What Does ‘Good’ Look Like in SaaS (And How Does ScreenCloud Measure Up)?

What are the key measures that are widely accepted as being good in SaaS and how are we at ScreenCloud measuring up against them at this stage in our development?

By
David Hart
on
Dec 17, 2019
Category:
Startup

What are the key measures that are widely accepted as being good in SaaS and how are we at ScreenCloud measuring up against them at this stage in our development?

In terms of the history of business evolution, SaaS is a relative new-comer. But nevertheless, there is already a load of data out there that we can draw upon: data that is a pretty reliable predictor of future success. Think of it like the human body: we know what a healthy BMI is; what represents good blood pressure and what is cause for concern; a decent pace for a 5km run based on your age; that smoking and alcohol is bad, but fiber is good. And if you can keep all of your numbers roughly in check and mitigate for any that aren’t, then your odds of survival increase.

SaaS has similar tried and tested benchmarks for what constitutes good. If you’re hitting or smashing all of these, then you’re on the right road. I’ve broken down some of them here:

TL;DR

Growth: <$1m in ARR: 200%; $1m-$5m: 196%; $5m-$10m: 119%
SaaS Quick Ratio: 4
Churn: 7%-15% annual revenue churn
ACV: >$15k/annum
LTC:CAC: >3
CAC Payback Period: <12 months
Cash in the bank: $1 for every $2 you make in ARR
Runway: >6 months
Revenue/FTE: $125k — $150k

Growth

Clearly this will depend on where you are in the journey. Doubling your growth is easier if your starting point is low, than if it’s already at $100m ARR.

According to SaaS Capital’s 2018 Growth Benchmark report, the median Annual Revenue growth was:
<$1m in ARR: ~60%
$1m-$5m: ~44%
$5m- $10m: ~31%

A similar survey by Openview had higher media ARR percentages:
<$1m in ARR: 83.5%
$1m-$5m: 63.5%
$5m-$10m: 80%*

*(yeah, weird — it increases after $5m. SaaS Capital’s report saw a small increase in the $10m–20m range to about 37%, too).

So, where you could see that somewhere around the median rates here would make you OK, and anything below would be poor, the Openview stats shows the ranges of growth for each size category, so you can also see what the best in class were:

<$1m in ARR: 200%
$1m-$5m: 196%
$5m-$10m: 119%

Bear in mind, that 200% means that they tripled in size.

There is an oft-quoted rule of 40% that could also be used to figure out whether growth is on track. The rule says that your growth rate + your % profit/loss should equal at least 40. It means that you could be growing at 50% and making a 10% loss and be OK. But bear in mind, if you’re growing at 40% on an ARR of $100k, then it’s going to be a stretch to expect that you’ll get to $100m, or even $10m, anytime soon.

One other thing that might be worth considering is the Mendoza Line for SaaS Growth. This would suggest a successful growth rate would be in the top half of the Openview survey respondents.

How is ScreenCloud doing? We’re in the >$5m category and our growth is pretty good: better than the ‘best in class’ Openview stats at the moment. Go ScreenCloud!

SaaS Quick Ratio

SaaS Quick Ratio looks at how efficiently the company is growing. In other words, how fast you are able to grow the company in spite of churn. The key drivers being both growth and churn within a single month.

To calculate your SaaS Quick Ratio it is simply:
(New MRR growth + Expansion growth) / (Contraction + Churn)

Here, the received wisdom is somewhat more specific than what represents good ARR growth.

The magic number for your SaaS Quick Ratio is 4.

So, for every $1 you lose, you need to replace it with at least 4.

There are some problems associated with this Ratio:

  1. It has been questioned whether 4 is only really achievable up to $5m in ARR.
  2. If you have customers that regularly increase and decrease their contract value (like we do at ScreenCloud) it can skew the numbers but broadly speaking, this is a great benchmark.

How is ScreenCloud doing? We’re sometimes a bit above and sometimes a bit below. We think that part of that is to do with the fact that we have a proportion of customers who pause and reactivate their screens, which skews the ratio.

Churn

If you look up churn, you almost only see stuff written about revenue churn, rather than customer churn (often referred to as Logo Churn). Part of the problem is that logo churn can vary from business to business and depends a lot on the types of customer you have. Generally speaking, SMBs are more likely to churn than enterprise-level companies.

