes absurdly large. In fact, as NRR approaches or exceeds 100%, each of your customers becomes infinitely valuable. The workaround is gross revenue retention GRR, but that’s only a workaround because the formula can’t deal with high retention percentages. There is no good reason expansion revenue should be excluded, which is what happens when you use GRR.
  3. Lastly, the results of these metrics are not intuitive. Is 13 a good CAC Payback? Is 4.1 a decent LTV to CAC? The metrics must be benchmarked for context because they don’t hold meaning themselves. Benchmarking is fine, but it has drawbacks regarding directly comparable companies, sample size, and consistent metric calculation. 

There is a better way. We eliminate all these issues by rearranging the same inputs into an internal rate of return or IRR calculation.

Also, using an IRR approach, sales and marketing investments can be compared to any other investment. Is a 50% internal rate of return good? Of course. Is a negative 10% return good? No.  You don’t need to benchmark–the result is entirely intuitive.

CAC IRR takes no more data than the CAC Payback Period calculation and is easy to calculate. Spreadsheet here.

You still need to go through the process of aligning your spending with the new ARR it generates. To do this, you need a good understanding of your sales cycle because that is the period by which you lag the measurement of incremental ARR from the spending that generated it. As you may have seen in other posts, it’s also helpful to separate expansion revenue from new revenue and track their respective acquisition costs separately. 

Once you have aligned your sales and marketing spend as best you can with increases in ARR, simply divide the former by the latter, and that’s the CAC Ratio. Despite the comments earlier, the CAC Ratio is a helpful building block for CAC IRR and valuable in its own right when trended and contextualized with the IRR calculation. 

The strength of the CAC Ratio is its simplicity. It’s more challenging to manipulate, and it focuses on only one aspect of the business–sales and marketing efficiency.

The last two puzzle pieces for CAC IRR are gross margin and retention rate. If you separate New CAC from Expansion CAC, use GRR for the calculations because these metrics address expansion revenue separately. If you calculate a combined New and Expansion CAC IRR, use NRR even if it’s over 100%.

To visualize the cash flows driving CAC IRR, let’s assume a company has a CAC Ratio of 2.0, a gross margin of 80%, and a net retention rate of 95%.

Blog Image_A Better Way to Measure CAC

The accompanying spreadsheet generates this chart and the CAC IRR.

This chart is based on unit economics, but it can also be shown with total sales and marketing spending for the period and the total gross margin dollars from the cohort of customers acquired with that investment.

Notice here that the cash flows stop at year 11. This was somewhat arbitrary, but cash flows beyond year ten don’t impact the result much and can be dropped. This is also closer to reality than the LTV to CAC calculation, which considers each customer with an NRR greater than 100% infinitely valuable.

This model shows annual in-advance payments, but there are tabs in the spreadsheet for monthly and quarterly payments.

The CAC IRR based on these assumptions is 58%. Pretty good.

The good news is that communicating CAC IRR is relatively easy despite being a new metric. If you tell any investor the IRR on your customer acquisition costs is 58%, they will understand immediately.

As with any compound metric, operators must peel it back to address the underlying drivers, but the IRR approach is the most comprehensive and intuitive place to start.

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Chart your path to profitability with metrics like:

  • Subscription Momentum (ARR, customer count, average ARR)
  • Churn & Retention (churn rate, renewal rate, net revenue retention)
  • Customer Lifetime Value (CLV)

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Learn why SaaS companies should forecast, and how Maxio customer, CFO, and finance consultant, Ben Murray (AKA The SaaS CFO) uses Maxio to produce quick and easy forecasts.

Ben has been a finance leader for the last 20 years and now helps lead as a fractional CFO for several SaaS companies. Take advantage of his forecasting experience to learn the best sources of data and general best practices when conducting a SaaS revenue forecast.

What we covered:

  • The best “source of truth” data for forecasting SaaS revenue
  • How to nail your ARR/MRR waterfall inputs before forecasting
  • Ben Murray’s best practices for forecasting

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In this episode of Maxio’s SaaS Expert Voices podcast, I interviewed Thomas Lah, a leading expert on SaaS business models. Aside from being a serial author and a professor at Ohio State University, Lah brings over two decades of experience advising technology firms on strategy, business operations, and professional services as the co-founder of the Technology Services Industry Association (TSIA).

During our discussion, Lah gave me his invaluable perspectives on the rapid evolution of software delivery models, the performance metrics that actually matter, and actionable ways executives can transform their organizations to achieve sustainable growth. Whether you’re a founder aiming to scale responsibly or an established leader managing through economic uncertainty, these insights from Thomas Lah will show you how to uncover hidden profitability levers in your business and scale your SaaS responsibly.

How the SaaS industry has changed since cloud-based delivery

The software industry wasn’t always the “move fast and break things,” product-led, AI-powered hodge-podge that’s synonymous with the tech industry today.

The SaaS landscape has undergone big changes since the emergence of cloud-based software delivery over a decade ago. As Lah recounts, “If you look at software companies right now, there’s really three profiles” consisting of born-in-the-cloud providers, legacy on-prem vendors, and a majority occupying a middle “hybrid mode.” He elaborates that these companies have “moved their pricing models to recurring, so they have a lot of subscription revenue” but maintains that “there’s still a lot of on-prem out there.”

According to Lah, this transitional positioning creates financial instability for many SaaS ventures. 

By failing to realize the economies of scale and operational efficiencies that are intrinsic to genuine cloud platforms, products risk becoming competitively disadvantaged. “I think there’s no doubt that [cloud-based delivery] is the winning distribution model,” says Lah.

The verdict is clear—true cloud-native architectures represent the undisputed winning approach to long-term success. The question facing organizations today is not whether to make the leap, but how to migrate their legacy systems without disrupting the business.

TSIA Cloud 40 Index: How are top cloud companies performing?

To quantify the financial performance of leading SaaS businesses, Lah spotlights analytical research from TSIA’s benchmarking of “The TSIA Cloud 40”, an index of 40 of the largest born-in-the-cloud companies. 

He notes, “If you move forward to what we’re seeing now [in Q3 2023], the TSIA Cloud 40 companies are growing by 14% on average, but that’s down from a couple of years ago when they used to grow north of 20%.” 

Despite the decrease in growth for cloud-based companies, Lah also noted that we’re seeing improving gross margins as operators squeeze more from existing infrastructure. As Lah reports, these companies are now seeing “about 70% gross margin.” However, he also highlights how their “sales and marketing expenses are getting chipped down.” 

This chipping away of vital GTM functions like sales and marketing over the past year has left profits lacking, with Lah stating that the average GAAP “operating income [remains] lingering in negative territory at -7%.” On the other hand, best-of-breed competitors like Salesforce have turned the corner to consistent profitability. 

In Lah’s estimation, for SaaS companies operating in a competitive vertical or horizontal market, “it’s going to take a lot more work for these companies to get into a profitable posture.”

The “Rule of 40” vs. TSIA’s “Rule of 35”

Given this recent uninspiring profitability, Lah questions the traditional benchmarking metrics that investors use to evaluate SaaS companies. If you’ve read my article on the subject, you know I believe SaaS founders should obsess over the Rule of 40, so I was curious to hear Thomas’s perspective.

He first addresses the ubiquitous “Rule of 40,” which states that as long as revenue growth percentage plus profit margin percentage exceeds 40%, a company demonstrates adequate financial health. As Lah points out, this benchmark “rewards high growth even with losses” and has become a “myth” that is rarely achieved in practice. 

To better assess operational efficiency, his firm, TSIA, devised what they believe to be the superior “Rule of 35.” 

As Lah explains, it harshly scores companies by saying they should convert at least 35 cents of each dollar into profit after accounting only for basic product delivery and sales/marketing costs. Savvy analysts now use this formula and have discovered that “the rule of 35 companies’ valuations are holding up much better” through turbulence. 

Essentially, the ability to functionally operate at scale now trumps impractical growth targets, but investor perspectives still need to catch up to this reality.

Revenue Acquisition Cost (RAC): A new way to track sales efficiency

Alongside broader profitability, Lah meticulously tracks sales efficiency as a key indicator of enterprise health. He highlights Revenue Acquisition Cost (RAC) as a crucial metric that compares investment in sales and marketing to revenue growth yielded. 

Calculating ratios here benchmarks how much spending is required to acquire each incremental dollar of income. Lah reveals that “the average RAC number for cloud companies is actually 2.84,” meaning $2.84 must be spent across the Cloud 40 to gain $1 in sales. However, leading players demonstrate far greater frugality. For example, cybersecurity company Zscaler achieved a RAC number of 0.46, attaining enviable customer monetization traction. 

For laggard organizations with bloated RAC multiples, Lah warns, “If your RAC number is higher than your competitors, you have a problem. You have a serious problem.” Pencil-pushing sales leaders who are obsessed with negligible percentage gains often miss the bigger picture here, according to Lah. Modern cloud and SaaS companies should instead focus on maximizing their overall market capture through enhanced sales efficiency.

The changing role of the SaaS CFO

Let’s pivot away from abstract scoring systems for a second. While modern SaaS sales leaders have their work cut out for them, Lah also spotlights the urgent need for upgraded financial stewardship as a driver toward consistent profitability. 

He observes that “there are a lot of SaaS executive teams that have never ever managed a profitable software business model” accustomed to an “it’s okay to lose money” ethos.

Today, the role of the modern SaaS CFO must expand beyond the historical duties of governance and reporting. Instead, they should act as a “genuine strategic partner and advisor to the rest of the business.” As Lah encourages, these finance leaders must build new competencies to help model, plan, and engineer sturdy yet dynamic profitable business models tailored to recurring revenue streams.

For SaaS finance leaders that only have experience scaling tech unicorns, TSIA research offers the “porpoise principle” as a viable framework for achieving efficient growth. 

The “porpoise principle” states that: SaaS companies should demonstrate the ability to breach into profitability for a period to prove credible control of the enterprise, then optionally plunge resources into aggressive growth initiatives once more on a deliberate basis. If you’ve read Todd Gardner’s article on the Dolphin Strategy for SaaS growth, you know we believe in this same mantra—SaaS companies can operate unprofitably for long periods and still create substantial value

Lah concludes “there’s a new muscle that’s getting built there. [Finance leaders] really do need to be a strategic partner with the rest of the executive team to help get a vision around what a profitable business model is going to look like.”

Thomas’s proven tactics for getting SaaS companies profitable

While finance leaders are under pressure to adapt to new market circumstances, the good news is that becoming profitable doesn’t require reinventing the wheel. TSIA’s research has identified several strategies used by leading SaaS companies to build profitable recurring revenue models. Here are a few of the tactics Thomas gave me from our conversation:

1. Monetize your company’s service efforts

First, Thomas recommends “monetizing service efforts” instead of providing services that drain your company’s resources. Many SaaS companies offer customer support or professional services for free or at break-even pricing as part of their baseline packages. However, these resource-intensive services eat into profit margins.

Instead, you can consider capturing the value of these premium services by making them paid add-ons or limiting them to higher pricing tiers.

2. Diversify your sales channels

Next, he suggests “diversifying sales channels” to target different customer segments. For example, specialized customer success managers could handle simpler mid-market sales while complex enterprise deals can be reserved for seasoned account executives who are familiar with high-touch sales efforts. 

Then, for prospects who may need more self-education before committing, you can offer free trials, freemium tiers, or low-touch webinar sales to enable bottom-up adoption. Making it easy to experience the value of your SaaS upfront can convert many smaller customers.

3. Leverage customer data to drive growth

Finally, Thomas advised me that companies should enable “customer-led growth” by leveraging their users’ usage data and analytics. 

For example, your analysis may reveal certain use cases or workflows that strongly correlate with higher annual contract value. Customers using certain premium features or integrating with certain complementary tools may have higher retention rates. These signals will help you pinpoint segments that are primed for upsells into premium tiers or product bundles.