There is some great data here for logo churn. Where you can see there is a correlation between ACV (Annual Contract Value) and logo churn. If your customers are paying you $25–100/annum, the median logo churn rate was 3.4%/month. If you were doing more than $3,000/customer/annum, then the median is 1.0%/month.

What is more critical to companies is revenue churn. This is the value of revenue from a group of customers at the beginning of a period, compared to the revenue they pay you at the end. The assumption being that over that time, some of them will no longer be your customers and so the revenue they pay you will be proportionately less.

This can be calculated as:
(Contraction+Churn)/Starting MRR

So, if you started the month with $100,000 in MRR and over the next 31 days, a few people moved to a lower-value subscription which reduced the MRR by $500 and then another few customers cancelled which reduced the MRR by a further $1,000, you would have:
(500+1,000)=1,500/100,000 = 1.5%

If you are lucky enough to have negative revenue churn (ie your customers at the beginning of a period pay you more at the end of it), then it’s tempting to think that you don’t have to worry about it. However, as I explain here, you need to be careful that you are really experiencing net negative revenue churn and not just short-term account expansion.

So, what is a good revenue churn number for SaaS businesses?

It seems that somewhere between 7% and 15% Annual Revenue Churn is where good SaaS businesses are. 7% and 15% works out at about 0.6% and 1.4% per month respectively.

To work out your Annual Revenue Churn, use this formula:
=(1 — n) ^ 12
(where n = Monthly Revenue Churn/100)

How is ScreenCloud doing? We have Net Negative revenue churn. Our logo churn is good given the size of our ACV.

ACV (Annual Contract Value)

Sometimes referred to as ARPU (Average Revenue Per User) where that revenue is calculated over a year.

This has always been an interesting one for us, because, whilst our metrics are generally pretty good, more than one VC told us our ACV was low for a SaaS company. We understood why this was because it was part of our launch strategy (to drive a critical mass using self-serve). But nevertheless, it became a recurring theme, so clearly there was a figure that represented good and we were below it.

But if you do a bit of research, you always get the same sort of message: “ACV varies from business to business” but “the higher your ACV is, the less customers you need to get to $100m ARR”. We were told that SaaS businesses with less than, say, $5,000 ACV who were also at $100m in ARR were the exception, rather than the norm.

There is one survey from KBCM Technology Group, which looks at SaaS business’ data from 2017 which gives a bit of a clue. A couple of things that leap out of that survey:

  1. Growth rate isn’t impacted that much by ACV. In fact, according to the survey (which only had 189 respondents), the biggest growth came from companies with ACVs of $6–15k.
  2. The median ACV was ~ $21k. (you would need 4,762 customers to get to $100m ARR on that basis), but 26% of the companies they surveyed had an ACV <$5k.

What can we conclude from this? I guess you want to be somewhere around $15k+ in ACV for it to be considered good. With the caveat that you can still have a great business with a lower ACV, you just need to get more customers.

How is ScreenCloud doing? We’re not at the level of ACV that we’d like yet. This is in part because we’ve been serving the needs of our SMB customers well with our current product, but our about-to-be-launched new product will address their needs plus the needs of larger account-sized clients and we should see the ACV level rise.

LTV:CAC

How much does it cost you to acquire a customer (Customer Acquisition Cost) proportionate to how much that customer is going to ultimately pay you (LifeTime Value)?

So what is a good LTV:CAC ratio? Just going to cut to the chase here: the answer is 3. I don’t know why it is, it just is.

But for me, as a growing company, especially one without years and years of data (our LTV calculations assumes that, because we have net negative revenue churn, customers stay with us on average for longer than we’ve been alive), I’m really interested in how capital efficient we are at acquiring customers based on when they’ve have paid back the up front cost of acquiring them in the first place.

Why the distinction? Well, take our example: if the average lifetime of our customer is 5 years, then arguably, so long as we’re paying less than what they will pay us in the first 20 months of them being a customer, then we should be fine with that. But we’re a fast-growing company and we want to use whatever capital we have to continue that growth, not have it tied up in a customer who isn’t going to even start making a contribution for another 20 months.

So maybe a better ratio for a company like ours is………

CAC Payback Period

CAC Payback Period is the length of time it takes for your customer to cover the costs of acquiring them. Even if you are early-stage and not profitable yet, your CAC Payback Period (sometimes also referred to as just CAC Ratio) is still an important number. In fact, if your Payback Period is long or non-existent, then you will never ever see that profit horizon unless you can change it over time.