By using a SaaS metrics platform to keep up with your customer usage data, you’ll be able to both identify and take advantage of these signals to improve your profitability.

There’s one last growth lever Thomas and I had to address that’s fairly straightforward: raising your prices.

Lah notes that we’ve definitely seen knee-jerk across-the-board price hikes throughout the technology space as a response to inflation. But Lah questions the sustainability of this tactic.

He warned that “customers are not going to just accept double-digit price increases.” He then highlighted bold moves like Salesforce imposing a sizable 9% fee escalation but cautions that most SaaS vendors lack the market dominance to unilaterally squeeze greater profits from their end-users. 

Lah and I concluded, if you’re considering a 10-12% price increase but don’t have any competitive advantage or a pre-existing hold over your industry’s market share, you’re going to eventually lose customers. Plain and simple.

Instead, he advises a more strategic approach before hitting customers with higher costs. First, analyze which customers see your product as an essential “must-have” versus a “nice-to-have” they could live without. Segmenting your customer cohorts will inform the rest of your pricing strategy, whether that means offering discount bundles, implementing a usage-based pricing model, or pursuing customer expansion to hit your revenue goals.

Adopting the new SaaS playbook

As the SaaS landscape matures, leaders must update their go-to-market playbooks. This means embracing new performance metrics, pricing models, and executive responsibilities that are tailored to today’s cloud-native businesses. 

Want to hear more from my conversation with Thomas Lah? Check out the full SaaS Expert Voices podcast episode to learn more.

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Get usage-based pricing benchmarks and best practices

In partnership with The SaaS CEO and RevOps Squared, we surveyed 490 SaaS professionals to better understand how usage-based pricing fits into a B2B SaaS monetization model. In this report, we share the data we gleaned along with commentary from SaaS across the industry.

2023 was supposed to bring long-awaited stability. Instead, it surfaced hidden risks.

According to our January 2024 Growth Index report, after an uptick in Q2/Q3, overall subscription growth leveled off in Q4 2023. Rates settled around the 14% mark for sub-$100MM companies—a notable 6% decline from Q4 2022 figures.

In other words, the market has undoubtedly normalized again—but “normal” looks very different depending on your business sector and situation. Businesses seeking to rebound or accelerate their growth need to update their go-to-market playbook.

As we’ll explore in this article, the future favors those flexible enough to adapt to these new market conditions rather than banking on the return of predictable growth trends.

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Benchmarking your business: Growth rate comparisons

Wondering how your business stacks up against wider subscription industry growth rates? With so much fluctuation happening in the market, you need the right context to set your business goals in 2024.

Based on our analysis of the billing data from our own customers (over 2,400 B2B SaaS companies), our report revealed that, while broader subscription growth settled around 14% for sub-$100MM businesses in Q4 2023, plenty still outperformed the pack.

For example, the Southeast maintained the highest regional growth at 21% over the last eight quarters—a prime opportunity for geographic expansion. Meanwhile, the cybersecurity sector exhibited impressive resilience with 37% average annual growth through 2022-2023.

But when you zoom out and observe average growth rates across the board, you’ll see that businesses large and small were typically experiencing fluctuating growth this past year:

Maxio Institute Chart_January 2024_Average Growth Rates for B2B Subscription Companies processing >< $1MM in annual billings

Of course, it’s critical to keep context in mind: not all industries recover at the same pace. For example, the eCommerce & Retail industries had just 11% average annualized growth over the last 2 years—lower than the overall 17% B2B average.

Maxio Institute Chart_January 2024_Average growth rate by software and service companies

Regardless of where your business’s growth rate currently stands, you should constantly be thinking about your next steps toward growth.

If your growth significantly outpaces industry benchmarks, leverage that momentum. It signals unrealized opportunities in your business or customer segments. But if your growth lags the broader market, we recommend you reevaluate your go-to-market strategy, prioritize stabilization, and prepare a contingency plan to ensure your business stays afloat.

The problem: Growth rate stabilization isn’t enough

At first, it seems like good news that subscription growth rates have stabilized at 14% for smaller companies. After all, steady feels better than the ups and downs of the past few years. But there are some risks with stabilization to be aware of. 

First, steady growth makes it harder to stand out to investors who want to see faster growth. Second, companies can’t rely on broader market trends to fuel their growth anymore; go-to-market strategies and tactics are evolving differently across industries. Finally, some sectors, like Cybersecurity, are still seeing much faster growth than others post-pandemic outliers like these would fly under the radar if you were studying market trends as a whole instead of analyzing specific industry cohorts.

In other words, stabilization may hide changing conditions underneath. The new normal is unpredictability, and subscription businesses have to optimize for constant changes in growth rates between industries. While stabilization may feel safer, it could put you in a losing position while your competitors continue to pursue steady growth.

Alright, enough fear-mongering. Despite these recent developments, there are plenty of actionable steps subscription companies can take to secure their foothold in the market and stay growing. Here’s what we recommend:

The solution part I: Hybrid billing for capturing product usage

Rather than relying solely on fixed subscription revenue, innovative companies are maximizing their growth through hybrid billing models (combining subscription contracts with consumption-based pricing).

What’s the upside of hybrid billing, exactly?

Consumption billing lets you immediately earn more revenue when customer usage or transactions increase above typical levels. This lets you capitalize on upswings across regions or industries when they happen and outperform your industry peers who are still capped by fixed subscription pricing.

The solution part II: Hybrid billing for downside protection

While growth is nice, many subscription companies are also focused on mitigating risks to ensure their business survives.

Hybrid models also help hedge risks by limiting downside exposure when compared to pure consumption pricing models. This is because fixed subscription revenue can cushion any revenue losses that may result from lowered usage. This is especially helpful during periods of market fluctuation as the steady baseline income provided by a fixed subscription model helps avoid any overdependence on a consumption or usage-based pricing model.

Finding your industry’s ideal billing mix

Every industry’s growth rates are recovering differently from the pandemic. So the right subscription vs consumption balance ultimately depends on what’s happening in your sector.

For example, Cybersecurity maintained extreme resilience even amid normalization, delivering 37% average annual growth through 2022-2023—over 2x higher than other software sectors. Because project workloads are rising so fast with security threats, Cybersecurity companies should focus more on consumption pricing that captures growth as it occurs.

Meanwhile, industries like Hospitality are finally accelerating, but still have uncertainty. A mix of 50-60% steady subscription revenue and 40-50% consumption billing would help them handle the unpredictable seasonality inherent to their business model.

When you drill down even more, you’ll find that each niche sub-sector has its unique growth patterns. Pay attention to what your specific community of customers needs right now. Then, mix subscription and consumption billing in a way that captures seasonal spikes without completely relying on consumption-based billing.

Maxio Institute Chart_January 2024_Average Growth Rates for B2B Consumption vs Subscription Invoicing for Businesses Processing >$1MM in Annual Billings

The future of billing: Outcome-based pricing models

While you’re probably already familiar with subscription and consumption pricing, a few new pricing models are presenting themselves. Specifically, we’re seeing outcome-based pricing models start to emerge.

Rather than relying on subscriptions or usage, these outcome-based frameworks tie pricing directly to the exact value a customer receives from your solution. Factors like savings achieved, revenue generated, or milestones hit determine dynamic custom charges. In other words, the more value is delivered to the customer, the more their SaaS vendor will earn in lockstep.

Some forward-thinking companies are starting to test out this kind of value-based pricing today on a small scale. For example, Syncari, an ERP integration, offers dynamic “ROI pricing.” As implementation projects automated by Syncari deliver expanding cost savings, their monthly fee scales up accordingly.

If this model continues to work well, it could replace the old subscription and usage-based models that don’t always match the real value customers get.

Growth rates in 2024 and beyond

Now that we’ve given you the tools to adapt your pricing models and discussed how growth fluctuated over the past year, it’s time to look ahead. Our Growth Index revealed how stabilization took hold in 2023 across B2B subscription companies. But while rates may seem steady, changes are still unfolding rapidly at the sector level. 

So what does 2024 have in store?

While we can’t guarantee any predictions, we expect growth normalization to occur industry-wide in the coming year. Most pockets of outlier growth or decline will revert back towards the mean. Cybersecurity may descend from its 37% peak but still expand faster than average. Meanwhile, the Hospitality sector may flag from its 34% spike but still sustain growth at a healthy rate.

This will create a squeeze for subscription-only SaaS companies who are relying on this broad uplift to maintain their outlier growth rates. Despite this stabilization, opportunities still exist for companies who decide to implement complex, hybrid billing models. By diligently tracking microtrends and buyer behavior shifts, companies utilizing consumption billing and outcome-based pricing can continue to outperform their peers.

The insights we provided here are only scratching the surface of how growth rates are trending. 

If you want an in-depth look at the most recent B2B subscription growth trends, check out the recent Maxio Institute Report to benchmark your performance against 2,400 B2B subscription companies.


Alec Beard is a writer in the B2B SaaS industry and founder of StoryWon. His work has been featured in SaaS Brief, and in similar industry blogs for Driven Insights and Churnkey. When he’s not writing about SaaS or Finance, you can find him tucked in a local coffee shop or cruising around on the Atlanta Beltline.

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The State of SaaS Growth 2024

In this report, we present an update on the overall state of today’s B2B subscription marketplace based on the actual billing data of 2,400 B2B SaaS companies. We discuss:

  • The general return to normalized growth levels in 2023
  • The differences in “normalized” growth rates for each industry, including which industries grew the most and which proved “recession-proof”
  • The impact of billing model on company growth from $0-$1MM, and then to $100MM

Get the full report

Imagine steering a ship with only your hunch to guide you, in the dark heart of the ocean. That’s almost the same as running your SaaS business without an effective financial model. Perplexing, right? It’s time to illuminate your course.

Every year, over countless SaaS businesses are launched, yet 65% of new startups fail during the first ten years, a bitter truth that could often be attributed to poor financial planning. Your SaaS business is anything but a quick sprint; it’s more like a marathon that requires the strategic management of your monetary resources to thrive and survive in this digital ocean.

On the crest of scaling your SaaS business? Let’s light your way to victory by digging into the dos and don’ts behind effective financial modeling.

Mastering SaaS revenue forecasting: the key to predictable growth

Here’s the TLDR of what we’ll cover in this section: 

  • A foundational understanding of SaaS revenue forecasting concepts
  • The steps to design a substantial SaaS revenue forecast

Understanding the basics of SaaS revenue forecasting

Revenue forecasting is the lifeline of any SaaS business. It serves as a roadmap to your enterprise’s monetary future, enabling you to prepare for potential financial pitfalls and explore lucrative opportunities. SaaS revenue forecasting differs from forecasting traditional business models due to the recurring nature of revenue in SaaS. In short, accrual accounting, upsells, downgrades, renewals, sales-negotiated contracts all make revenue forecasting more complex for SaaS companies.

When done right, revenue forecasting helps to keep SaaS companies financially healthy by guiding decisions about scaling the business, managing cash flows, and long-term strategic planning. It’s a bedrock of knowledge for any SaaS business in the growth stage or aspiring to scale to the next level. 

A step-by-step guide to creating a robust SaaS revenue forecast

To create an effective SaaS revenue forecast, first, you need to calculate your Monthly Recurring Revenue (MRR). This is the predictable and calculable income that a SaaS business can count on every 30 days. You can then multiply this number by twelve to get a rough estimate of your annual recurring revenue (ARR) – excluding any fluctuations cause by churn, upsells, and downgrades of course.

Next, you should identify your churn rate – the percentage of your customers who are leaving over a certain period. A lower churn rate indicates that your company holds onto most of its customers, which is beneficial for forecasting stability. Not only does this correlate with revenue growth and a higher customer lifetime value, but it’s one of the key metrics that VCs analyze when determine the valuation of a SaaS business.