The other interesting thing here is that you can see right away that there is a direct relationship between ACV (Annual Contract Value) and CAC. If you are mainly serving the SMB market, then you will need to have a low-cost Customer Acquisition strategy with as little human intervention as possible. If, on the other hand, you are primarily selling very large contracts to Fortune 500 Companies, then of course you can afford to spend a lot more on marketing and sales staff to close that deal.

So what is good?

Received wisdom is anything less than 12 months is good. But 5–7 months is where the superstars are living.

Having said that, it seems to be that for larger SaaS businesses, the payback period is longer. Maybe they have bigger budgets generally to experiment. In this survey of companies with <$5m in ARR, the median Payback Period was 18 months.

How is ScreenCloud doing? Because we have net negative revenue churn, our LTV:CAC is off the scale which is why we don’t like it as a KPI particularly. Our current CAC payback is hovering around 8 months, which is definitely within the right ball-park.

Cash in the bank

I included this because it’s something we’re thinking about now and I’ve only ever heard this one benchmark from one person, Jason M. Lemkin, who said (and I’m paraphrasing because it was a presentation I attended rather than anything I read):

“ You need $1 in the bank for every $2 of ARR you are generating.”

So think about that for a sec. It’s impossible to maintain that ratio unless you are either raising every month or you are profitable. So really, what he means is that for a start-up, you should have at least $1 to $2 in ARR. In other words, if you are raising today and your ARR is $3m and your probable next raise is going to be when you are $10m in ARR, you need to be raising something in excess of $5m today. Either that, or you plan to become profitable before you dip below that ratio.

If I recall, his main reason for this was to make sure that you weren’t ever in the place where you couldn’t react to opportunities. Your need to scale fast and if you can’t do that because you are worried about creating a really short runway for your business (which is a very valid concern), then you could end up missing out on that opportunity. You also don’t want to be, as a founder, constantly worrying that you won’t be able to make payroll. That takes your energy off in the wrong direction when it should be focused on growth.

Right now, we’re probably bang on where Jason says we should be. But we’re also not ready to raise yet. We may be sailing a bit close to the wind, but we estimate when we do want to raise the ratio will be closer to 1:5. But our runway will still be healthy, so we won’t be panicking.

Burn and runway

OK, so burn is how much money you lose and runway is the amount you have in the bank divided by your monthly burn. In other words, if you are burning $100k/month and you have $1m in the bank, your runway is 10 months.

So how much should you aim for when you raise a funding round and what is the minimum runway length before you raise again?

The answer has probably more to do with your appetite for risk and dilution. But it would appear that the general rule of thumb is:

18 months minimum for your raise (ie if you are expecting to burn $200k/month for the foreseeable future, then you would need to raise at least $3.6m). You could also flip that and say, if you have just raised $4.5m, you should be looking to burn $250k/month.

6 months minimum runway for when you raise your next round. The reason for this is because it can take that long from start to finish to close an investment round, but also, as a founder you want to be negotiating with investors from a position of strength rather than one of desperation.

At ScreenCloud, we could probably afford to be burning a bit faster than we are but we’re aiming to stretch our runway out a bit to hit an important milestone before we do our next raise.

Revenue/FTE

This measures how efficiently you are running your business: how many people (Full-time Equivalent) you employ to generate the revenue you are making.

As a start-up, your Revenue/FTE will be lower than an established, profitable company. As a very early-start-up with just a few customers, of course, your Revenue/FTE might only be a few thousand dollars.

But if you are a $1m — $10m ARR company, what should you be looking at? I have it on authority that the best in class SaaS businesses in this stage of their evolution are somewhere between $125k and $150k.

And at ScreenCloud? We’re a bit lower than we should be: but mitigating factors here include a recent hiring spree as we opened a new office and the fact that we have spent the last 18 months working on a product that is about to be commercially launched. This also means that we’ve had a lot of people tied up on something that isn’t generating an ROI yet.

There are loads of other key metrics our there, but these are the ones we tend to focus on. Have I missed out anything? Am I woefully wrong on anything? Please let me know. I’ll also be returning to revisit things in the future.

Hero photo by Volkan Olmez on Unsplash.

David Hart

Co-Founder and COO of ScreenCloud. Interested in how tech will improve the way we work and play.