Lastly, you should consider the growth rate of your new MRR. This can indicate the potential average revenue of your product in the market.

By applying mathematical forecasting models to this data, you can anticipate future monthly recurring revenue, growth rates, churn rates, and the overall future growth of your business. This might appear as a daunting task, but leveraging the right tools and techniques simplifies this process substantially.

SaaS unit economics: the foundation of your financial model

SaaS unit economics form a critical core of any SaaS startup’s financial model. As the financial backbone, unit economics demonstrate not only how profitable each customer can be but also hint at a business’s long-term financial health. It’s the tiny threads weaving together to form the financial tapestry of your SaaS business. 

SaaS unit economics metrics help outline the anticipated cost to acquire customers (CAC), the expected lifetime value of a customer (LTV), and the rate at which customers churn. 

The significance of these SaaS metrics isn’t solely in their numerical values but in what they symbolize about your business’s health and future. They provide clarity around the state of your company’s financials, and can make it easier to conduct financial forecasts and adjust your business plan as needed. 

A quick dive into key SaaS unit economics metrics 

In SaaS, the battle isn’t won simply by understanding the role of unit economics; one must also be well-versed in maneuvering its calculation. There are three essential metrics: Customer Acquisition Cost (CAC), Customer Lifetime Value (LTV), and Customer Churn rate.

Let’s dissect each:

Calculating customer acquisition cost (CAC)

CAC represents the average cost of acquiring a single customer.

Determining customer lifetime value (LTV)

LTV is the total revenue a company can expect from a single customer over the duration of their relationship. 

Understanding Churn Rate

The churn rate, also known as the rate of attrition, refers to the percentage of subscribers to a service who discontinue their subscriptions within a given time period. 

Accounting for cost of goods sold (COGs)

In SaaS businesses, Cogs refers to the direct costs attributable to producing and delivering subscription services to customers. Tracking COGs allows SaaS companies to determine their gross margin. As subscription revenue grows, the gross margin tends to improve as well since cogs does not rise proportionately.

Amping up your SaaS unit economics with effective strategies

With a solid comprehension of SaaS unit economics, your CFO, business leaders, and other key stakeholders can all get on the same page about the health of your business. Once you’ve pored over your company’s financial statements and seen where you can improve your company’s KPIs, you can then employ these strategies to improve your unit economics.

Optimizing your customer acquisition cost (CAC)

Lowering your CAC goes a long way in fortifying your unit economics. Consider strategies that lower your marketing, sales, and R&D costs without compromising on acquisition quality. If the situation is dire, you may decide to lower your companies headcount.

However, you can also play offense by pursuing opportunities to increase your average revenue per user (ARPU) by increasing your pricing or monetizing your existing user base. Ultimately you want to lower your CAC ratio and shorten your CAC payback period – this will save you countless fundraising dollars and lost revenue as you scale.

Fortifying your customer lifetime value (LTV)

Increasing your LTV often results developing a remarkable customer experience, leading to increased customer retention and upsell opportunities within your existing customer base. While increasing the number of customer who sign up for your SaaS or improving closed/won conversion rates are often seen as the fastest ways to generate revenue for early-stage companies, improving your LTV can reap massive monetary rewards at scale.

Managing your churn rate

Mindful churn management ensures healthier unit economics. Plain and simple. You can implement effective retention strategies and customer satisfaction initiatives to keep your churn rate low. A quick look at your cash flow statement, income statement, or balance sheet should tell you how much revenue is being lost to churn each month.

Once you identify what’s causing churn in your SaaS business, you can work toward improving your retention rate month over month. By continuing to benchmark your churn rate each month, you’ll gain a better understanding of what growth levers you need to pull to reduce churn and keep your customers signed up and sticking around.

Want to improve your unit economics? Download our SaaS financial model template. Just download the template, plug in your company’s existing metrics, and start building out your very own startup financial model in minutes.

SaaS cash flow management: ensuring your business’s financial health

In SaaS, like most businesses, cash is king. That’s why, in this section, you’ll learn the following:

  • How to keep the lifeline of your SaaS business, your cash flow, in check for ensuring your long-term survival.
  • How to implement best practices for effective SaaS cash flow management.
  • And, how to utilize tools and resources specifically designed for SaaS cash flow management.

The importance of cash flow management in SaaS businesses

The era of Software as a Service (SaaS) businesses has brought about the concept of scalable growth, where optimizing financial resources is imperative to survival. Cash flow management stands as the pulse check of any SaaS entity, gathering its significance from the unique subscription-based revenue model and high upfront investment.

For any subscription-based business, cash collections occur over a span of time, while expenses might be upfront. Hence, maintaining an efficient cash flow can shield the organization from disastrous economic downturns and also enable it to seize growth opportunities during a downturn. In essence, effective cash flow management gives you the power to control your financial destiny.

Similarly, a SaaS business’s valuation is largely affected by its burn rate or the rate at which it’s consuming its cash reserves. A higher burn rate often sends a red signal to investors, waring them to reconsider their investment decision.

Best practices for effective SaaS cash flow management

To effectively manage cash flow in your SaaS business, you need to live by some best practices. First, strive to understand and manage your operations and financing cash flows. Developing a thorough understanding will provide you with the clarity to take informed decisions during challenging economic times.

Second, be proactive, not reactive. To do so, attempt to forecast your cash flow based on various plausible scenarios. This hypothetical projection will equip you with the resilience to withstand real-life cash crunch situations. A stitch in time, indeed, saves nine.

Third, focus on increasing customer lifetime value (CLTV) and decreasing customer acquisition costs (CAC). By maximizing this ratio, you are essentially maximizing your profitability, consequently aiding cash flow. Such practices help to foster a business that’s resilient, adaptable, and capable of thriving in the most turbulent market environments.

Tools and resources to help with SaaS cash flow management

In the digital age, several tools are available to assist you in your cash flow management journey. Accounting software platforms, like Maxio, provide real-time insights into your financials. The Maxio platform offer features like real-time cash flow projections, which enable you to see both the current and future states of your cash flow.

You can also use the Maxio platform to keep track of metrics that directly impact your cash flow, like CLTV and CAC. With these tools, you can track changes in these metrics over time and understand the trends impacting your business.

Many SaaS cloud platforms – that aren’t exclusively fintech – also offer financial management embedded within their service. Salesforce, for example, provides a complete solution for sales, service, and finance in a single application.

Remember, managing financial health requires more than just tools; it requires an understanding of your business’s financial ecosystem. However, seeking help from these resources can take you closer to attaining that proficiency, ensuring your business prospers in your competitive space.

SaaS financial metrics: what to track and why

Curious what metrics actually matter in your SaaS business? Here are the KPIs and SaaS metrics you should keep an eye on to ensure future growth and make sound business decisions.

Overview of essential SaaS financial metrics

Among the vast sea of data available to a SaaS business, certain numbers take precedence over others when it pertains to financial health. These financial metrics can be aptly compared to vital signs in medical checks – indicating the overall condition of the company.

The first critical metric, MRR, reflects the income garnered from subscriptions in a month. CAC, on the other hand, reflects how much is being invested to bring new customers aboard. Finally, LTV displays the predicted revenue from a customer over their lifetime. It helps weigh if the acquisition cost was justified or not.

How to track and analyze these metrics effectively

While knowledge of these metrics is crucial, even more important is the understanding of how to track and analyze them effectively. Financial metrics are your business’s map and compass, and knowing how to read them can be the difference between sailing smoothly or being shipwrecked.

Investing in a trustworthy SaaS dashboard for tracking these metrics is invaluable. They provide realtime insights reducing the risk of decision-making based on outdated information. Pairing this with regular and thorough analysis, you can keep your finger on the pulse of your business’s health.

Using financial metrics to inform strategic decisions

The real value of tracking and accurately analyzing these metrics culminates in their ability to support and guide strategic decisions, transforming your financial data into your business’s crystal ball. By keeping a close eye on these metrics, you can preemptively identify opportunities for growth or potential financial challenges.

For instance, if your CAC is escalating, it could be signaling the need for a more cost-effective marketing approach. Continually high LTVs, on the other hand, may suggest an under-tapped market waiting to be explored.

Effectively leveraging these metrics takes you from being reactive to proactive, setting your SaaS business on the path from zero to hero.

Crafting a comprehensive SaaS financial plan: your roadmap to success

A solid financial plan is crucial for growth in SaaS businesses. But building and executing on a financial plan is easier said than done (just ask anyone who has done accounting at a SaaS startup before). In this section, we’ll show you everything you need to build a comprehensive financial plan of your own.

The indispensable role of a financial plan in a SaaS businesses

A financial plan is not just a roadmap; it’s the GPS guiding your SaaS business towards success. It serves as a tactical tool, helping to make informed decisions and forecast future performance. Without a financial plan, a business might as well be venturing into the unknown. 

For SaaS businesses, the stakes are even higher. With a unique set of challenges such as high customer acquisition costs, unpredictable revenue flows, and scaling issues, financial planning is not optional; it is a must-have. A robust financial plan is vital in navigating these challenges while ensuring business growth, sustainability, and avoiding unexpected pitfalls. 

Key components of a successful SaaS financial plan

A winning financial plan for SaaS businesses consists of several critical elements. 

Realistic revenue forecasting

SaaS revenue is mainly recurrent, making it different from traditional business models. Understanding each revenue stream – be it monthly, annual, or ad-hoc – is essential for realistic forecasting. 

Analysis of customer acquisition cost (CAC)

In SaaS businesses, the cost of acquiring a customer often exceeds the initial revenue they bring. Understanding the interplay between CAC and long-term customer value is vital. 

Retention and churn rates

Keeping an eye on churn rates gives insight into the stickiness of your product. The lower the rate, the higher the potential for growth – simple as that. 

Cash flow management

Last but not least, tracking operating expenses versus revenue is paramount. The idea is to manage cash flow effectively to support growth while maintaining fiscal health. 

Tips for maintaining and updating your SaaS financial plan

A financial plan is not a set-and-forget tool. It requires regular maintenance and updates to remain relevant and effective. Here are a few tips to make sure you stick to your plan.

Regular monitoring and adjustment 

Business environments change, and so should financial plans. Regular tracking and adjusting of financial indicators is required to keep pace with changing circumstances. 

Using right tools and technology

Financial planning can be tedious and complex. Automating the task by using dedicated tools, like Maxio, can streamline the process, improve accuracy and provide insightful analytical data. 

Remember, the goal should always be progress, not perfection. A good financial plan is a continually improving work in progress, informing all your strategic decisions as it adapts and matures with your business. With the right approach and diligent effort, you can transform your SaaS business from zero to hero!

Sealing the deal: up your SaaS game with effective financial modeling

SaaS businesses survive and thrive based on the effectiveness of their financial modeling. It’s their way of staying competitive, resilient, and growth-driven in a volatile market.

But how should you ensure continuous improvement in your modeling game? For starters, you’ll want to build a financial model that gives you visibility into the health of your business.

Don’t worry. We made it easy for you.

You can download our SaaS financial model template, plug in your company’s existing metrics, and start building out your very own startup financial model in minutes.

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Your Plug-and-Play SaaS Metrics Dashboard

In this template, you’ll find a comprehensive set of pre-built SaaS metrics (that you can trust) to wow investors and make key business decisions with confidence.

Chart your path to profitability with metrics like:

  • Subscription Momentum (ARR, customer count, average ARR)
  • Churn & Retention (churn rate, renewal rate, net revenue retention)
  • Customer Lifetime Value (CLV)

Remember SaaS before the Rule of 40? Life was simpler then. Grow fast with good retention, and capital will find its way to your door. You can create value that way, but it’s reliant on cheap capital, which no longer exists.

Given the current cost of capital, should CEOs press the accelerator, drive growth, and raise another round? Or should they pull back to break even with more moderate growth and forgo additional dilution?

I’ve built a financial model to answer these questions. It looks at the outcomes for existing shareholders based on the following four assumptions: burn ratio*, growth rate, cost of capital, and exit multiples.

The model provides insight into this fundamental question:  based on how efficient your business is at turning cash into ARR, and given the dilution needed to support that growth, should you jump on the accelerator or not? Alternatively, how much of a slowdown can you absorb in transitioning to breakeven without destroying value?

The assumptions graphed compare a 50% growth business with a 1.1 burn ratio to a 33% growth business with a .2 burn ratio. The higher growth business raises capital at five times ARR and sells at six times ARR, and the efficient business raises money at four times ARR and exits at five times. Feel free to adjust as you see fit. Fundamentally, the burn ratio in the model drives the need for capital, which dilutes the current shareholders.

In this example, the current shareholders clear $229 million in the High Growth scenario vs. $146 million in the Efficient scenario. That’s the math. The model, however, does not include a risk adjustment. The High Growth plan requires $127 million to be raised in five rounds over ten years. A lot can go wrong with that plan, including droughts in the VC market like we see today.

In addition, the existing shareholders’ ownership in the High Growth scenario is only 33% at exit. That might be fine, but founders need to take into account of the lack of control that implies.

*Burn ratio is defined as Cash Consumed/New ARR. For this model, profit and loss are equivalent to cash flow.


About the author

Todd Gardner is the Managing Director of SaaS Advisors and the founder and former CEO of SaaS Capital. Todd was also a partner in the venture capital firm Blue Chip Venture Company and was a management consultant with Deloitte. Todd has worked with hundreds of SaaS companies across various engagements, including pricing, capital formation, M&A, metrics, valuations, and content marketing. Todd is a graduate of DePauw University and Indiana University.

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The State of SaaS Growth 2023

We’ve analyzed the billing data of over 2,100 B2B SaaS companies between 2022 and 2023 and have presented key insights, including:

  • Growth rates of businesses based on billing type
  • Where some of the fastest growing companies are located
  • The bar for raising your successive round of investment.

Download the report

Retention is king in SaaS, for both operators and lenders.

While all retention is good, not all retention is equal. And the ratio between gross revenue retention and net revenue retention contains useful diagnostic information.

We call this “The Gap.”

While the math here is simple, The Gap is a rarely discussed metric that provides helpful insights into the continuing health of your SaaS companies and customers.

While it’s not often discussed, the GRR-NRR gap can be a useful “sanity check” on a SaaS company’s metrics, and when it falls outside of the usual range, it can give a hint to operators and investors that something in a company might need tweaking.

In this webinar conducted by Chris Weber, COO at Maxio and Randall Lucas, Managing Director at SaaS Capital, we discussed:

  • Retention benchmarks from this year’s annual SaaS Capital survey
  • Common ranges for The GRR-NRR Gap
  • What a narrow GRR-NRR Gap means (and ways to improve)
  • What a wide GRR-NRR Gap means (and ways to improve)

In this article, we’ll go over the highlights from the webinar and help you understand how to benchmark retention in your own SaaS business.

Retention benchmarks from the SaaS Capital survey

Each year, SaaS Capital conducts an extensive annual survey of over 1,500 SaaS companies to gather anonymized operational and financial metrics. When it comes to retention, this year’s survey revealed several trends in the gross revenue retention (GRR) to net revenue retention (NRR) gap.

  • There is a consistent gap: Across the survey sample, NRR exceeded GRR in almost every revenue range, including average ARRs and ACVs.
  • The gap widens with contract value: The data showed that as average annual contract values increase, the GRR-NRR gap also grows wider. Lucas noted, “As the annual contract value increases, this gap tends to grow alongside it.”
  • The gap normalizes above $1M ARR: When segmented by company revenue size, the gap stabilizes around 12% on average for firms above $1M in ARR. For smaller or younger firms, the gap is more variable above the $1M ARR mark.
  • Most fall within 8-20%: While the survey saw GRR-NRR gaps ranging from 0% to over 50%, a clear majority of respondents reported a gap between 8% and 20%.

This extensive benchmark data from SaaS Capital reveals a consistent gap between GRR and NRR in SaaS businesses. But how does “The Gap” affect your business, exactly? In this next section, we’ll go over the most common GRR-NRR gap ranges and what they reveal about your business.

Download the 2023 SaaS Benchmarking Report

Common GRR-NRR gap ranges

While the gap can vary widely, SaaS Capital’s data found these to be the most common ranges:

  • 0-5%: A narrow gap is abnormal and may indicate missed expansion opportunities
  • 8-20%: This is the normal range for most established SaaS companies
  • Above 20%: An unusually wide gap, which could mean major expansion success or volatility from customer concentration

What a narrow gap means

A 0-5% GRR-NRR gap is a “yellow flag,” according to Lucas. It likely means the business model lacks upsell opportunities and expansion potential. As he explained, “This means you’re not growing your MRR per customer, which means you’re probably missing expansion opportunities within your customer base.”

To widen a narrow gap, SaaS businesses can:

  • Add usage-based pricing models
  • Introduce new products/modules
  • Revamp packaging and pricing

Lucas pointed out that a narrow gap means “there may not be that much growth within the customer’s usage.” So, in addition to adding expansion opportunities, it’s important to ensure your customers are satisfied with your service and able to grow usage with you over time.

What a wide gap means

A gap exceeding 20% is generally positive, signaling major expansion success. But as Weber noted, it’s still ambiguous: “I think what was really interesting about the benchmarking data was that it revealed that a company’s price point or ACV as it was defined, seemed like it produced a larger gap regardless of the overall company size.”

A wide gap could mean:

  • Strong upsell and customer expansion success 
  • Usage-based pricing is working well
  • Potentially high initial contract values

Lucas recommended investigating further: “While a wide GRR-NRR gap is generally a healthy sign, it is also advised to take a peek at and consider just exactly why that’s the case.” 

In other words, even if your company is experiencing healthy retention, you need to investigate the underlying reasons behind that retention or expansion. This way, you double down on what’s working in your business and avoid any unnecessary churn across your customer base.

How lenders assess retention when funding SaaS companies

Now, before we dive into how you can improve your GRR-NRR gap, we need to understand how lenders are scrutinizing your retention metrics. As previously stated, if you have a wider GRR-NRR gap, then you’re likely experiencing success across your retention and customer expansion efforts. However, the health of your customer base is important to potential lenders (like Randall Lucas at SaaS Capital) for entirely different reasons.

For B2B SaaS companies seeking growth capital, customer retention takes center stage in the lender evaluation process. Retention metrics provide critical signals used to assess credit risk, set valuation multiples, and determine funding eligibility.

As Randall Lucas of SaaS Capital explained, their lending is based almost entirely on recurring subscription revenue. According to Randall, “At SaaS Capital, we are lenders to growing private B2B SaaS companies. We lend from 2 to 15 million to such companies, and our only real collateral is the recurring revenue.”

Essentially, the quality of a company’s retention is valued like an asset appraisal due to reliance on recurring revenue streams. Lucas emphasized, “The same way a banker writing a mortgage will appraise a house, we appraise the retention quality of a company’s recurring revenue. So we spend a lot of time, and we care quite a bit about this.”

Both gross revenue retention and net revenue retention provide important signals. Low gross retention suggests higher customer churn risk, decreasing the durability of the revenue stream, while net retention shows the ability to expand wallet share over time.

As Lucas explained, lenders like SaaS Capital analyze the interplay between these SaaS metrics rather than taking them in isolation. He advised, “Looking at one alone, in isolation. Even if you’ve picked that as your most important KPI, it’s gonna be incomplete.”

In other words, the relationship between gross and net retention reveals risks that may not be noticeable if you were observing one metric by itself. For example, high net retention could mask excessive churn, while declining gross retention severely impedes expansion efforts.

At this point, you may be wondering, “Great… but how does this affect my funding eligibility?”

Well, according to Randall, lenders combine retention analysis along with other factors to set their interest rates and valuation multiples. For asset-based lenders, stronger retention supports higher leverage and loan amounts. And for equity investors, a company’s retention health feeds directly into their applied revenue multiples.

Ultimately, all this really means is if you’re seeking growth funding, you should demonstrate a commitment to monitoring, reporting on, and improving retention before engaging with capital partners. Developing cohort analyses and measuring retention trends over time can also add credibility when presenting metrics to potential lenders and investors.

Did we mention that all of this is possible within Maxio? Yep—just take a look at our SaaS metrics and reporting capabilities.

How to improve your GRR-NRR gap

Now that we’ve gone over how lenders think about retention, what specific steps can you take to optimize your GRR-NRR gap? Here are some practical tips that Chris and Randall recommend to improve retention in your company:

1. Trend your retention metrics over time

To start, you should be looking at your retention metrics for longer than one month or quarter at a time. Regularly calculate your GRR-NRR gap and analyze the trends over longer periods of time. Watching for positive or negative movement in the gap over the years will provide better insights than any single data point.

2. Segment your data by cohort

Do a granular analysis of the GRR-NRR gap trends by customer cohort. Look at the gap for customers acquired each quarter or year to identify any issues within specific segments. For example, you may find newer customers have much better expansion behavior and gaps than legacy customers. This could point to potential churn risks from your legacy customer base.

3. Consider adjusted NRR

As Weber suggested, you should calculate an adjusted NRR metric that adds back revenue lost from cancellations or downsells. Compare your current NRR to this adjusted NRR to quantify how much net expansion potential exists. A large difference indicates significant room for improvement in retaining and expanding your overall revenue per customer.

4. Add upsell opportunities

If you have a chronically narrow gap, actively introduce opportunities like usage-based pricing, additional products or modules, and packaging changes to facilitate expansion. However, don’t just focus on adding offerings—ensure they provide value and fill customer needs based on feedback.

5. Ensure customer satisfaction

Improving the gap long term requires keeping customers happy and naturally increasing their usage and spend. To do so, you can tap on your customer success team to survey users, run NPS studies, and research customer needs to identify areas of dissatisfaction you must address first before layering on upsells.

6. Investigate any wide GRR-NRR gaps

While a wide NRR-GRR gap is generally positive, you should analyze the source if it exceeds 20% by a large margin. An unusually wide gap could signal volatility risks if driven primarily by just a few large enterprise customers. The last thing you want is to have the rug pulled out from underneath you because a few outlier customers decided to cancel their renewals at the end of the year.

Key takeaways for SaaS leaders and operators

No matter where your GRR-NRR gap falls, the key is to trend it over time and watch out for any outstanding positive or negative movements. As Weber advised, you should layer in a cohort analysis to back up your interpretation of the metrics.

He also suggested an “adjusted NRR” metric that adds back lost revenue, revealing maximum expansion potential. Comparing your current NRR to your adjusted NRR will show you how much room for improvement exists within your retention and expansion efforts. And while GRR and NRR alone provide limited perspectives, together, they paint a more complete picture of the health of your customer base. 

Ultimately, analyzing your GRR-NRR gap over time, segmented by cohort, can unlock insights into your SaaS business’s health and opportunities that you would have missed otherwise—but you need the right metrics and reporting tools to make this possible.

By leveraging a purpose-built SaaS reporting solution like Maxio, you’ll be equipped with the flexibility and tools to diagnose your GRR-NRR gap properly. You can watch the original webinar or take a tour of our platform to learn more about how thousands of other B2B SaaS leaders are improving their retention with our SaaS metrics and reporting tools.

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2023 B2B SaaS Metrics Benchmarks Report

Download the newest benchmark report from Benchmarkit (formerly RevOps Squared) to see how you compare and how the general market has trended the past few years.

Download the report